25-08-2017, 09:32 PM
Corporate Restructuring
Corporate Restructuring.ppt (Size: 145 KB / Downloads: 14)
Restructuring can be defined as a strategy by which a firm changes it business or financial structure. Firms use restructuring strategies in response to changes in external & internal environment, to create value for its stakeholders.
Business or Operational restructuring refers to outright or partial purchase or sale of companies, businesses ,product lines, or downsizing by closing unprofitable / non strategic facilities. Restructuring can lead to radical changes in composition of the business. Often organizational structure reorganization could be done to improve efficiency, cut costs . Asset restructuring also could be done to improve productivity of assets
Financial restructuring refers to actions taken by the firm to change its total debt or equity structure.
The success of GE highlights the importance of restructuring in a competitive business environment.
As CEO, Jack Welch during 1981-2001, sold 350 businesses for a total of $23.8 b and acquired some 900 businesses worth $105.5b. Under Welch, restructuring became a continuous process, resulting in greater efficiencies and globalization of operations.
In Europe & US, between 1960s & 1990s, diversification to an unmanageable extent led to bureaucratic inefficiencies, plummeting performance and sharp fall in stock prices.
As a result many became soft targets for hostile takeovers. Firms often undertook to restructuring to come out of mess.
Tender Offer
In a Tender Offer, a firm which intends to acquire a controlling interest in another firm , basically asks the shareholders of the target firm to submit (tender) their shares in the firm at a given price.
“Bear Hug” approach : in this approach , a company communicates in writing with the director’s of target company regarding its acquisition proposal (putting pressure). The directors are required to make a quick decision on the proposal.
If the acquiring company does not get the approval of the directors, then it can directly appeal to the stock holders through tender offer.
Sell-Offs
There are two major types of sell-offs
Divestiture : involves the sale of a portion of a firm to a third party. Since the buyer is an existing firm, no new legal entity is created.
The two main reason for divestures are – the assets being divested are worth more as part of the buyer’s organization than as part of the sellers or the assets are actively interfering with other profitable operations of the seller.( Sale of TOMCO by Tatas , sale of ITC classic by ITC)
Efficiency gains, refocus on wealth transfers and tax reasons could be other reasons for divestures.
Equity Carve-out
Equity carve-out is a variation of divestiture. In this a portion of wholly owned subsidiary of the firm or portion of a firm is sold to the outsiders through an equity offering, giving them ownership of the previously existing firm. Equity carve-out results in a new legal entity.
The sale can be made either through a secondary offering by the parent company or through a primary offering by the subsidiary itself.
Numerator and Denominator Management -as expressed by Hamel & Prahalad
During economic downturns, Two alternatives for maintaining profitability levels:
Denominator management – reduce head count, stringent cost cutting, reduce investments and sell assets under a denominator driven belt-tightening program
Numerator management – seeking ways of increasing revenues , improving productivity and increase net profit , rather than the denominator – oriented approach of cutting investment and reducing head counts.
Hamel & Prahlad say “ regardless of business cycle, talented CEOs are devoted to adopting numerator driven business strategy”.