What is Corporate Restructuring?

Curious to know what is corporate restructuring? If yes, this blog is for you. This blog unveils what corporate restructuring is, its different types, and the various strategies applied. You can also learn about corporate restructuring, like why corporate restructuring is needed, how to implement corporate restructuring and many more. Sure! After reading this blog, you will get good exposure to what corporate restructuring is and its importance in enhancing business outcomes.

It is a given that change is not risky but stagnant. When a company is not growing, showing poor performance, or encountering many financial difficulties, sticking to the existing strategies and methods will no longer be helpful. Now, it poses a question of how the company can overcome the abovementioned setbacks. The answer is – corporate restructuring. Yes! Changing the company strategy and business operations is necessary to break through its difficulties and achieve growth.

Know that corporate restructuring is a vital strategy that companies adopt to quickly align with changing market conditions, overcome financial difficulties, and steer away from stagnancy in their business. More to the point, corporate restructuring is the process of improving a company's ownership as well as organizational structure. It improves a company's finance and business operations to overcome its financial and operational challenges.  Are you still wondering what corporate restructuring is and its importance in business growth? Read along the blog to explore more about what is corporate restructuring, its importance and types, benefits, and more.

Corporate Restructuring: Table of Contents

What is Corporate Restructuring?

A company performs corporate restructuring to streamline its financial and organizational operations. Corporate restructuring is a company's response to its financial falls and productivity challenges. In other words, the company aims to overcome financial setbacks and boost income through corporate restructuring. Moreover, corporate restructuring is also done when a company wants to change its ownership structure. It is critical to note that there will be an ownership change when there is a merger, company takeover, buyout, etc., made by a company. By embracing corporate restructuring, companies can improve productivity by overcoming financial issues and overriding the ever-changing market conditions.

Know that corporate restructuring can be done in many ways. A company can execute corporate restructuring by changing its business model, downsizing the workforce, selling off assets, regrouping employees, forming new work groups, etc. In simple words, corporate restructuring plays a pivotal role in pushing a company back on track from its financial disruptions as well as organizational challenges. As a result, it stabilizes the company's revenue and emerges as a competitive brand in the market. Right now, you must be clear about what corporate restructuring is.

Let’s see what are the various reasons that drive companies to adopt corporate restructuring.

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Why is Corporate Restructuring Required?

Here are the reasons why companies leverage corporate restructuring.

#1.Strategy Revisions

When a company’s certain business divisions don’t bring up expected results or align with the vision of the company, then there is a need to implement corporate restructuring. The company executes corporate restructuring by selling off unaligned business divisions, redefining the business and financial strategies and operations, and more.

#2.Mergers and Acquisitions

The different divisions of a company can be merged together to increase the performance of a company. Similarly, two companies can be merged as a single, robust, and larger company, thereby increasing profitability. Once the merger is done, the new company will have a new management structure as well as financial operations. When it comes to acquisitions, a company acquires another company or a division and attaches it to the parent company. In this case, corporate restructuring must be done to streamline its business operations.

#3.Financial Difficulties

When a company falls into a severe financial crisis, it executes corporate restructuring to stabilize its financial base and open new income channels. As a result, the company improves its capital structure and strengthens its financial background.

#4.Need to improve profitability

When companies lack efficiency and expect to be competitive in markets, they need corporate restructuring. In other words, if a company is stagnant for a long duration or continuously shows poor productivity figures, it needs compulsory changes in its business strategy and to make a new formulation. The company must employ corporate restructuring in the above-mentioned scenarios to improve efficiency and enhance productivity.

#5.Cash flow Requirement

We all know that cash flow is the lifeline of any business. Smooth and uninterrupted cash flow ensures the healthy financial background of a company. There is a severe need to restore the cash flow if there is poor or no cash flow. Improper cash flow makes companies unable to pay their employees, vendors, or other parties on time. As a result, it will take a significant toll on the reputation of the companies. Thus, corporate restructuring is seriously needed to redefine the companies' financial strategies.

#6.Reverse Synergy

As you know, synergy is usually created by merging divisions or companies. On the contrary, sometimes, if you allow the merged companies or divisions to run separately, they open up more growth opportunities and improve profitability. This phenomenon is known as reverse synergy. 

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Types of Corporate Restructuring

Corporate restructuring can be classified into two major types, as shown in the graphic below.

Types of Corporate Restructuring

While the first type focuses on stabilizing the financial background, the latter focuses on optimizing management structure and business operations.

Let’s understand more about them!

#1.Organizational Restructuring

This type of corporate restructuring completely revives a company's organizational structure. It is done by upscaling or downscaling the organizational hierarchies, downsizing employees, redefining job roles, etc. Organizational restructuring can be done by merging or separating business divisions. It helps to cut down costs drastically and enhance productivity to greater scales.

#2.Financial Restructuring

When there is a severe drop in the financial figures of a company, it requires financial restructuring compulsorily. This financial setback may occur due to poor financial management, unsupportive economic conditions, or other reasons. You can employ financial restructuring by streamlining many financial components such as value design, cross-holding pattern, value property, equity pattern, etc. Not only financial losses, but you can also make financial restructuring while making mergers and acquisitions. Financial restructuring helps companies overcome their financial difficulties and streamline mergers and acquisitions. Thus it supports improving the reliability and reputation of the companies.

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Strategies for Corporate Restructuring

There are many crucial strategies with which you can leverage corporate restructuring effectively.

Strategies for Corporate Restructuring

Let’s see what they are!

#1.Mergers

Mergers profit companies simply because they scale up businesses and enhance productivity. Although a merger is a complex process, it will yield excellent business outcomes if done perfectly. Know that there are many types of mergers, such as horizontal, conglomerate, vertical, and cash. You can pick the correct merger type based on your needs.

#2.Reverse Merger

A reverse manager strategy merges a private company with a public company. This strategy eliminates listing the company's shares on the stock exchange and provides many benefits to the private company.

#3.Demerger

It is just the opposite of a merger. Demerger means that a company or division can be split into two separate entities. So the entities will generate more profits when they function as individual divisions. Hence it simplifies business operations and strengthens the capital of the company.

#4.Divestment

Companies sell off or liquidate some of their business divisions to reduce debts. This process is known as disinvestment. Mainly, the business divisions not connected to the company's core are sold off. As a result, the companies reduce the number of debts and raise income through disinvestment. In this strategy, all the companies that are part of the Joint Venture have complete control, ownership, and management of the business. Not only that, all the companies will have authorization to manage the company’s knowledge base, assets, and money.

#5.Strategic Alliance

A strategic alliance is also known as a strategic partnership. It is entirely different from the Joint Venture. This strategy creates a certain kind of binding between two parties based on specific objectives. It is vital to note that the binding is established through well-crafted and mutually agreed contracts.

#6.Joint Venture

In a Joint Venture, two or more companies join together as a single entity and run the entity or business. For example, Singapore Airlines and Tata companies combinedly to run Vistara Airlines by embracing the joint venture strategy.

#7.Spin-offs

In a way, it is similar to divestment. A company separates its division or business unit in spin-offs, making it a new and independent company. After the spin-off, the new company will have separate shares, ownership, and assets.

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Procedure for Corporate Restructuring

Corporate restructuring is a complex process altogether. A well-planned implementation procedure will help to apply corporate restructuring smoothly.

Procedure for Corporate Restructuring

Let's closely look at the corporate restructuring procedure step by step.

  • Determination: In this step, you must clearly define the objectives for the corporate restructuring. You can specify the objectives after conducting multiple discussions with relevant teams.

  • Identification: Now, you must evaluate the strengths as well as weaknesses of your company. This process will support the implementation of corporate restructuring in the best manner possible.

  • Implementation: In this step, implementing corporate restructuring is done carefully. You must incorporate the strengths of the company while implementing the corporate restructuring. Not just that, you must identify the potential problems in the implementation procedure and figure out the remedial measures proactively.

  • Post-implementation Analysis: In this step, you will measure the post-effects of the corporate restructuring over time after the implementation process. It aids in assessing the implementation's success and improves the corporate restructuring's effectiveness.

  • Evaluation of Restructuring: This is the final step. Improvements are incorporated in the corporate restructuring based on the results of the post-implementation analysis. Hence a comprehensive corporate restructuring is executed positively.

Real-time Examples of Corporate Restructuring

In this section, let's learn some real-time examples of corporate restructuring.

  • L&T Company has made corporate restructuring by employing demerging strategy. The company decoupled its cement division into a separate company, Ultratech Cement Ltd. This demerger helped L&T to focus on its core businesses.
  • Dr. Reddy’s laboratory limited is a company that has made many acquisitions in the past. It has acquired companies such as Benzex Lab, Betapharm, Meridian Healthcare, and many others. This is how the company has emerged as a giant in the Medicare business.
  • Tata Steel Limited has embraced corporate restructuring by applying the acquisition strategy. The company acquired an overseas company known as Corus Group. This acquisition has elevated the synergy of the company to high levels. Hence, the company’s retail and distribution network expanded, its research capabilities improved, and more.
  • Bharti Airtel Limited is the company that made corporate restructuring by applying leveraged buyout strategy (LBO). According to this strategy, the company raised funds through borrowing and completed the buyout. Mainly, the company's balance sheet is affected in no way.

Benefits of Corporate Restructuring

Undeniably, corporate restructuring provides plenty of benefits to companies that adopt it.

Let’s outline the merits of corporate restructuring in the following.

#1.Improves Communication

Corporate restructuring enhances the interaction between business leaders and employees. So it encourages collaboration and drives employees to meet business goals.

#2.Tuning to Market Conditions

 Generally, market conditions are unexpected and wavering. The corporate restructuring will provide companies the strength to adjust to market conditions. It may create a positive or negative impact on the business performance of companies.

#3.Reviving up Financial Backgrounds

Corporate restructuring maximize revenue streams and minimize debts. Simply put, it revives the financial background of a company.

#4.Enhance Productivity

The refined organizational structure after the corporate restructuring will boost the productivity of employees and teams. Ultimately, it will enhance the business outcomes.

#5.Proactive Leadership

The corporate restructuring allows leaders to frame new financial and structural strategies effectively. By applying these strategies, leaders can revive a company’s financial background and concretize its organizational structure. Mainly, corporate restructuring protects companies before they face any severe consequences due to debts or unaligned organizational structure and business operations.

#6.Ensures Cash Flow

Corporate restructuring frees up all the hurdles in the cash flow and allows free cash flow in a company. It helps companies to pay their suppliers, employees, and others on time.

#7.Synergy and Empowerment

Because of acquisitions and mergers, companies get new assets, employees, and shares, thus opening up new income channels. It creates synergy in the businesses and boosts performance.

Corporate Restructuring FAQs

1. What are the three dimensions of corporate restructuring?

  • Assets
  • Capital structure
  • Management

2. What are the different expansion types in Corporate Restructuring?

  • Mergers
  • Acquisitions
  • Joint Venture

3. What are the limitations of corporate restructuring?

  • Inefficient change management
  • Insufficient cooperation from employees
  • Inadequate time for implementation
  • Miscommunication with stakeholders

4. What is the result of Corporate Restructuring?

Companies achieve smooth, efficient, and sound financial and business operations with corporate restructuring.

5. What are the characteristics of corporate restructuring?

  • Improving the balance sheet of a company
  • Eliminating unused assets and optimizing underutilized assets
  • Reorganizing marketing, sales,  and supply chain operations
  • Minimizing interest payments

Conclusion

On a final note, we are confident that this blog might have helped you to learn about what corporate restructuring is, why it is needed, its benefits, and more extensively. Remember, corporate restructuring is a process of reviving back a business from its financial and organizational disruptions. So by adopting corporate restructuring, companies can avoid financial losses, enhance productivity, and increase reliability among stakeholders. In short, corporate restructuring helps companies to stand on their feet and emerge as solid entities in the competitive market. If you would like to Enrich your career to get a certified professional, then visit Mindmajix - A Global online training platform: “Artificial Intelligence Online Training”  Course.  This course will help you to achieve excellence in this domain.

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Last updated: 16 Aug 2023
About Author

 

Madhuri is a Senior Content Creator at MindMajix. She has written about a range of different topics on various technologies, which include, Splunk, Tensorflow, Selenium, and CEH. She spends most of her time researching on technology, and startups. Connect with her via LinkedIn and Twitter .

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