Corporate Restructuring - Session 4.pdf

Corporate restructuring is a significant and intricate aspect of modern business management. In an era where companies are constantly faced with economic fluctuations, technological advancements, regulatory changes, and competitive pressures, the ability to adapt and evolve is crucial. The focus of this presentation is to delve deep into the multifaceted world of corporate restructuring, which serves as a strategic tool to enhance business operations, improve financial performance, and ensure long-term sustainability.

Corporate restructuring can be described as the reorganization of a company's structure, operations, or finances in response to internal or external pressures. It often involves changes in ownership, asset management, financial restructuring, or business operations, with the ultimate goal of increasing efficiency and profitability. In today's globalized and dynamic economic environment, companies are continually restructuring themselves to remain competitive, mitigate risks, and pursue growth opportunities. This presentation will explore the various dimensions of corporate restructuring, including its types, triggers, challenges, and benefits.

The Importance of Corporate Restructuring
Corporate restructuring is not merely a reactive measure but also a proactive strategy that allows organizations to position themselves for future growth. In the face of globalization, businesses must contend with evolving markets, disruptive technologies, and new competitors. As a result, restructuring has become a necessity for companies looking to maintain their relevance, improve financial health, and enhance shareholder value.

Restructuring is also crucial for companies experiencing financial distress. For organizations grappling with declining profits, increasing debts, or shrinking market share, corporate restructuring offers a lifeline to restore operational efficiency and realign business objectives. On the other hand, successful companies may engage in restructuring to capitalize on new opportunities, expand their market presence, or optimize their operations for greater efficiency.

1. Corporate
Restructuring

2. CORPORATE
SPLITS
Thecorporatesplitproceduremakesiteasierfor
companies tosplitbusiness unitsintonew
companies(orexistingcompanies).
Priortotheintroductionofthecorporatesplit
procedure,itwaspossibleforacompanytosplit
abusinessunitintoanewsubsidiarythrough
either an investment-in-kind or apost-
establishmenttransferofbusiness.
However,thetraditionalmethodstocompletesuch
transactions wereexpensive andtimeconsuming
procedures.
Forexample, anassetvaluation byacourt
appointedinspectorwasrequired.
Company
1
Company
2
Company
3
Company
4
Company
5

3. Acorporatesplitwhichdoesnotinvolvethe
distribution ofshares directly tothe
shareholdersofatransferorcompany,enables
aparentcompanyto:
1.Focusoncorebusinesses,
2.Improve thecontrol spanoftheparent’s
managementteambyreducingparentalinvolvement,
and
3.Accommodate differing personnel andcompensation
systems.
Atthesametime,suchsplitsenableaparent
companytounlockthevalueofabusiness unitby:
1.Clarifyingthebusinessunit’sresponsibilityand
authority;
2.Providingacertaindegreeofautonomytofoster
anindependentculture;
3.Expeditingthebusinessunit’sdecision-makingto
improvebusinessperformance;and
4.Enhancingvisibilityforcustomers,suppliersand
potentialalliancepartnersorbuyers.
Moresignificantly,corporatesplitsfacilitatethe
participationofstrategicpartnerswhocan provide
necessarycapabilities.

4. oTrackingstockisaclassofparentcompanycommon
stockthatprovidesareturntoinvestorslinkedtothe
performanceofaparticularbusinessunitwithinthe
parentcompany.
oIntheory,trackingstockcancreatemanybenefitsfor
boththeparentcompanyandthesubsidiary.
oAtrackingstockdoesnotrequiretheparentcompanyto
makethetax,legal,governanceandorganizational
changesrequiredforanequitycarve-outorspin-off,
e.g.,noseparateboardofdirectorsisrequired.
oThisprovidesthemainappealtotheparentcompany
overotheralternatives.
TRACKING
STOCKS
Trackingstocksareoftenterminatedwhen
thecircumstancesandobjectivesofthe
businessand/orparentcompanychangeand
consequentlytheparentcompanydecidesto
sell,spinofforspininthetrackedbusiness.
Note:

5. Theadvantagestousingtrackingstocksinclude:
1.Theparentcompanycontinuestocontrolthebusinessunitand
maintainownershipofitsassets,
2.Atrackingstockcanraisecapitalonattractiveterms,
3.Apubliclylistedtrackingstockestablishesamarketvaluefor
thebusinesstowhichmanagementcompensationprograms
canbetied,
4.Atrackingstockpreservestheoperatingbenefitsofasingle,
integratedcorporation,and
5.Theparentcompanymayusethetrackingstockasacquisition
currency.
Thedisadvantagesofatrackingstockincludethefollowing:
1.Theparentcompanyissuingatrackingstockmustcreate
financial"firewalls"betweenthebusinessandtherestofits
operations,
2.Theparentcompanywillshouldertheadministrative
burdeninconnectionwithatrackingstock,
3.Acompanythatissuesatrackingstockcreatesthepotentialfora
conflictattheboardlevelbetweentheinterestsofthetwosetsof
shareholders,and
4.Investorsmaynotgiveasmuchvaluetothetrackingstockasif
sharesrepresentedadirectownershipinterestintheassetsof
thetrackedbusiness.

6. JOINT VENTURES
Whenwellcrafted,JointVentures(JVs)
canachievemanyofthesameobjectives
fortheparentcompanyasanacquisitionof
theothercompany.
Itincludesaccesstotheresourcesand
capabilitiesofthejointventurepartner,but
atalowercostandwithoutmanyofthe
risksassociatedwithanacquisition.
Consequently,theparentcanincreasethe
valueofasubsidiarybywayofaJV.
SuccessfulJVsareoftenfollowedbyIPOs.

7. Jointventuresmaybealsousedasameansofdivestingabusiness.
a)ThefirststepisthecreationofaJVwithastrategicpartner.Oftenthestrategic
partnercontrolsamajorstake(i.e.,over50%)intheJVcompany.
b)ThesecondstepistheacquisitionoftheminoritysharesoftheJVcompanyby
thestrategicpartner.
Suchtwo-stagetransactionsprovidetheacquiringpartnerwithbenefits,
includingthefollowing:
1.Ameanstoencouragethepartnertoassistinbuildingthebusiness;
2.Ameanstogettoknowthebusinessbeforeasubsequentacquisition;
and
3.Ameanstolaythegroundworkforsmoothintegrationafteralater
acquisition.
Buy-outfirmsareactivebuyersofnon-coresubsidiariesoflargepublic
companies.

8. AlthoughJVsarenottheirtraditionalbusinessmodel,buyoutfirmsmaybeinterestedin
formingJVs.Suchbuyoutpartnershipscanbeusedasameansofdivestingnon-core
businesseswhenacashsaleisunavailableorundesired.
Theadvantagesofabuyoutpartnershipfortheparentcompanyandthesubsidiary
include:
1.Ameanstoencouragethepartnertoassistinbuildingthebusiness,
2.Experiencedbuyoutfirmscangreatlyassistinbuildingthesubsidiary,recruitinga
managementteam,formingrelationshipswithcustomersandsettingbusinessstrategy,
3.Buyoutfirmsinvestcashintothesubsidiaryandassistinfundingkeybusiness
initiatives,
4.Theinvolvementofexperiencedandrespectedbuyoutfirmsmaybeasignificantasset
tothesubsidiaryinalaterIPO.
Thechallengesofabuyoutpartnershipfortheparentcompanyandthesubsidiary
include:
1.Abuyoutfirmmaynotinvestinanentitywhentheparentcompanyisincontrol,and
2.Buyoutfirmsareusuallyinterestedinexecutinganexitstrategywithinareasonable
timeframe.

9. CONCLUSION
•Althoughrestructuringisavaluedtoolforanorganizationtouseinanattempttomaintainitsgoals
andobjectivesmanycompaniesrecognizetheneedtorestructuretoolate,whenfeweroptions
remain,savingtheorganizationmaybemoredifficult.
•Thepatternofatypicalcorporaterestructuringprocesscallsforanorganizationtostabilizeits
financialsituation,returntoprofitandthenfocusongrowth.Inparallel,itmuststrengthenitscore
businessessothatitcangenerateenoughcashtofinancesubsequentgrowthinitiatives,although
focusingoncorebusinessaloneisnotenough.
•Toachievevalue-buildinggrowth,companiesmustdevelopandmaintainbalancedbusiness
portfolios.Thekeychallengeistonurturegrowthoptionswhiledivestingunderperformingornon-
corebusinessesproactively.
•Successinproactivedivestitures,asignificantrestructuringtool,ismorelikelywhencompaniesuse
deliberatelyinterimsolutionstoaneventualexitandlaythegroundworkforcreatingastand-alone
entity.
•Organizationsneedinsightintohowtobestutilizetalentandfindthebestfitbetweenexisting
employeesandthejobsthatawaitthem.Restructuringinitiativesfailwhenundertakenapproaches
areunrealistic.

10. •Restructuringisanon-goingprocessandunderstandingtherelationshipbetweencorporate
restructuringanditsemployeesisthekeynotonlytoimprovinganyorganization'sabilitytomove
throughchangeeffectivelybuttoguaranteeeverlastingcompetitiveness.
•Organizationsareencouragedtopreemptivelyrestructure.Themoreextensivetherestructuring,the
greaterthegrowthprospects;thestrongerthegrowth,thegreatertheneedforrestructuring.
•Continuousorganizationallearningisnecessaryfororganizationstostayuptodateandexcel,and
mustbetheessenceofeveryrestructuring.Organizationsthatarenotwillingtolearnwillbecome
obsolete.
•Attheendoftheday,whetheritisanorganizational,financialorportfoliorestructuring,asuccessful
corporaterestructuringrestsonhumanbehavior,achangeinbehavior;thatis,changingthebelief
systemofthepeopleoftheorganization.
•Important:Organizationsmustperforma"restructuringaudit"ontheirbusinessesperiodically,looking
foropportunitiestocreatevaluebyvoluntarilyrestructuring,beforecircumstancesleavethemwithno
choice.
CONCLUSION