9 corporate restructuring

Business Strategy II 11. Corporate Restructuring 1/17

CORPORATE RESTRUCTURING


The process in which business firms engage in broad activities like expanding, shrinking, and otherwise restructuring assets and ownership structures.

Two primary types: voluntary and involuntary

Four primary triggers for restructuring activity:

– Environmental

– Governance

– Strategy

– Performance



Environmental:

– Competition

– Takeover threats

– Tax motivations

Governance (weak):

– Ineffective management

– Complacent board

– Inadequate incentives

– Lack of ownership concentration

Strategy:

– Poor strategy or implementation

– Over-diversification

– Leverage

Performance:

– Poor or declining performance

– Difference between desired and actual performance

– Assets are undervalued

– Perceived threat of takeover



Growth: Looking for instantaneous growth through merger & acquisition.

Increasing the market share: Enhance sales and profits through additional bargaining power with regards to dealers, suppliers and consumers. *HLL’S merger with TOMCO

Acquiring competence or capability: Acquiring or merging with a company having a wide distribution network or an efficient R&D team. *ICICI acquired ITC Classic to obtain the latter’s retail network and depositor base.

Tax benefits: Try to gain tax benefits by merging with other companies. *ITC Bhadrachalam with ITC.

WHY RESTRUCTURE?


Entering new markets/ product segments: Company which plans to enter into new market can do so by merging with another company which is already successful in that area. *Ranbaxy acquired Crosslands to enter into therapeutic and dermatology categories in which the later had successful brands

Access to funds: A company rich in cash can merge with other companies and can expand its operations and utilize its funds more effectively. *TDPL the cash starved pharma company merged with the cash rich Sun Pharma, as the former did not have funds to launch new products.

WHY RESTRUCTURE?


Change in business or financial structure to achieve greater efficiencies and increase in value to shareholders

Selling & acquiring businesses

Downscaling or divestment: Over-diversification may lead to inefficiencies, fall in stock prices, hostile takeover bids, etc., prompting restructuring

RESTRUCTURING


EXPANSIONSMergers

Tender Offer

Vertical

Conglomerate

Joint Ventures

Horizontal

Bear Hug

Hostile Takeover

Strategic AlliancesAcquisitions

White Knight


SELL OFFSSpin Offs

Split Ups

Equity Carve Out

Split Offs

Divestitures


CORPORATE CONTROL

Premium Buy-Backs Anti-takeover AmendmentsGreen Mail

Standstill Agreements

Super Majority Voting Provisions

Unspecified Service Terms for Directors

Golden Parachutes

Proxy Contests


CHANGES IN OWNERSHIP STRUCTURE

Exchange Offers Going Private

Debt/preferred stock for common stock

Share Repurchases

Management Buy-out

Leveraged Buy-outs

Common stock for debt/preferred stock


Expansion Sell Offs Corporate ControlChanges in Ownership Structure

Mergers Horizontal

Vertical

Conglomerate

Acquisitions Tender offer

Bear hug

Hostile takeover

Joint Ventures

Strategic Alliances

Spin Offs

Split Off

Split Up

Divestiture

Equity Carve Out

Premium Buy- Backs

Standstill Agreements

Anti-Takeover Amendments

Proxy Contests

Exchange Offers

Share Repurchases

Going Private

Leveraged Buy-Outs

FORMS OF RESTRUCTURING


THEORY OF THE FIRM & CORPORATE ACTIVITY

A. RATIONALE FOR EXISTENCE OF THE FIRM

A.1: Transaction cost efficiencyTo improve cost efficiency of transactions/interfaces in the transfer of goods and services; cost of transaction should be less than cost of managing the firm

Bounded rationalityTo overcome the limited capacity of the human mind to process linguistic and computational information necessary for effecting transactions

Computational capacityEfficient & transparent internal review & monitoring process. Hierarchical structure, specialized decision making, systematic information collection & distribution

Contd..


THEORY OF THE FIRM & CORPORATE ACTIVITY (Contd..)

A. RATIONALE FOR EXISTENCE OF THE FIRM (Contd..)Curbs opportunismLimits shirking, cheating & other sub-optimal behaviour; opportunistic rivalry with competitors, distortion of data and making unrealistic promises

A.2: Production cost efficiencyEfficient production in spite of transaction and managerial costs – team production

A.3: Nexus of contractsFramework of contracts through franchises, partnerships, joint ventures, etc.

Contd..


THEORY OF THE FIRM & CORPORATE ACTIVITY (Contd..)B. ORGANISATIONAL FORMSB.1: Vertical structureControl of manufacturing and business in the same industry – extra profits, goodwill & reputationBackward & forward integrationControl of communication channels

B.2: Horizontal structureMulti-divisional corporations (M-Form organizations) – profit centres, SBUs, communications across divisionsAutomobile manufacturer – car rentals, used car sales, vehicle financing Unitary organizations (U-Form organizations) – experience communication overload (bounded rationality) & functional areas pursue sub-goals (opportunism) Contd..


THEORY OF THE FIRM & CORPORATE ACTIVITY (Contd..)C. NUMERATOR & DENOMINATOR MANAGEMENTC.1: Denominator management

Cut costs – relatively easy to do

Reduce head counts, sell assets, belt tightening

Restructure, cut manpower, shut down unviable units

C.2: Numerator focused management

Increase revenues & profits in a cost effective manner – positive approach

Improve productivity

Preserve technological leadership with comparatively low R&D budget

Increase sales with limited increase in ad spend

Expand distribution & improve customer service at minimal cost


NUMERATOR & DENOMINATOR MANAGEMENT

Hamel and Prahalad state that:

– To grow the numerator, top management must know where opportunities lie, anticipate changing customer needs, must pre-emptively invest in building new competencies etc.

– This is time consuming and difficult, hence to provide quick results, managements concentrate on reducing the denominator (downsizing, divesting etc.)

– Whereas improvement in efficiency and productivity are desirable, more often than not, only denominator management ends up in the company 'selling away' market share profitably (i.e. harvesting rather than growing the market).


TURNAROUND MANAGEMENTTurnaround occurs when a firm perseveres through an existence threatening performance decline; ends the threat with a combination of strategies, systems, skills and capabilities; and achieves sustainable recovery. The obverse of performance recovery is failure and eventual death.

FRAMEWORK DEVELOPED BY SHAMSUD CHOWDHURY

Shamsud Chowdhary’s framework of turnaround management

1. Decline – K-extinction (due to external factors) & R-extinction (due to decline in organization’s resources)2. Response Initiation – strategic & operational3. Transition4. Outcome – success or failure

9 corporate restructuring

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