CORPORATE

RESTRUCTURING

1. INTRODUCTION TO CORPORATE RESTRUCTURING

Corporate restructuring is one of the most complex and fundamental phenomena that management confronts. Each
company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While
diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core
business. Corporate restructurings necessary when a company needs to improve its efficiency and profitability and
it requires expert corporate management. corporate restructuring strategy involves the dismantling and rebuilding of areas
within an organization that need special attention from the management and CEO. The process of corporate
restructuring often occurs after buyouts, corporate acquisitions, takeovers or bankruptcy. It can involve a significant
movement of an organizations liabilities or assets. A significant modification made to the debt, operations or
structure of accompany. This type of corporate action is usually made when there are significant problems in a
company, which are causing some form of financial harm and putting the overall business in jeopardy. The hope is
that through restructuring, a company can eliminate financial harm and improve the business.
From this perspective, corporate restructuring is reduction in diversification. Corporate restructuring is an episodic
exercise, not related to investments in new plant and machinery which involve a significant change in one or more.

2. MEANING & NEED FOR CORPORATE RESTRUCTURING

Corporate restructuring is one of the means that can be employed to meet the challenges which confront business.
Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing
a company may be implemented due to a number of different factors, such as positioning the company to be more
competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new
1

CORPORATE
RESTRUCTURING

direction. Here are some examples of why corporate restructuring may take place and what it can mean for the
company. Restructuring a corporate entity is often a necessity when the company has grown to the point that the
original structure can no longer efficiently manage the output and general interests of the company. For example, a
corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more
effective management model as well as taking advantage of tax breaks that would allow the corporation to divert
more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the
company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate
restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may
be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a
subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often
implement a dismantling of the company, selling off properties and other assets in order to make a profit from the
buyout. What remains after this restructuring maybe a smaller entity that can continue to function, albeit not at the
level possible before the takeover took place In general, the idea of corporate restructuring is to allow the company
to continue functioning in some manner. Even when corporate raiders break up.
Corporate restructuring is one of the means that can be employed to meet the challenges which confront business.
Corporate restructuring involves restructuring the assets and liabilities of corporations, including their debt-to-equity
structures, in line with their cash flow needs in order to,
Promote efficiency,
Restore growth.

3. OBJECTIVES OF CORPORATE RESTRUCTURING

Corporate restructuring is much more commonplace in the 21st century.
Corporate restructuring once was a much more rare occurrence than it is today. With technology, communications
and global networking evolving so rapidly, corporations must restructure almost on an ongoing basis to keep up with
the change. Some of the objectives of these restructuring efforts include erasing debt, evolving with trends and
responding to regulatory changes in various industries.
1. Unloading Unprofitable Businesses
Some corporations have branches or businesses they own that are producing marginal profit or even losing money.
They may have purchased the company when it was doing well but trends shifted, or perhaps it was part of another
merger in which they acquired the weak business along with a strong one. Whatever the reason, these parts of the
2

CORPORATE
RESTRUCTURING

business tend to be a drain on the corporate profits and corporate resources. Corporations may restructure in order to
put their best resources into the parts of the business that make money and sell off or liquidate parts that don't.
2. Eradicating Debt
Many corporations have debt that threaten the viability of the business because the stock fell, the price of materials
rose or consumer demand faltered. These corporations must restructure in order to pay the debts. This often includes
employee layoffs, the selling of assets and a reduction in benefits for employees who remain. The objective of this
kind of corporate restructuring is to rope the debt to equity ratio back to a number where the corporation can survive.
3. Responding to Changing Trends
Frequently a corporation's business model is based on a trend that has changed.For example, a construction company
may have to alter its business model to creating or retrofitting buildings according to LEED standards. Likewise, a
company whose business centered on telephones and faxes has to face the change in how the world communicates.
These changes often require corporate restructuring, selling old assets to buy new and putting people who understand
the new trends and technologies over those who have worked their way up in the old system.
4. Meeting Regulatory Change
Regulatory changes create a need for corporate restructuring. The deregulation of the banking industry, for example,
meant banks could suddenly sell products such as insurance and could operate across state lines. This required a
restructuring along with many mergers and acquisitions. Regulatory changes resulting from the financial crisis of
2009 are leading to other corporations' restructuring their businesses, particularly in financial services such banks,
mortgage companies and credit cards.

CORPORATE
RESTRUCTURING

4. PURPOSE OF CORPORATE RESTRUCTURING

Restructuring a business can make a business stronger.
When a company or organization is having financial difficulties, one of the tools available is to implement a
restructuring plan. Restructuring can mean anything from eliminating redundant jobs to closing down departments
and even entire facilities. Restructuring sometimes becomes necessary for businesses to stay competitive. It is of
paramount importance to have a business restructuring plan prior to the restructure.
1. OOC Date
One aspect to include is the out of cash date for the business. At some point when a company is in need of
restructuring, it will run out of money unless there are changes made. Keeping the OOC date at the forefront means
you remain aware that the clock is running down.
2. Accounts
Another area to include in a business restructuring plan is overhauling the accounts receivable department. Too often,
a company will get into financial difficulty because of clients with financial problems of their own. For this reason,
having a strong accounts receivable policy will make for a stronger restructuring process.
3. Personnel

CORPORATE
RESTRUCTURING

Any business restructuring plan needs to examine where you can cut costs in terms of personnel. Sometimes, this can
be the hardest decision to make, but if a company is to survive, it must use every cent to its fullest potential. If two
workers are doing the job of one, someone needs to go. If there are multiple locations to restructure, the plan should
include the parent company. This can mean letting people go from the executive level, where there are larger salaries
and the more costly retirement packages.

4. Future
Your business restructuring plan needs to look to the future. This means putting core policies in place geared toward
survival and growth. To arrive at the restructuring necessary, the business needs to operate at the most efficient level
possible. This might include incorporating new technologies that can eliminate redundant task processing.
5. Government
Just as businesses restructure, governments can do the same. Governments will often attack a fiscal problem by
going down the path of restructuring, and the same basic principles apply. Businesses and governments both need to
include fiscal responsibilities within the plans, as well as an examination of the entire organizational structure,
determining what you can eliminate or consolidate.

CORPORATE
RESTRUCTURING

5. WHY BUSINESS FIRMS FAIL

Lets see different reasons same makes failure to corporate:
An imbalance of skills within the top echelon.
A chief executive who dominates a firms operations without regard for the inputs of peers
An inactive board of directors. The board of Directors lack of interest in the financial position of the company
may lead to insolvency.
A deficient finance function within the firms management.
The absence of responsibility for the chief executive officer.
Apart from the above mistakes the firm usually is vulnerable to several mistakes,
Management may be negligent in developing effective accounting system
The company may be unresponsive to change
Management may be inclined to undertake an investment project that is
disproportionately large relative to firm size. If the project fails the probability of insolvency is greatly
increased.
Finally the management may rely heavily on debt financing that even a minor problem can place the firm in a
dangerous position.

CORPORATE
RESTRUCTURING

6. FIVE PRINCIPLES OF CORPORATE RESTRUCTURING

Be Smart Get experts to help.

Restructuring is both an art and a science. Make sure to enlist help from experienced restructuring specialists. From
the financial and legal advisors to the claims and noticing agent, these specialists should have experience in
managing and dealing with the complexities of the corporate restructuring process.
Be Quick Time is of the essence.
Recognized authorities in the restructuring industry can guide companies expeditiously in negotiating and
consummating transactions. From pre-planning to emergence, companies can achieve their goals in a relatively quick
period of time with strategic planning and agile execution.
Be Prepared Organize information efficiently.
From the planning phase through execution, organization of company information is critical. All key information
should be clearly accessible to help expedite the process and easily locate the required data. Data and other
information needed during the process can include financial statements, vendor listings, employee/retiree listings,
contracts, real estate deeds, etc.
Be Transparent Disclosure is good.
Develop a strategic communications strategy to disclose forward progress to relevant constituencies during the
restructuring process from employees and vendors to financial institutions and the media. It is critical that you
know what to say and how to say it, but it is also vital to recognize the strategic relevance of your communications.
Be Sensitive Take stakeholders financial insecurities into consideration.
When dealing with financial matters of this scale, emotions run rampant. Be sensitive to the needs of stakeholders
and provide reassurance that their matter is one of significance and is being addressed during the process.

7. METHODS OF CORPORATE RESTRUCTURING

The important methods of Corporate Restructuring are:
1.

Joint ventures

2.

Sell off and spin off

3.

Divestitures
7

CORPORATE
RESTRUCTURING

4.

Equity carve out (ECO)

5.

Leveraged buy outs (LBO)

6.

Management buy outs

7.

Master limited partnerships

8.

Employee stock ownership plans (ESOP)

1. Joint Ventures
Joint ventures are new enterprises owned by two or more participants. They are typically formed for special purposes
for a limited duration. It is a combination of subsets of assets contributed by two (or more) business entities for a
specific business purpose and a limited duration. Each of the venture partners continues to exist as a separate firm,
and the joint venture represents a new business enterprise. It is a contract to work together for a period of time each
participant expects to gain from the activity but also must make a contribution.

Reasons for Forming a Joint Venture

Build on companys strengths

Spreading costs and risks

Improving access to financial resources

8

CORPORATE
RESTRUCTURING

Economies of scale and advantages of size

Access to new technologies and customers

Access to innovative managerial practices.

2. Spin-off
Spinoffs are a way to get rid of underperforming or non-core business divisions that can drag down profits.
Process of spin-off
1.

The company decides to spin off a business division.

2.

The parent company files the necessary paperwork with the Securities and Exchange Board of India (SEBI).

3.

The spinoff becomes a company of its own and must also file paperwork with the SEBI.

4.

Shares in the new company are distributed to parent company shareholders.

5.

The spinoff company goes public.

Sell-off:
Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or General term for
divestiture of part/all of a firm by any one of a no. of means: sale, liquidation, spin-off and so on.
3.Divestures
Divesture is a transaction through which a firm sells a portion of its assets or a division to another company. It
involves selling some of the assets or division for cash or securities to a third party which is an outsider.
Divestiture is a form of contraction for the selling company. means of expansion for the purchasing company. It
represents the sale of a segment of a company (assets, a product line, a subsidiary) to a third party for cash and or
securities.
Mergers, assets purchase and takeovers lead to expansion in some way or the other. They are based on the principle
of synergy which says 2 + 2 = 5! , divestiture on the other hand is based on the principle of anergy which says 5
3 = 3!.

CORPORATE
RESTRUCTURING

Among the various methods of divestiture, the most important ones are partial sell-off, demerger (spin-off & split
off) and equity carve out. Some scholars define divestiture rather narrowly as partial sell off and some scholars
define divestiture more broadly to include partial sell offs, demergers and so on.
4. Equity Carve-Out
A transaction in which a parent firm offers some of a subsidiaries common stock to the general public, to bring in a
cash infusion to the parent without loss of control.
In other words equity carve outs are those in which some of a subsidiaries shares are offered for a sale to the general
public, bringing an infusion of cash to the parent firm without loss of control. Equity carve out is also a means of
reducing their exposure to a riskier line of business and to boost shareholders value.
Features

It is the sale of a minority or majority voting control in a subsidiary by its parents to outsider investors. These
are also referred to as split-off IPOs

A new legal entity is created.

The equity holders in the new entity need not be the same as the equity holders in the original seller.

A new control group is immediately created.

5. Leveraged Buyout
A buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share
in the stock of a company. Buyouts great and small occur all over the world on a daily basis.
Buyouts can also be negotiated with people or companies on the outside. For example, a large candy company might
buy out smaller candy companies with the goal of cornering the market more effectively and purchasing new brands
which it can use to increase its customer base. Likewise, a company which makes widgets might decide to buy a
company which makes thingamabobs in order to expand its operations, using an establishing company as a base
rather than trying to start from scratch.
Features of Leveraged Buyout

Low existing debt loads;

A multi-year history of stable and recurring cash flows;

10

CORPORATE
RESTRUCTURING

Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower
cost secured debt;

The potential for new management to make operational or other improvements to the firm to boost cash
flows;

Market conditions and perceptions that depress the valuation or stock price.

6. Management buyout
In this case, management of the company buys the company, and they may be joined by employees in the venture.
This practice is sometimes questioned because management can have unfair advantages in negotiations, and could
potentially manipulate the value of the company in order to bring down the purchase price for themselves. On the
other hand, for employees and management, the possibility of being able to buy out their employers in the future
may serve as an incentive to make the company strong.
It occurs when a companys managers buy or acquire a large part of the company. The goal of an MBO may be to
strengthen the managers interest in the success of the company.
Purpose of Management buyouts
From management point of view may be:

To save their jobs, either if the business has been scheduled for closure or if an outside purchaser would bring
in its own management team.

To maximize the financial benefits they receive from the success they bring to the company by taking the
profits for themselves.

To ward off aggressive buyers.

The goal of an MBO may be to strengthen the managers interest in the success of the company. Key considerations
in MBO are fairness to shareholders price, the future business plan, and legal and tax issues.
7. Master Limited Partnership
Master Limited Partnerships are a type of limited partnership in which the shares are publicly traded. The limited
partnership interests are divided into units which are traded as shares of common stock. Shares of ownership are
referred to as units.
11

CORPORATE
RESTRUCTURING

MLPs generally operate in the natural resource (petroleum and natural gas extraction and transportation), financial
services, and real estate industries.
The advantage of a Master Limited Partnership is it combines the tax benefits of a limited partnership (the
partnership does not pay taxes from the profit the money is only taxed when unit holders receive distributions) with
the liquidity of a publicly traded company.
8. Employees Stock Option Plan (ESOP)
An Employee Stock Option is a type of defined contribution benefit plan that buys and holds stock. ESOP is a
qualified, defined contribution, employee benefit plan designed to invest primarily in the stock of the sponsoring
employer. Employee Stock Options are qualified in the sense that the ESOPs sponsoring company, the selling
shareholder and participants receive various tax benefits. With an ESOP, employees never buy or hold the stock
directly.

8. ADVANTAGES AND DISADVANTAGES OF CORPORATE

RESTRUCTURING
Advantages of corporate restructuring

legal protection of the debtor from creditors

recovery of society based on the forgiveness of liabilities (debt elimination)

12

CORPORATE
RESTRUCTURING

protection of assets (it is not possible for the creditors to proceed with the execution of lien, distraint and
legal proceedings are suspended and subsequently stopped)

providing time for the re-launch of the copmany (7-9 months)

maintenance of economic independence and legal personality of the debtor

preserving jobs etc.

unblocking of the debtor's bank accounts

the inability to count old liabilities with new liabilities that arose after the beginning of the restructuring
process (the company does not carry out old obligations after the beginning of restructuring; others have to
carry out obligations towards the restructured company)

supervision of the administrator over the process of restructuring

after succesful restructuring, a company can operate without restrictions

greater satisfaction of creditors than during bankruptcy

relative and gradual satisfaction of creditors (distribution of liabilities over a longer period of time)

Disadvantages of corporate restructuring

During the restructuring process, the administrator approves the debtor's legal actions (with the exception
of common legal actions)

13

CORPORATE
RESTRUCTURING

In case the restructuring plan is not approved, the company is declared bankrupt (There is a possibility to
replace a group disapproval with the restructuring plan with a court decree)

In case the plan towards the creditor is not being fulfilled (even after additional appeal) the plan becomes
legally unenforceable towards this creditor

9. CHARACTERISTICS OF CORPORATE RESTRUCTURING

1. To improve the countrys Balance sheet ,(by selling unprofitable division from its core business)
2. To accomplish staff reduction (by selling/ closing of unprofitable portion)
14

CORPORATE
RESTRUCTURING

3. Changes in corporate mgt

4. Sale of underutilized assets, such as patents/brands.
5. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.
6. Moving of operations such as manufacturing to lower-cost locations.
7. Reorganization of functions such as sales, marketing, & distribution
8. Renegotiation of labor contracts to reduce overhead
9. Refinancing of corporate debt to reduce interest payments.
10. A major public relations campaign to reposition the co., with consumers.

10. TYPES OF CORPORATE RESTRUCTURING

Business firms engage in a wide range of activities that include expansion, diversification, collaboration, spinning
off, hiving off, mergers and acquisitions. Privatization also forms an important part of the restructuring process. The
different forms of restructuring may include:

CORPORATE RESTRUCTURING

15

CORPORATE
RESTRUCTURING

EXPANSION
Mergers &
Acquisitions
Tender Offers

SELL OFFs
Spin-Off
Split- Off
Equity Crave -Out

Joint Ventures

CORPORATE
CONTROL

CHANGE IN
OWNERSHIP

Premium Buy Back

Exchange Offer

Anti -Take Overs

Share Repurchase

Standstill Agreements

Going Private

Expansion: Expansions may include mergers, acquisitions, tender offers and joint ventures. Mergers per se, may
either be horizontal mergers, vertical mergers or conglomerate mergers. In a tender offer, the acquiring firm seeks
controlling interest in the firm to be acquired and requests the shareholders of the firm to be acquired, to tender their
shares or stock to it. Joint ventures involve only a small part of the activities of the companies involved.
Sell-Off: Sell-Off may either be through a spin-off or divestiture. Spin-Off creates a new entity with shares being
distributed on a pro rata basis to existing shareholders of the parent company. Split-Off is a variation of Sell-Off.
Divestiture involves sale of a portion of a firm/company to a third party.
Corporate Control: Corporate control includes buy-backs and greenmail where the management of the firm wishes
to have complete control and ownership.
Change in Ownership: Change in ownership may either be through an exchange offer, share repurchase or going
public.
An example: Cesar Steel Announces Restructuring Plans

16

CORPORATE
RESTRUCTURING

Cesar Steel Limited recently announced its restructuring plan through which the company plans to reduce its interest
burden. The company has also initiated several other steps including increasing production and lowering operating
costs as a part of its restructuring program. The company also announced the development of a strategy addressing
its debt burden-reduction and lengthening the maturity period.
Other restructuring programs initiated by the company included:

Raising equity through rights issue

Reduction in usage of power

The company, subsequent to its restructuring program, expects to be in a position to make net profits, declare
dividends and enhance shareholder value.

11. THE CHALLENGE OF CORPORATE RESTRUCTURING

Large-scale corporate restructuring made necessary by a financial crisis is one of the most daunting
challenges faced by economic policymakers. The government is forced to take a leading role, even if
indirectly, because of the need to prioritize policy goals, address market failures, reform the legal and
tax systems, and deal with the resistance of powerful interest groups. The objectives of large-scale
corporate restructuring are in essence to restructure viable corporations and liquidate nonviable ones,
restore the health of the financial sector, and create the conditions for long-term economic growth.
Successful government-led corporate restructuring policies usually follow a sequence. First, the
government should formulate macroeconomic and legal policies that lay the foundation for successful
restructuring. After that, financial restructuring must start to establish the proper incentives for banks to
take a role in restructuring and get credit flowing again. Only then can corporate restructuring begin in
earnest with the separating out of the viable from nonviable corporationsrestructuring the former and
liquidating the latter. The main government-led corporate restructuring tools are mediation, incentive
17

CORPORATE
RESTRUCTURING

schemes, bank recapitalization, asset management companies, and the appointment of directors to lead
the restructuring. After achieving its goals, the government must cut back its intervention in support of
restructuring.
Tasks of Restructuring
Corporate restructuring on a large scale is usually made necessary by a systemic financial crisis
defined as a severe disruption of financial markets that, by impairing their ability to function, has large
and adverse effects on the economy. The intertwining of the corporate and financial sectors that defines
a systemic crisis requires that the restructuring address both sectors together.

12. CATEGORY OF CORPORATE RESTRUCTURING

Corporate Restructuring entails a range of activities including Financial Restructuring and Organization
Restructuring.
Financial Restructuring
Financial Restructuring is the reorganization of the financial assets and liabilities of corporation order to create the
most beneficial financial environment for the company. The process of financial restructuring is often associated
with corporate restructuring, in that restructuring the general function and composition of the company is likely to
impact the financial health of the corporation. When completed this reordering of corporate assets and liabilities can
help the company to remain competitive, even in a depressed economy. Just about every business goes through a
phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as the
means of allocating resources for new marketing campaign or the launch of the new product line. When this
happens, the restructure is often viewed as a sign that the company is financially stable and has set goals for
future growth and expansion.
Corporate Restructuring entails a range of activities including Financial Restructuring and Organization
Restructuring.
Organizational restructuring
Organizational restructuring has become a very common practice amongst the firms in order to match the
growing competition of the market. This makes the firms to change the organizational structure of the company
for the betterment of the business.
18

CORPORATE
RESTRUCTURING

Some of the prime reasons for organizational restructuring are as follows:

Changing nature of the markets

The continuous innovations in technology, product, work processes, materials, organizational culture and
structure

Various actions of work force values, global competitors, demands and diversity

Ethical constraints and regulations

Individual transition and development of the business

The most common features of organizational restructures are:
Regrouping of business
This involves the firms regrouping their existing business into fewer business units. The management then handles
theses lesser number of compact and strategic business units in an easier and better way that ensures the business to
earn profit.
Downsizing
Often companies may need to retrench the surplus manpower of the business. For that purpose offering voluntary
retirement schemes (VRS) is the most useful tool taken by the firms for downsizing the business's workforce.
Decentralization
In order to enhance the organizational response to the developments in dynamic environment, the firms go for
decentralization. This involves reducing the layers of management in the business so that the people at lower
hierarchy are benefited.
Outsourcing
Outsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed
costs of the company to variable costs.
Business Process Engineering
It involves redesigning the business process so that the business maximizes the operation and value added content of
the business while minimizing everything else.
Total Quality Management
The businesses now have started to realize that an outside certification for the quality of the product helps to get a
good will in the market. Quality improvement is also necessary to improve the customer service and reduce the cost
19

CORPORATE
RESTRUCTURING

of the business.
The perspective of organizational restructuring may be different for the employees. When a company goes for the
organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their
jobs. This may decrease the morale of employee in a large manner. Hence many firms provide strategies on career
transitioning and outplacement support to their existing employees for an easy transition to their next job.

13. BANK AND CORPORATE RESTRUCTURING

Weaknesses in financial and corporate sectors were at the heart of the Asian crisis. In a situation where rapid
financial liberalization had outpaced institutional capacities, vulnerabilities accumulated and put at risk the solvency
of large parts of the affected economies. Inadequate regulation, weak supervision of financial institutions, poor
accounting standards and disclosure rules, outmoded laws, corporate recklessness and inferior governance all played
their part. Together, these factors seemed to legitimize investor panic that culminated in the disorderly collapse of
asset prices and exchange rates. Prompted in part by the terms of international assistance packages, the affected
economies have now embarked on the complex and time consuming task of tackling these institutional deficits. This
section reviews the progress made in financial and corporate restructuring in the affected countries of Asia. To begin
with, some analytical background is provided and lessons from managing crises elsewhere are summarized. Next, the
approaches to restructuring that have been taken in Indonesia, Korea, Malaysia, and Thailand are described. The
Philippines, on the other hand, did not experience a systemic banking crisis. Hence, the discussion of reforms in the
Philippines is brief. Finally, progress to date is evaluated.
RESTRUCTURING THE FINANCIAL SECTOR

Even after the foundation has been laid, corporate restructuring cannot begin to make headway without
substantial progress in restructuring the financial sector. The draining of bank capital as part of the crisis
will usually lead to a sharp cutback in lending to viable and nonviable corporations alike, worsening the
overall contraction. Moreover, banks must have the capital and incentives to play a role in restructuring.
The first task of financial restructuring is to separate out the viable from the nonviable financial
institutions to the extent possible. To do this work, financing and technical assistance from international
financial institutions can be helpful, as in Indonesia following the 1997 crisis.
Nonviable banks should be taken over by the government and their assets eventually sold or shifted to
an asset management corporation, while viable banks should be recapitalized. Banks should be directly
20

CORPORATE
RESTRUCTURING

recapitalized for normal operation or else, in the absence of strong competitive pressures, they may
impede recovery by recapitalizing themselves indirectly through wide interest rate spreads. At the same
time the government should ensure that bank regulation and supervision is strong enough to maintain a
stable banking sector.
There is a degree of circularity here in that the separation of viable from nonviable banks is helped by
completion of the same task for corporations, which itself is aided by financial restructuring. The best
way to close this circle seems to be rapid restructuring of the banks because a cutback in bank financing
to corporations amplifies the overall contraction, and has irreversible consequencessuch as the sale of
assets too cheaply.
RESTRUCTURING THE CORPORATE SECTOR

Corporate restructuring can begin in earnest only when banks and market players are willing and able to
participate. As with the financial sector, the first task is distinguishing viable from nonviable
corporations. Nonviable corporations are those whose liquidation value is greater than their value as a
going concern, taking into account potential restructuring costs, the "equilibrium" exchange rate, and
interest rates. The closure of nonviable firms ensures that they do not absorb credit or worsen bank
losses. However, the identification of nonviable corporations is complicated by the poor overall
performance of the corporate sector during and just after the crisis. Viable and nonviable firms can be
identified using profit simulations and balance sheet projections, as well as best judgment.
Liquidating nonviable corporations during a systemic crisis usually requires the establishment of new
liquidation mechanisms that bypass standard court-based bankruptcy procedures. The bankruptcy code
of the United States can be taken as the standard minimal government involvement approach. In
practice, however, this code has a strong liquidation biassome 90 percent of cases end in liquidation,
and reorganization takes a long time. Moreover, courts are usually unable to handle a large volume of
cases, lack expertise, and may be subject to the influence of vested interests. Giving debtors protection
from bankruptcy during mediation proceedings allows corporations that are later judged to be viable to
remain operating and enables the orderly liquidation of nonviable corporations. If debtors are protected
from bankruptcy, however, monitoring of the corporations is needed to ensure that incumbent managers
21

CORPORATE
RESTRUCTURING

do not hive off the most profitable assets. Liquidation can be speeded up by special courts or new
bankruptcy laws. Hungary introduced a tough bankruptcy law in 1991 under which firms in arrears
were required to submit reorganization plans to creditors; if agreement was not reached, firms were
liquidated. Also, a standstill on payments to banks during negotiations allows cash-strapped
corporations to continue operation while their viability is being decided. Without effective bankruptcy
procedures, restructuring can be significantly slowed down, as happened in many of the transition
countries, in Mexico in 1995, and especially in Indonesia after the 1997 Asian crisis.
The government must also decide on disposal of the assets of liquidated corporations. Delays in asset
disposal tie up economic resources, slow economic recovery, and impede corporate restructuring.
Of course, the balance sheets of viable corporations must be restructured. Restructuring will involve
private domestic and foreign creditors, newly state-owned creditors, and asset management
corporations, as well as stakeholders such as unions and governments. Usually, balance sheet
restructuring takes place through the reduction of debt or through the conversion of debt into equity.
Often minority creditors slow debt restructuring by threatening to liquidate the debtor in an attempt to
force majority creditors to buy them out on favorable terms. This coordination problem can be avoided
by rules that allow less-than-unanimous creditor approval of reorganization plans, which can be
enforced by government moral suasion, by prior creditor agreement to a set of principles, or through
bankruptcy proceedings.
Early completion of relatively clear-cut transactions can jump-start the restructuring program.
Restructuring is often delayed by difficulties in valuing transactions because of economic instability and
unreliable corporate data.
Long delays in implementing bankruptcy reforms greatly slowed the large-scale corporate restructuring
efforts of the mid- and late 1990s. By early 2000, Mexico had still not completed bankruptcy law
reform, even though there had been a sharp drop in bank claims on the private sector since the country's
1995 crisis. In East Asia, ineffectual bankruptcy laws stymied corporate restructuring by allowing
nonviable firms to stay afloat, which not only precluded banks from collecting the underlying collateral,
22

CORPORATE
RESTRUCTURING

but also acted as a disincentive for viable firms to repay their debtfurther hurting the banks. Delays in
bankruptcy reform are due mainly to pressures from groups and individuals who would be hurt by the
liquidation of nonviable firms, as well as by the time needed to bring up to speed legal systems faced
with a sudden increase in bankruptcy cases.
Transparency is one positive suggestion for bankruptcy reform: regular government disclosure of all the
aspects of restructuring can make clear the impediments put in the way by vested interest groups, and
thus lead to public pressure to accelerate reform.

14. THE MAJOR REASONS FOR RESTRUCTURING

Changed Nature of Business
In todays business environment, the only constant is change. Companies that refuse to change with the times face
the risk of their product line becoming obsolete. Because of this, businesses experiment with new products, explore
new markets, and reach out to new groups of customers on a continuous basis. Businesses seek to diversify into new
areas to increase sales, optimize their capacity, and conversely shed off divisions that do not add much value, to
concentrate on core competencies instead.
All such initiatives require restructuring. For instance, expansion to an overseas market may require changes in the
staff profile to better connect with the international market, and changes in work policies and routines to ensure
compliance with export regulations. Starting a new product line may require changes in the system of work, hiring
new experts familiar in the business line and placing them in positions of authority, and other interventions. Hiving
off unprofitable or unneeded business lines may require changes to retain specific components of such divisions that
the main business may wish to retain.
Downsizing
One common reason for restructuring a company is to downsize the workforce. The changing nature of economy
may force the business to adopt new strategies or alter their product mix, making staff redundant. Similarly, cutthroat
competition and pressure on margins from competitors who adopt a low price strategy may force the company to
adopt lean techniques, just in time inventory, and other measures to cut input costs and achieve process efficiency.
In such situations, the organization will need to redo job descriptions, rework its team, group, and communication
structures and reporting relationships to ensure that the remaining workforce does the job well. Very often,
23

CORPORATE
RESTRUCTURING

downsizing-induced restructuring leads to a flatter organizational structure, and broader job descriptions and duties.
New Work Methods
Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory based work. Newer
methods of work, especially outsourcing, telecommuting, and flex time require new systems, policies, and structures
in place, besides a change in culture, and such requirements may trigger organizational restructuring.
The presence of telecommuting employees, temporary employees, and outsourcing work may require a drastic
overhaul of performance management parameters, compensation and benefits administration, and other vital
systems. The newer work methods may, for instance, require placing emphasis on the results rather than the methods,
flexible reporting relationships, and a strong communication policy.
New Management Methods
Traditional management science recommends highly centralized operations, and the top management adopting a
command and control style. The new behavioral approach to management considers human resources a key driver of
strategic advantage, and focuses on empowering the workforce and providing considerate leeway to line managers in
conducting day-to-day operations. The top management intervenes only to set strategy and ensure compliance;
strategic business units receive autonomy in functioning.
Traditional management structures were bureaucratic and hierarchical. Of late, management experts see wisdom in
flatter organizations with wider roles and responsibilities for each member of the team. Job flexibility, enlargement
and enrichment are key features of such new structures, but successful implementation requires changes in the
communication and reporting structures of the organization. While new organizations can start with such new
paradigms, old organizations have to restructure themselves to keep up with these best practices to remain
competitive.
Quality Management
Competitive pressures force most companies to have a serious look at the quality of their products and services, and
adopt quality interventions such as Six Sigma and Total Quality Management. Implementing new quality standards
may require changes in the organization. Most of the new quality applications strive to imbibe quality in the actual
work process rather than maintain a separate quality control department to accept or reject output based on quality
specifications.
In many cases, an organizational level audit precedes quality interventions, and such audits highlight inefficiencies in
the organizational structure that may impede quality in the first place. For instance, reducing waste may require
eliminating certain processes,
24

CORPORATE
RESTRUCTURING

Technology
Innovations in technology, work processes, materials and other factors that influence the business, may require
restructuring to keep up with the times. For instance, enterprise resource planning that links all systems and
procedures of an organizational by leveraging the power of information technology may initially require a complete
overhaul of the systems and procedures first.
Such technology-centric change may be part of a business process engineering exercise that involves redesigning the
business processes to maximize potential and value added, while minimizing everything else. Failure to do so may
result in the company systems and procedures turning obsolete and discordant with the times.
Mergers and Acquisitions
In todays corporate world, where survival of the fittest is the maxim, mergers and acquisitions are commonplace and
any merger or acquisition invariably heralds a restructuring exercise. The reasons for such restructuring
accompanying mergers and acquisitions are many. Some of the common reasons are:
Reconciling the systems and procedures of the merged organizations to ensure that the new entity has consistency of
approach.
Eliminating duplication of work or systems, such as two human resource or finance departments.
Incorporating the preferences of the new owners, and more.
Joint ventures may also require formation of matrix teams, special task forces, or a new subsidiary.
Finance Related Issues
Very often, small and medium scale businesses have informal structures and reporting relationships, and an ad-hoc
style of decision-making. When such companies grow and want to raise fresh funds, venture capitalists and
regulations might demand a more professional set up, with formal written-down structures and policies. A listed
company may undertake a restructuring exercise to improve its efficiency and unlock hidden value, and thereby
show more profits to attract fresh investors.
Bankruptcy may force the business to shed excess flab such as workforce, land, or other resources, sell some
business lines to raise cash, and become lean and mean, to attract bail-outs or some other rescue package. Companies
may try to restructure out of court to avoid the high costs of a formal bankruptcy.
Induce Higher Earnings

25

CORPORATE
RESTRUCTURING

The two basic goals of corporate restructuring may include higher earnings and the creation of corporate value.
Creation of corporate value largely depends on the firms ability to generate enough cash.
Divestiture and Networking
Companies, while keeping in view their core competencies, should exit from peripherals. This can be realized
through entering into joint ventures, strategic alliances and agreements.
Provide Proactive Leadership
Management style greatly influences the restructuring process. All successful companies have clearly displayed
leadership styles in which managers relate on a one-to-one basis with their employees.
Empowerment
Empowerment is a major constituent of any restructuring process. Delegation and decentralized decision making
provides companies with effective management information system.
Reengineering Process
Success in a restructuring process is only possible through improving various processes and aligning resources of the
company. Redesigning a business process should be the highest priority in a corporate restructuring exercise.

15. FORMS OF CORPORATE RESTRUCTURING

Corporate restructuring changes the way a company approaches finances, technology or its business focus.
Corporate restructuring is a general term used to describe major changes within a company. These changes usually
affect basic business practices, redetermining who makes the major decisions in a company or how certain parts of
its business plan are approached. The type of restructuring depends on the elements of the business being affected
and the reasons that the restructuring is occurring.
Internal Restructuring

26

CORPORATE
RESTRUCTURING

Corporate restructuring occurs based on the needs of the company. Internal restructuring typically occurs as a result
of business analysis that shows a need for greater efficiency in the way business departments communicate and
complete tasks. Sometimes a particular segment of the business will start to fail, and the company will need to
reallocate resources in order to support it. Sometimes a business may have expanded to much, and needs to refocus
on its core abilities. At other times a business may need to restructure its financial position in order to continue
making profits. Often, restructuring plans are necessary simply to meet the constantly change demands of technology
that competitors are embracing. Not all reasons for restructuring are negative, and many benefit employees as well as
executives in the company.
Financial Restructuring
Financial restructuring deals with all changes the businesses makes to its debts and equity, including mergers,
acquisitions, joint ventures and other deals. Generally these occur when a company joins or is bought by another
company. Ownerships of the company, or at least some interest in the company, is transferred to another organization
or group of investors. Actual business practices may remain unchanged.

Technological Restructuring
Technological restructuring occurs when a new technology has been developed that changes the way an industry
operates. This type of restructuring usually affects employees, and tends to lead to new training initiatives, along
with some layoffs as the company improves efficiency. This type of restructuring also involves alliances with third
parties that have technical knowledge or resources.
Restructuring Methods
Restructuring methods are typically divided into expansion, refocusing, corporate control, and ownership structure.
The last two, corporate control and ownership structure, apply mostly to financial changes and affect ownership.
Corporate control, for instance, is a method where the company buys back enough shares to be able to make its own
decisions again. Expansion occurs with acquisition, mergers, or joint ventures. Refocusing can take many forms,
including business splits, sell offs of certain ventures, and general consolidation practices.

27

CORPORATE
RESTRUCTURING

16. THE EFFECTS OF A CORPORATE RESTRUCTURING STRATEGY

Corporate restructuring is a legal maneuver employed by a company with too much debt and not enough income or a
business model that is proving unsuccessful. The effects of restructuring are varied and range from nervous nailbiting from shareholders to employees wondering about job security. A corporation with a well-honed restructuring
strategy can mitigate these initial worries and emerge a leaner company with a profitable business plan.
Find the Specific Problem
A corporate restructuring strategy must determine and effectively target the specific challenge or problem the
corporation is facing. This allows the corporation's rebuilding efforts the best chance for success without
hindering any parts of the company that are currently working well. At its best, a restructuring is a highly targeted
surgical strike that fixes the problem without dismantling the whole company to do it. A restructuring strategy
that lacks direction can often cause more harm for a corporation by worsening an existing problem and
weakening functioning departments or business strategies.
Management Understanding
All levels of management must have an understanding of the corporation's overall restructuring strategy. This
allows managers to prepare employees for possible changes within departments, and to develop new operational
strategies to meet shifting corporate priorities. Managers may also have to prepare for the possibility of difficult
28

CORPORATE
RESTRUCTURING

business decisions resulting from corporation restructuring. Department sizes many shrink, causing employee
layoffs along with pay cuts for managers. Departments may also merge with other departments in a corporation
as a result of the restructuring. Managers must understand how the corporation's new leadership structure
operates in order to ensure that productivity stays at a high level.

29

CORPORATE
RESTRUCTURING

Effects on Investors
Corporate restructuring makes investors nervous. This can cause a stock sell-off that decreases the overall value
of the corporation and exacerbates the underlying reason for the restructuring. A corporation undergoing a
restructuring must develop a proactive strategy to communicate to investors all the positives that will come with
reorganization. Investor funds are a key component in the restructuring process. If a corporation loses a large
number of investors, it may experience difficulty raising capital needed to bring its restructuring plan to fruition.
Improving Organizational Direction
A company emerging from a successful restructuring should have an improved organizational direction with
increased focus and streamlined operational costs. The company's new direction should revolve around a set of
specific business goals identified in the very beginning stages of restructuring. Business goals could be as simple
as turning a profit, or as complex as dividing the corporation into several new companies, all with specific
business models and different product offerings.

Find the Specific Problem

A corporate restructuring strategy must determine and effectively target the specific challenge or problem the
corporation is facing. This allows the corporation's rebuilding efforts the best chance for success without
hindering any parts of the company that are currently working well. At its best, a restructuring is a highly targeted
surgical strike that fixes the problem without dismantling the whole company to do it. A restructuring strategy
that lacks direction can often cause more harm for a corporation by worsening an existing problem and
weakening functioning departments or business strategies.
Management Understanding
All levels of management must have an understanding of the corporation's overall restructuring strategy. This
allows managers to prepare employees for possible changes within departments, and to develop new operational
strategies to meet shifting corporate priorities. Managers may also have to prepare for the possibility of difficult
business decisions resulting from corporation restructuring. Department sizes many shrink, causing employee
layoffs along with pay cuts for managers. Departments may also merge with other departments in a corporation
as a result of the restructuring. Managers must understand how the corporation's new leadership structure
operates in order to ensure that productivity stays at a high level.
Effects on Investors

30

CORPORATE
RESTRUCTURING

Corporate restructuring makes investors nervous. This can cause a stock sell-off that decreases the overall value
of the corporation and exacerbates the underlying reason for the restructuring. A corporation undergoing a
restructuring must develop a proactive strategy to communicate to investors all the positives that will come with
reorganization. Investor funds are a key component in the restructuring process. If a corporation loses a large
number of investors, it may experience difficulty raising capital needed to bring its restructuring plan to fruition.
Improving Organizational Direction
A company emerging from a successful restructuring should have an improved organizational direction with
increased focus and streamlined operational costs. The company's new direction should revolve around a set of
specific business goals identified in the very beginning stages of restructuring. Business goals could be as simple
as turning a profit, or as complex as dividing the corporation into several new companies, all with specific
business models and different product offerings.

17. CONCLUSION
Corporate restructuring on a large scale is potentially one of the most challenging tasks faced by economic
policymakers. The need for large-scale restructuring arises in the aftermath of a financial crisis when corporate
distress is pervasive. The successful completion of restructuring requires a government to take the lead in
establishing restructuring priorities, addressing market failures, reforming the legal and tax systems.

31

CORPORATE
RESTRUCTURING

For instance, in a Banking sector, the best way is to rebuild the financial company around currently profitable and
cash positive business units (like credit cards and short term personal loans), while cutting all the unprofitable units
(like Auto finance or long term business loans).
Some general lessons regarding large-scale corporate restructuring that can be drawn from the experience of the
countries examined in this pamphlet are as follows:

Governments should be prepared to take on a large role as soon as a crisis is judged to be systemic.

Measures should be taken quickly to offset the social costs of crisis and restructuring.

Restructuring should be based on a holistic and transparent strategy encompassing corporate and financial
restructuring.

Restructuring goals should be stated at the outset, and sunset provisions embedded into the enabling
legislation for new restructuring institutions based on these goals.

A determined effort to establish effective bankruptcy procedures in the face of pressures from vested interest
groups is essential.

Large-scale post-crisis corporate restructuring takes a minimum of five years to complete, on

average. Finally, crisis can ultimately boost long-term growth prospects both by weakening special interests that
had previously blocked change, and through the successful completion of corporate restructuring.

18. WEBLIOGRAPHY

WEB SITES

www.valueadder.com

www.wisegeek.com

www.equitymaster.com

www.investopedia.com
32

CORPORATE
RESTRUCTURING

33