corpo restruc doc

7/31/2019 Corpo Restruc Doc

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Introduction:

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. 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 of the following

Pattern of ownership and control

Composition of liability

Asset mix of the firm.

It is a comprehensive process by which a co. can consolidate its business operations and strengthen

its position for achieving the desired objectives:

(a)Synergetic

(b)Competitive

(c)Successful

It involves significant re-orientation, re-organization or realignment of assets and liabilities of the

organization through conscious management action to improve future cash flow stream and to

make more profitable and efficient.

MEANING & NEED FOR CORPORATE RESTRUCTURING

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 direction. Here are some examples of why
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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 propertiesand 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 the company and leave behind a shell of the

original structure, there is still usually a hope, what remains can function well enough for a new

buyer to purchase the diminished corporation and return it to profitability.

Purpose of Corporate Restructuring -

Business restructuring is a means towards an end. It is a tenacious, long drawn out process that is

embarked upon to achieve identified business goals provided by the corporate vision. Companies

experiencing a major restructuring are generally doing poorer than expected and wish to increase

future earnings by writing down their assets.

If a firm is operating in an environment where changes in competition, technology, product,

customer mix and cost of financing are minimal or if the firm is in a steady or dominant position in

the industry, there may not be a need for the firm to restructure. With the onset of competition,
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rapid obsolescence in technology, skills and product market and rising volatility in money and

capital market, the steady state is virtually non-existent.

Overnight, companies that were known to dominate the respective industries for decades have

begun to underperform and are showing signs of extinction. The reasons can be traced to:

Absence in growth segments of the market. Lack of economies of scale. Poor efficiency in operations. Changes in business structures . both domestic and global. Declining competitiveness of the product, technology and value creation process. High cost structure and high cost of capital. 7. Mismanagement of fixed and working

capital. Lack of funds to support brand and distribution network. Changes in environment in areas like technology, competition, regulations etc. It can prevent a competitor from establishing a similar position in that industry. It offers a special timing advantage because it enables a firm to leap ahead in the process of

expansion. It may entail less risk and even less cost In a saturated market simultaneous expansion and replacement (through a merger) makes

more sense than creation of additional capacity through internal expansion. Changes in government policy regulating a given industry.

Hence restructuring becomes crucial whenever there is a major shift in the business environment,

which is beyond the control of the firm. Such restructuring, given the volatility of present day

business environment has to be a continuous process.

The main purpose of corporate restructuring is as follows:

To enhance the share holder value, The company should continuously evaluate its:


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1. Portfolio of businesses,

2. Capital mix,

3. Ownership &

4. Asset arrangements to find opportunities to increase the share holders value.

To focus on asset utilization and profitable investment opportunities.

To reorganize or divest less profitable or loss making businesses/products.

The company can also enhance value through capital Restructuring, it can innovate

securities that help to reduce cost of capital.

Characteristics of Corporate Restructuring -

1. To improve the companys Balance sheet, (by selling unprofitable division from its core

business).

2. To accomplish staff reduction (by selling/closing of unprofitable portion)

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.


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11. Forfeiture of all or part of the ownership share by pre restructuring stock holders (if the

remainder represents only a fraction of the original firm, it is termed a stub).

Benefits of Business Restructuring

The benefits of Business Restructuring will be explained through 2 corporate examples: A.B

Group and the merger between Dabur & Balsara.

The Aditya Birla group merged group companies, Indo Gulf Fertilizers and Birla Global Finance

into Indian Rayon & Industries. The company has been renamed Aditya Birla Nuvo.

The benefits of the above restructuring are stated below:

1. It created shareholder value.

2. It created a company that captures opportunities in the evolving Indian economy through

leadership in focussed value businesses and driving high growth businesses.

3. It provided the shareholders of Indo Gulf Fertilizers - so far restricted in its growth due to

regulatory uncertainties - a broader canvas to participate in value creation.

4. It also extended the participation of Birla Global Finance shareholders beyond mutualfunds into life insurance.

5. With such strong financials, Indian Rayon would be in a better position to tap possible new

opportunities.


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6. In the emerging environment of consolidation in the mutual funds industry, Indian Rayon's

strong balance sheet will help it compete better.

Another most important acquisition that happened is the acquisition of Balsara group by Dabur .

The benefits of this restructuring are as follows:

1. It strengthened Daburs position in oral care: Balsaras were the pioneers in herbal oral

care products launched in the seventies. Balsaras herbal oral care range (Promise, Babool

and Meswak) is a good strategic fit for Dabur whose products are also positioned on the

herbal platform.

2. Added a new avenue of growth - Household care: Balsara had a diverse portfolio of brands

in extremely attractive categories. The acquisition enabled Dabur to enter the Rs.20 billion

household care business through well entrenched brands.

3. Enabled Dabur to expand regional presence: 45% of Balsara revenues were from west &

south. This complemented Daburs regional saliency.

4. Economies of scale from combined business: The acquisition provided several synergies to

Dabur on the manufacturing and marketing front.

Combined business provided economies of scale in marketing, sales and distribution.

Backend synergies in supply chain, operations, purchase, IT, etc. The acquisition also marked Daburs entry into niche segments of household care

products providing it completely new area of growth.

Corporate Debt Restructuring In India

Corporate Debt Restructuring (CDR) is more than a mere fad for India Inc. As the global

economic resurges after several months of an economic slowdown, analysts fastidiously evaluate

the impact of debt restructuring processes on the overall well being of the economy. It may be

argued that these prevailing conditions are perhaps the appropriate litmus test to assess the success

of the CDR system in emerging economies such as India.


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CDR & India: A Fad which is here to Stay?

For Corporate India, CDR has remained at the receiving end of constant media-attention. With a

formalized CDR system which was put in place over half a decade ago by the RBI, and an ever

growing number of corporations taking refuge under its provisions, CDR has established a strong

foothold in the field of banking and finance.

Current Trends: The Global Crisis & Debt Restructuring

What do giant companies such as Wockhardt, Vishal Retail, India Cements, HPL, Subhiksha,

Sakthi Sugars, Jindel Steel, Essar Steel, have in common? They are all recent participants of the

Indian CDR system.

In between 2001 and 2005, the CDR Cell restructured 138 cases with an aggregate debt of over Rs

75,000 crore. Of these, 75% of the cases were a success they performed well and met their debt

obligations in time. The total references received by the cell at the end of December 2009 stood at

208 with an aggregate of Rs 90,888 crores.Of these, 29 cases totaling Rs 5,018 crores were

rejected and 173 cases with a total debt of Rs 84,510 crores were implemented under the program.

These proposals came from all quarters of the industry. While in the year 2008-09 alone the CDR

Cell in India received proposals from 34 companies, the number of cases received for restructuring

tripled in the year 2009-10.

It is believed that investments earmarked for CDR constitute 60% of the total industrial

investments. Waajid Siddique in his comment published in a popular business law magazine,

observed that at a macro level, the current situation (referring to the global economy in the wake

of the sub-prime crisis) constitutes the largest global restructuring ever attempted.

The primary reason for this surge has been attributed to the mounting debt of companies along

with a drop in the returns causing a sustained period of debt. Although India outperformed

expectations riding through the global economic slowdown relatively unaffected, its exposure to

the crisis was unavoidable. Therefore, CDR has had, and shall continue to play, an integral role inthe Indian restructuring efforts in the post-crisis phase.

CDR: what is it and why do we hear so much about it?

it is a proactive step to avoid companies from slipping into a mess from where it may become

difficult to make any recovery.


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- An executive, quoted by a leading Indian financial daily.

Adam Smith, way back in the late 18 th century, spoke about the invisible hand of self-interest that

motivated the proliferation of business. Today, the situation has changed, but not by much. In the

working of corporations within todays complex mechanisms, it is the self-interest of the various

creditors and the members of the company which are the driving force.

Simply put, CDR is a non-statutory and voluntary method for companies to resolve their unmet

financial obligations. It is founded on the understanding that making such restructuring facilities

available to companies in a timely and transparent matter goes a long way in ensuring their

viability which is sometimes threatened by internal and external factors. Corporate debt

restructuring as a remedial measure prevents incipient delinquency in corporate accounts.

Therefore, this system resolves the financial difficulties of the corporate sector and enables entities

to become viable.

Other available options to restructuring may include re-financing or filing for bankruptcy. In

practice, restructuring brings to the table the interests of the company along with those of the

creditors. This is what sets restructuring apart from other creditor friendly approaches.

This restructuring is multi-faceted. It usually involves the waiver of part of interest or concessions

in payment, or converting the un-serviced portions of interests into term loans, re-phasement of

recovery schedules, reduction in margins, reassessment of credit facilities including working

capital, restructuring the management, reduction in equity capital to make more capital available

for expansion, conversion of debentures into equity to give relief on the compulsory payment of

interest on the debentures. In addition to these, often, additional finance may be sought for

bringing about change in the working of the corporation.

A look at the Indian Insolvency

& Restructuring Regime


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2.1 A Look at the Insolvency / Restructuring Laws

A need has long been felt for India to develop a comprehensive code of insolvency and

restructuring laws. Currently, the regime is highly fragmented and consolidation would be a move

in the right direction.

When companies in India are faced with financial turmoil, they may consider a number of options

to achieve restructuring or liquidity. There are six ways for them to attempt to achieve the desired

results. These include winding up, arrangements or compromises under the Companies Act,

restructuring under the Sick Industrial Companies (SIC) Act, reconstruction of assets under the

Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest

(SRFAESI) Act, and restructuring as per specific governing statutes which is mostly in the case of

public sector banks and insurance companies. Lastly, informal debt restructuring as per the RBI

guidelines also provides a forum to address these concerns.

A. Winding-Up

Background:

The Companies Act, 1956 lays down procedures for companies to wind-up. The winding up may

be ordered by the court in circumstances where the company is unable to pay its debt or it may be

consequent to a petition filed by the creditors or the shareholders or by the company itself.

Voluntary winding up may also follow the occurrence of a trigger- event as specified in thearticles of the company.

After the appointment of a liquidator, in whom the estate of the company vests, assets are

distributed in a preferential order. While the winding up process is under way, the operations of

the company are halted and there is a bar on initiating any other legal proceedings against the

company without the leave of the court.

Foremost priority is given to the dues of the workmen and debts owed to secured creditors who

often choose to enforce their securities outside of the winding up process. From the proceeds of the companys estates, amounts owed to the government are paid first. Thereafter, the dues of the

unsecured creditors and those secured creditors who participate in the winding up process are

settled. Any remaining surpluses are then divided amongst the shareholders.

Drawbacks:


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One of the major drawbacks of this process is that the Act as such does not provide for a time

frame for winding up. The average time taken for the procedure to complete is as high as 10 years.

In addition to this, the recoveries are often low and the creditors usually suffer losses.

B. Schemes of Compromise or Arrangements

Background:

The Companies Act also allows for formation of schemes of compromise or arrangements,

facilitating the entering into such schemes in between debtor companies and their creditors or

members. In the course of such an arrangement, the creditors who stand to be affected by the

proposed scheme are divided into appropriate classes. These individual classes must consent to the

scheme with a 75% majority. Once approved, the scheme needs to be sanctioned by the court

which reserves the right to modify the scheme. Pending the execution of the scheme, companiesare usually granted moratoriums on actions their pending dues to the creditors.

Drawbacks:

Once again, this procedure involves convening several meetings and court approvals and is

therefore time consuming. Nonetheless, since the court does not look in to the commercial benefits

of the scheme and only assesses whether the scheme is in the interest of the company or not,

constructive schemes can be implemented. For these reasons, and its ability to bind dissenting

creditors, this process has been successful in the past.C. Restructuring under the Sick Industrial Companies (Special Provisions) Act, 1985

Background:

An industry is considered to have become sick when it accumulates losses equal to, or more than,

its net worth. Under the SIC Act, if a company turns sick, the directors of the company must refer

the matter to the BIFR (Board of Industrial and Financial Reconstruction) which has extremely

broad powers. BIFR, on its satisfaction that the company may be restructured, sanctions a scheme

which is binding on the members and the creditors.

Drawbacks:

In practice, this process has been widely implemented by debt-struck companies. Unfortunately,

the process rarely culminates in a successful restructuring because of the inordinate delays in the

implementation. Companies, in fact, use the reference to BIFR as a tactic to defeat debt claims.


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Efforts are under way to reform the law in this regard and to make the Act a potent mechanism to

address sick companies.

D. Reconstruction of Assets under the SRFAESI Act, 2002

Background:The Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002 (SRFAESI) envisages private sector participation in asset reconstruction companies to

manage NPAs acquired from creditors and grants them certain special rights to aid in the

reconstruction of the assets. The secured creditors may exercise their rights outside of this

mechanism without interference from the BIFR.

Drawbacks:

Although the Act dates back to the year 2002, this process has not been fully tested and

commentators are of the opinion that its success rate as such remains unknown.

E. Statute Specific Remedies

Background:

Where the corporation in question has been incorporated under a specific statute, which is the case

with public sector banks and insurance companies, they may reconstruct as per the provisions of

that specific statute.

Drawback:

To the creditors of these corporations, other aforementioned remedies are not available.


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Restructuring Types

The broad types of Restructuring are displayed in the following diagram:

Each of these can be further classified into various types or methods of restructuring depending

upon the objectives to be achieved.

2.3.1 Portfolio & Asset Restructuring

Broadly, these types of restructuring affect distinctly the asset base or the product / service

portfolios of the organizations in consideration, as also the power and control related issues. Also,

these types of restructuring initiatives are usually undertaken to enhance the profitability of the

both companies in a mutually rewarding situation - as in a Merger scenario . or either of the

dealing parties . as in the case of Acquisitions . or even certain objective decisions as the

divestments of certain businesses to ensure growth and sustainable development.


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I. Mergers & Amalgamations: It is a combination of two or more business enterprises into a

single enterprise. Usually mergers occur in a friendly setting where executives from the respectivecompanies participate in a due diligence process to ensure a successful combination of all parts.

The Shareholders of each company must agree to it prior to undertaking it. Mergers can be of three

types; namely:

a). Horizontal Mergers: A horizontal merger is when two companies competing in the same

market merge or join together. This type of merger can either have a very large effect or little to no

effect on the market. When two extremely small companies combine, or horizontally merge, the

results of the merger are less noticeable. These smaller horizontal mergers are very common. If a

small local drug store were to horizontally merge with another local drugstore, the effect of this

merger on the drugstore market would be minimal. In a large horizontal merger, however, the

resulting ripple effects can be felt throughout the market sector and sometimes throughout the

whole economy. E.g. the Daimler Chrysler Merger.


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b. Vertical Mergers: A merger between two companies producing different goods or services for

one specific finished product. By directly merging with suppliers, a company can decrease reliance

and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire

company. Vertical Mergers can be in the form of Forward Integration of Business [E.g. A

manufacturing company entering in the Direct Marketing Function . which was not its foray in the

erstwhile times) or in the form of Backward Integration of Business [E.g. A manufacturing

company also focussing on the producing the required raw materials and managing its supply

chain activities on its own . which was not its foray earlier].

c. Conglomerates: This type of merger involves mergers of corporates in related as well as

unrelated businesses to achieve three objectives; a. Product Extension b. Entry into new

Geographic Markets c. Entry into unrelated yet profitable businesses. E.g. most big businesshouses such as Reliance Industries, Aditya Birla Group, etc. undertake such mergers to expand

their businesses.

Benefits of undertaking Mergers & Amalgamations:

Entry into new businesses Asset / Competencies Acquisitions

Development of New Capabilities

Issues in undertaking Mergers & Amalgamations:

i. Selection and Financial Analysis of the Target Firm (the company to be merged with).

ii. Valuation of the Target Firm

iii. Establishing the Basis of Exchange

iv. Rightsizing the new entity

v. Maintaining Employee Productivity

vi. Reorganizing the organization

Some Corporate Examples:

ICICI Bank Limited and Bank of Madurai, Proctor & Gamble and Gillette, Dabur and Balsara, etc.


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II. Joint Ventures: A joint venture (often abbreviated JV) is an entity formed between two or

more parties to undertake economic activity together. The parties agree to create a new entity by

both contributing equity, and they then share in the revenues, expenses, and control of the

enterprise. The venture can be for one specific project only, or a continuing business relationship

such as the Sony Ericsson joint venture. This is in contrast to a strategic alliance, which involves

no equity stake by the participants, and is a much less rigid arrangement.

a. Project Based JV: These are Joint Ventures entered into by companies in order to accomplish a

specific project.

b . Functional JV: These are Joint Ventures wherein, companies agree to share their functions and

facilities such as production, distribution, marketing, etc. to achieve mutual benefit.

Motives for forming a joint venture

Internal reasons

1. Build on company's strengths

2. Spreading costs and risks

3. Improving access to financial resources

4. Economies of scale and advantages of size

5. Access to new technologies and customers

6. Access to innovative managerial practices

Competitive goals

1. Influencing structural evolution of the industry

2. Pre-empting competition

3. Defensive response to blurring industry boundaries

4. Creation of stronger competitive units

5. Speed to market

6. Improved agility

Strategic goals


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1. Synergies

2. Transfer of technology/skills

3. Diversification

Benefits of Joint Ventures

Complementary Benefits Acquiring and Sharing Expertise New Business / Product Development Capacity Expansion

Issues in Joint Ventures

Due Diligence Business Strategy Development of HR Strategies Implementation

III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (thetarget) by another. An acquisition may be friendly or hostile. In the former case, the companies

cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the

target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a

smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control

of a larger or longer established company and keep its name for the combined entity. This is

known as a reverse takeover. There are two major types of Acquisition. These are explained as

follows:

1. Management Buyouts : It is a form of Acquisition wherein the management of a company

decides to take their company private because it feels it has the expertise to grow the business

better if it controls the ownership. Quite often, management will team up with a venture capitalist

to acquire the business because its a complicated process that requires significant capital. Hence,


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large borrowings are made by managers to buy stocks held by large shareholders - who later

become the shareholders of the new entity to earn higher returns for themselves.

2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one

company purchases a majority interest in the target company resulting in loss of management

control for the target company. Incidentally, the acquiring company has a stronger market standing

than the target company in this case. It is definitely not a merger of equals. Typically, this type of

acquisition is undertaken to achieve market dominance. There are three types of Takeovers;

namely:

a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is

undertaken by purchasing the majority of outstanding shares of the target company in the open

stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle

Corp. and Peoplesoft Inc. Hostile Takeover

b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large

amount of Debt . financing to pay the target company its valuation at the time of the takeover in

cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as

junk bonds.) E.g. Oracle Corp. and I . Flex Takeover

3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased,

rather than its shares. This is particularly popular in the case of bankrupt companies, who might

otherwise have valuable assets which could be of use to other companies, but whose financing

situation makes the company unattractive for buyers (an asset buyout strategy may be pursued in

almost any case where the potential target company has an unattractive financing structure).

Motives behind Acquisitions

To achieve Market Dominance. To achieve Economies of Scale. To Increase Revenues. To enable Cross - Selling. To improve Technological Capabilities.


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To enable better Tax Management. To expand into new Geographies. To expand Customer Base, etc.

Benefits of Acquisitions

Fairness of Price Paid Lower Cost to the Acquiring firm Market Dominance

Issues in Acquisitions

Resistance from the target company Inability to secure adequate shares to gain Management Control Hostility Reputation Assaults

III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (the

target) by another. An acquisition may be friendly or hostile. In the former case, the companies

cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the

target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of asmaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control

of a larger or longer established company and keep its name for the combined entity. This is

known as a reverse takeover. There are two major types of Acquisition. These are explained as

follows:

1. Management Buyouts : It is a form of Acquisition wherein the management of a company

decides to take their company private because it feels it has the expertise to grow the business

better if it controls the ownership. Quite often, management will team up with a venture capitalist

to acquire the business because its a complicated process that requires significant capital. Hence,

large borrowings are made by managers to buy stocks held by large shareholders - who later

become the shareholders of the new entity to earn higher returns for themselves.


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2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one

company purchases a majority interest in the target company resulting in loss of management

control for the target company. Incidentally, the acquiring company has a stronger market standing

than the target company in this case. It is definitely not a merger of equals. Typically, this type of

acquisition is undertaken to achieve market dominance. There are three types of Takeovers;

namely:

a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is

undertaken by purchasing the majority of outstanding shares of the target company in the open

stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle

Corp. and Peoplesoft Inc. Hostile Takeover

b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large

amount of Debt . financing to pay the target company its valuation at the time of the takeover in

cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as

junk bonds.) E.g. Oracle Corp. and I . Flex Takeover

3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased,

rather than its shares. This is particularly popular in the case of bankrupt companies, who might

otherwise have valuable assets which could be of use to other companies, but whose financingsituation makes the company unattractive for buyers (an asset buyout strategy may be pursued in

almost any case where the potential target company has an unattractive financing structure).

Motives behind Acquisitions

To achieve Market Dominance. To achieve Economies of Scale.

To Increase Revenues. To enable Cross - Selling. To improve Technological Capabilities. To enable better Tax Management. To expand into new Geographies. To expand Customer Base, etc.


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Benefits of Acquisitions

Fairness of Price Paid Lower Cost to the Acquiring firm Market Dominance

Issues in Acquisitions

Resistance from the target company Inability to secure adequate shares to gain Management Control Hostility Reputation Assaults

IV. Divestitures: The partial or full disposal of an investment or asset through sale, exchange,

closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of

time, or in large lots over a short time period. E.g. Volvo AB sold passenger business to Ford for

$6.5B.

There are four types of Divestiture initiatives; namely:1. Spin Offs: A company owns or creates a subsidiary whose shares are distributed on a pro rata

basis to the shareholders of the parent company where the Parent usually retains some ownership

of approximately 10 to 20%. There are two approaches to spin offs.

The first approach deals with disinvesting the corporation in terms of keeping equitable

shareholding pattern for the newly formed companies. In this case, the company distributes, on a

pro-rata basis, all shares that it owns in its subsidiaries, to its shareholders, thereby creating two

separate corporations with the same proportional equity in place of the one corporation that existed previously. E.g. Hilton spin-off Park Place Entertainment Corp (casino business) . 1 share for 1

share.


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The second approach resorts to floating a new entity, with the selling company (i.e. the company

which is disinvesting) participating in its equity and later selling off the assets or division proposed

to be spun . off to the new company. E.g. Kimberly Clark spin-off Midwest Express Airlines

2. Splits: As the term denotes, Splits refer to splitting the corporate entity into two or more parts to

achieve its strategic objectives such as enhanced profitability by removing non . core businesses

from the mainstream businesses, etc. There are two types of Splits; namely:

a. Split-ups: When a firm splits into 2 or more entities - usually accomplished with carve-outs and

spin-offs of individual parts, it is said to have split-up. The result of a split-up is that the parent

company ceases to exist. E.g. In September 1995, AT&T spilt into 3 publicly traded companies

and the 4th business was sold.

b. Split-offs: In this case, some of the shareholders of the parent company receive a subsidiary's

shares on condition that they return the shares they hold of the parent company. Family owned

businesses with complex cross holdings in all subsidiaries use this approach to separate the interest

of different family streams. e.g., The Reliance Industries Group has now split-off into Reliance

Industries Limited, Reliance Infocomm, Reliance Energy, etc.

3. Equity Carve-outs: It is the IPO of some portion / some percentage of the common stock of the

wholly owned subsidiary of the Parent Company. It is sometimes known as .split-off. IPO. It is

one method of equity financing when the assets of the parent company and the subsidiary are

separated. It initiates the public trading of the Subsidiarys shares and is not reversible a it is in

case of redeemable preference shares. E.g. In 1999, General Motors did a carve-out and spin-off of

Delphi - Delphi had many customers though GM remained protected.

4. Disinvestment: Disinvestment, sometimes referred to as divestment, refers to the use of a

concerted economic boycott, with specific emphasis on liquidating stock, to pressure agovernment, industry, or company towards a change in policy, or in the case of governments, even

regime change. The term was first used in the 1980s, most commonly in the United States, to refer

to the use of a concerted economic boycott designed to pressure the government of South Africa

into abolishing its policy of apartheid.


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Motives behind Divestitures

1. Dismantling conglomerates

2. Abandoning core business

3. Changing strategies

4. Adding Value by Selling into a better fit

5. Large Additional Investment required

6. Harvest past successes

7. Discard unwanted business from prior acquisitions

8. Finance prior acquisitions done before LBO

9. Ward off takeover

10. Meeting Government requirements

Benefits of Divestitures

i. Shedding Excess Flab

i.i Effective Market Regulation

ii. Financial Support

Issues in Divestitures

i. Market Reactions

ii. Government Interventions

Some Corporate Examples:

AT&T sold Global Network to IBM, Hoechst AG sold its Paint Division to DuPont, etc

Capital Restructuring

Capital is generally the assets, often monetary, that are available to generate more assets. Thus the

liquidity of capital should be high. Restructuring them means reallocating them to improve their availability (liquidity). The process requires selling assets to buy different ones in order to improve

your capital (monetary) position so that you can improve your asset position thus enabling you to

earn more with them. It is generally undertaken by companies that are generally doing poorer than

expected and wish to stabilize future performance of their assets.


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Capital / Financial Restructuring touches upon the following aspects:

1. Leverage of the company: This is essentially the Debt: Equity Ratio. Here, companies have the

option of undertaking Debt Restructuring - especially if it is a Debt - laden company (high debt

leveraged company).

> Debt Restructuring: It is a process that allows a private or public company - or a sovereign

entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent

debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.

2. Investment Pattern: This relates to ability of corporations to identify the various investments

opportunities that would lead to higher returns.

3. FDI Participation: This aspect relates to the change in structure of the shareholding due to the

increasing FDI inflows.

4. Divestitures: As stated earlier in the types of Divestiture in Portfolio and Asset Management,

this aspect relates to divesting divisions and / or businesses to improve the financial standing of the

organization.

Motives of Capital Restructuring

1. To enhance liquidity.

2. To lower the cost of capital.

3. To reduce risk.

4. To avoid loss of Control.

5. To improve Shareholder Value.

Benefits of Capital Restructuring

Greater Financial Muscle Access to Better / Greater Technologies Focus on Core Competencies

Issues in Capital Restructuring


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> Loss of Management Control

2.3.3 Organizational Restructuring

Organizational Restructuring hovers around the changes in organizational design. It brings about

changes in decision making, information flow and management style. Though this restructuring,

just like all other restructurings, is initiated by the CEO, it requires the participation of all

hierarchies of an organization, especially the employees. Organizational restructuring, combined

with portfolio restructuring and financial restructuring makes meaningful changes materialize and

touches upon the following aspects:

1) Centralization/decentralization of the organization: Functions or units of the organization

may be centralized or decentralized to create new linkages to better implement the strategy. Nature

of Decision making in the organization may be changed due to the changes in reporting levels and

hierarchy.

2) Organizational Culture: The essential fabric of the firm i.e. its culture is affected as a

consequence of changes in reporting levels and hierarchical levels.

3) Training and Redeployment: Imparting training to the workforce enables the organization to

cope better with the changing environment. At the same time some employees need to be

redeployed. However, training and redeployment may be inadequate at times and therefore

inducting educated and skilled professionals at different levels becomes necessary.

4) Changes in HR Policies: The current HR policies of the organization need to be changed in

accordance with the changing scenario. The HR department needs enable change management.

5) Rationalization of Pay Structure: The present pay structure should be modified and re-

evaluated to maintain the internal and external equity among the employees.

Symptoms indicating the need for organizational restructuring


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Parts of the organization are significantly over or under staffed. Organizational communications are inconsistent, fragmented, and inefficient. Technology and/or innovation are creating changes in workflow and production processes. Significant staffing increases or decreases are contemplated. New skills and capabilities are needed to meet current or expected operational

requirements. Accountability for results are not clearly communicated and measurable resulting in

subjective and biased performance appraisals. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating. Morale is deteriorating

Benefits of Organizational Restructuring

i. Lower cost

ii. Better formulation and implementation of strategies

Issues in Organizational Restructuring

i. Culture.

ii. Downsizing

iii. Loss of Employee Morale.

The approaches that various companies, large and small, public and private, adopted in their

efforts to restructure in terms of DOWNSIZING differed in terms of how they viewed their

employees.

One group viewed employees as costs to be cut. These are the "downsizers". The other group viewed employees as assets to be developed. These are the "responsible

restructurers."


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Various strategies for business restructuring are available. In our study of the subject, we found out

that following strategies play an important role in the business restructuring:

1. Smart-sizing: It is the process of reducing the size of a company by laying off employees on

the basis of incompetence and inefficiency.

Some Examples

Acquisitions: HLL took over TOMCO. Diversification: Videocon group is diversified into power projects, oil exploration and

basic telecom services. Merger: Asea and Brown Boveri came together to form ABB. Strategic alliances: Siemens India has got a Strategic alliance with Bharati Telecom for

marketing of its EPABX. Expansion: Siemens is expanding its medical electronics division- a new factory for

medical electronics is already come up in Goa.

2. Networking: It refers to the process of breaking companies into smaller independant business

units for significant improvement in productivity and flexibility. The phenomenon is predominant

in South Korea, where big companies like Samsung, Hyundai and Daewoo are breaking

themselves up into smaller units. These firms convert their managers into entrepreneurs.

3. Virtual Corporation: It is a company that has taken steps to turn itself inside out. Rather than

having managers and staff sitting INSIDE in their offices moving papers from in basket to out

basket, a virtual corporation kicks the employees outside, sending them to work in customer's

offices and plants, determining what the customer needs and wants, then reshaping the corporate

products and services to the customer's exact needs. This is a futuristic concept wherein companies

will be edgeless, adaptable and perpetually changing. The centrepiece of the business revolution isa new kind of product called a "Virtual Product" Some of the these products already exist,

camcorders create instant movies, personal computers and laser printers have made instant desktop

publishing a reality. And for all these we can obtain cash instantly at ATMs.


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4. Verticalization: It refers to regrouping of management functions for particular functions for a

particular product range to achieve higher accountability and transparency. Siemens in 1990

moved from a "function-oriented" structure to a vertical "entrepreneur-oriented" structure

embracing size business and three support divisions.

5. Delayering- Flat organization: In the post world war period the demand for goods was ever

increasing. Main objective of the corporations was production and capacity build up to meet the

demand. The classical, pyramidal structure was well suited to this high growth environment. This

structure was scalable and the corporations could immediately translate their growth plans into

action by adding workers at the bottom layer and filling in the management layers. But the price

paid in the whole process was much higher. The overall process became complicated; number of

middle managers and functional managers grew making the coordination of various functionscomplex. Senior/top management was alienated from the front-line people as well as the end users

of the product or service. Decision-making became slower. Hence, a need is felt to attack the

unproductive, bulky and sluggish network of white-collar staff. A powerful strategy would be to

remove the layers of senior and middle management i.e. making the organization structure flat.

6. Business Process Reengineering: The Business Process Reengineering method (BPR) is

defined by Hammer and Champy as 'the fundamental reconsideration and radical redesign of

organizational processes, in order to achieve drastic improvement of current performance in cost,service and speed'. Value creation for the customer is the leading factor for BPR and information

technology often plays an important enabling role. Business process reengineering is also known

as BPR, Business Process Redesign, Business Transformation, or Business Process Change

Management.

Category of corporate restructuring

Corporate Restructuring entails a range of activities including


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Financial restructuring and organization restructuring

.

FINANCIAL RESTRUCTURING

Financial restructuring is the reorganization of the financial assets and liabilities of a corporation

in 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 a means of allocating resources for a new marketing campaign or the

launch of a 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.

Need For Financial Restructuring

The process of financial restructuring may be undertaken as a means of eliminating waste from

the operations of the company. For example, the restructuring effort may find that two divisions or

departments of the company perform related functions and in some cases duplicate efforts. Rather

than continue to use financial resources to fund the operation of both departments, their efforts are

combined. This helps to reduce costs without impairing the ability of the company to still achieve

the same ends in a timely manner. In some cases, financial restructuring is a strategy that must take

place in order for the company to continue operations. This is especially true when sales decline

and the corporation no longer generates a consistent net profit. A financial restructuring may

include a review of the costs associated with each sector of the business and identify ways to cut

costs and increase the net profit. The restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are

scheduled to be phased out. Financial restructuring also take place in response to a drop in sales,

due to a sluggish economy or temporary concerns about the economy in general. When this

happens, the corporation may need to reorder finances as a means of keeping the company

operational through this rough time. Costs may be cut by combining divisions or departments,
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reassigning responsibilities and eliminating personnel , or scaling back production at various

facilities owned by the company. With this type of corporate restructuring, the focus is on survival

in a difficult market rather than on expanding the company to meet growing consumer demand.

All businesses must pay attention to matters of finance in order to remain operational and to also

hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that

can ensure the corporation is making the most efficient use of available resources and thus

generating the highest amount of net profit possible within the current set economic environment.

ORGANIZATIONAL RESTRUCTURING

In organizational restructuring, the focus is on management and internal corporate governance

structures. 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.

Need For Organization Restructuring

New skills and capabilities are needed to meet current or expected operational

requirements.

Accountability for results are not clearly communicated and measurable resulting in

subjective and biased performance appraisals.

Parts of the organization are significantly over or under staffed.

Organizational communications are inconsistent, fragmented, and inefficient

Technology and/or innovation are creating changes in workflow andproduction processes.

Significant staffing increases or decreases are contemplated.

Personnel retention and turnover is a significant problem.

Workforce productivity is stagnant or deteriorating.
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Morale is deteriorating.

Some of 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 andtransfers the fixed costs of the company to variable costs.

Enterprise Resource Planning


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Enterprise resource planning is an integrated management information system that is enterprise-

wide and computer-base. This management system enables the business management to

understand any situation in faster and better way. The advancement of the information technology

enhances the planning of a business.

Hurdles of Business Restructuring

Restructuring is not as simple as "Making the mission statement in the morning, assessing the

corporate strengths and weaknesses in the afternoon and articulating the strategies by evening".

Some of these are discussed below:

Culture: Culture is an important intermediary which determines whether the strategy will or will

not be successfully implemented. Culture either helps or hinders an organization as it seeks toachieve competitive advantage. The right culture for an organization is the one that best supports

its strategic objectives. The challenge for an organization is thus to assess the fit between the

current culture and the culture required to implement the chosen strategy successfully and to take

steps to change the organization's culture to better align it with what is required.

Inadequate focus and commitment of top management towards change program: Any change

program will be successful only if it gets adequate support and commitment of the top

management. If the top management themselves are not focused or committed the restructuring

will be a failure.

"What is in it for me" attitude: Say in case of a merger or an acquisition, if each party is

concerned only about itself rather than the organization as a whole, the restructuring would not be

effective nor successful i.e. if each party tries to gain benefits for itself at the cost of the others, the

new organization would fail.

Mind set/resistance to change: Any restructuring activity involves some amount of change. Be it

a merger or a joint venture or a takeover, the management as well as the employees require to align

themselves the new structure. If they are not willing to change their mindset, the restructuring will

not be successful.


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Lack of involvement of employees: A restructuring activity requires a lot of change: change in

the mindset, change in the working, change in the reporting, a change in the structure, etc. Since

human tendency is to resist change, the best way to incorporate any change is to involve people in

the formation of this change. Failure to do so would invite resistance from them which in turn will

affect a successful restructuring.

Poor planning: As goes the phrase "Well started is half done". If your planning stage itself is

faulty, the whole activity would be affected.

Resource Availability: Resource availability could be another constraint. Lack of availability of

adequate resources could affect the working of the business and affect the restructuring activity as

a whole.

Cost and time: The cost and time involved for the gains to seep through into the organization may

at times make the firm retreat from the process of restructuring.

Poor communication: At times, due to poor communication, the need and benefits of the

restructuring activity has not been percolated to the lower levels of the organization. This in turn

would affect the effective working of the employees and their performance. Unstructured

communication flow, unclear reporting structures, etc, after a restructuring activity, could also

affect the efficient working of the organization.

Restructuring At Lucent Technologies (A Success Story)

Lucent Technologies was a technology company composed of what was formerly AT&T

Technologies, which included Western Electric and Bell Labs. It was spun-off from AT&T on

September 30, 1996.

About Lucent Technologies

In September 1995, the US based telecom giant AT&T announced that it would be

restructuring itself into three separate companies- a services company(AT&T), a products

and systems company (Lucent technologies) and a computer company (NCR). In February 1996, AT&T divested Lucent off into a separate company


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At the time it was spun off, Lucent was already a major player in many business-mobility,

data, optical and voice networking technologies, professional network designs and

consulting services, web-based enterprise solutions which linked public and private

networks and optoelectronics and communications semiconductors By 1997, Lucent was the leading telecom equipment maker and was lauded as one of the

biggest success stories of the 1990s. Lucent had acquired many technology companies in the late 1990s.

Surfacing of the Problems

In the late 1990s, as the internet and data traffic businesses gained ground, Lucent lost its

competitive advantage in its core business of telecom equipment. Though Lucent invested in a few Internet and wireless companies after 1996, the company

focused more on its core competencies and failed to evolve in line with the changing

market dynamics towards convergence of voice, data and internet. With the growing popularity of wireless technologies, Lucent began to lag behind its

competitors, who were quick to recognize the potential of Internet. Compared to its competitors, Lucent had been very slow to respond to it customers? need

for higher-speed optical networking equipment which resulted in a severe blow to its

revenue as well as its market reputation By late 1999, Lucent's high priced acquisitions were not earning reasonable profits and the

company was also unable to integrate the operations of the acquired companies effectively,

leading to problems on the corporate culture front. The poor integration of corporate cultures led to a major exodus of talent from the acquired

companies, as a result of which, Lucent could not launch new technologies to match its

competitors Besides, Lucent had diversified workforce of over 1,38,000 people across its businesses,

and the workforce at each business unit had its own unique culture. Lucent became a hub

of diversified cultures and varied service delivery models. This made it difficult for the HR

staff to integrate the HR functions across the business units and to develop and implement

efficient retention strategies.


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In 1997, Lucent launched a major strategic initiative called "GROWS" an acronym for its

key elements - Global, Results, Obsessed, Workplace and Speed. This initiative promoted

an open supportive and diverse workplace at the company. However, by late 1999, under

McGinn's leadership, Lucent's focus on HR diminished. When Lucent had increased its sales to customers, many of them defaulted on their

payments as the technology and telecom industry reeled under an unprecedented slump in

2000, which threw Lucent into a deep financial crisis. Analysts and industry observers attributed Lucent's miserable performance to the wrong

strategies and mis-execution by the top management.

In 2001, Lucent announced a new restructuring plan. The plan concentrated on the following

things:

Elimination of product lines Significant cost cuts to the extent of $2bn a year Workforce reduction by 10,000 jobs Reduction in working capital

Restructuring Activity

In 2001, Lucent came up with the Service Delivery Project Team. The major objective of this team

was to simplify and standardize global HR policies and processes, in order to improve efficiency

throughout the organization, giving HR management a position of strategic importance in the

entire transformation process.

Tiger Team

In Feb 2002, Lucent selected six HR leaders from its domestic and global operations to serve full-

time for six weeks on HR restructuring exercise. The major objective of this team was to create a

road map indicating how the company could meet the financial challenges of its various

businesses, without disrupting the company's day-to-day Hr operations. The Tiger Team undertook

an analysis of Hr operations. The team also studied the possibilities of making HR activities more

efficient through policy changes, automation and process improvements.


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Expert Help

Lucent established a Project Management Office to oversee the implementation of findings and

suggestions of the Tiger Team. During the implementation period, the PMO was assisted by

Hewitt Associates.

Focus on IT

Lucent also focused on IT to save on the costs and time consumed in transactional and repetitive

HR activities by transferring them to global IT platforms and regional HR operating centres.

Workforce Reduction

Between 2000 and 2002, Lucent resorted to workforce reduction By early 2003, Lucent had cut its

workforce from 1,35,000 in late 2000 to 45,000 through various means like outsourcing, spinoffs

and lay offs.

Service Delivery Model

Lucent consulted the experts in compensation strategies and policies, staffing and talent

management and also other companies which had been through similar organizational

transformations. Lucent then went through a rigorous strategy setting phase, which helped it to lay

the foundation for its long-term HR vision.

Effects of Restructuring

1. Since the function of the HR organisational segments were clearly defined the decision making

process became very easy and quick.

2. The focus on IT, enabled the company to:

Manage HR functions efficiently. Reduce workforce costs Drastically reduced the need for manual interfaces.


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Encouraged employees to take advantage of various online training programs offered by

the company. Helped HR business partners to align their working closely with senior managers.

3. A strong shared vision, leadership support and clear communication was responsible for the

success Lucent

4. Lucent not only met cost reduction target but also exceeded its targets through its cost-cutting

initiatives.

Analysis

Proper planning phase: As goes the phrase "Well started is half done" - Lucent went through a

rigorous three-month strategy setting phase, which helped it to lay the foundation for its long-term

HR vision. Because of this Lucent could develop a detailed HR organization structure i.e. the

"service delivery model" which led to its success.

Proper Implementation: Implementation was done only after communicating the changes to the

workforce and in consultation with the employees. This enabled the employees to accept the

change easily.

Strong shared vision and full support of their top management greatly expedited the decisionmaking process.

Aligned Hr activities to Strategic Business Goals: Lucent tried to standardize global HR policies

and processes, to align it with strategic business goals thus giving HR management a position of

strategic importance in the entire transformation process.

Clear definition of functions: Since, function of the HR organisational segments were clearly

defined, the decision making process became very easy and quick.

Restructuring At Hewlett Packard

The Hewlett-Packard Company, commonly referred to as HP, is an American information

technology corporation, specializing in personal computers, notebook computers, servers, printers,


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digital cameras, and calculators, network management software, among other technology related

products.

Stanford University classmates Bill Hewlett and Dave Packard founded HP in 1939. The

company's first product, built in a Palo Alto garage, was an audio oscillatoran electronic test

instrument used by sound engineers. One of HP's first customers was Walt Disney Studios, which

purchased eight oscillators to develop and test an innovative sound system for the movie Fantasia.

Surfacing of the Problems

Notwithstanding the efforts made by the top management to generate synergies across

divisions, the decentralized structure that HP had, till the 1980s, created major problems

for the company. HP began to be perceived by users as three or four companies, with little co-ordination

between them. In 1990s, HP found that its elaborate network of committees was slowing down its ability

to take quick decisions - slow decision-making. To solve this problem, the then CEO John

Young, dismantled the committee network and also cut a layer of management from the

hierarchy. He further decentralized decision-making and divided the computer business

into two primary groups. One group was made responsible for PCs, printers and other products sold through dealers and the other for work stations and minicomputers sold to

large customers. With the growth in size of operations - 83 different product divisions, the bureaucracy had

increased significantly. This bureaucracy was hindering innovation as well. The company's stagnant revenues and the declining profit growth rate in 1998 compounded

its problems. HP's culture, which emphasized teamwork and respect for co-workers, had over the years

translated into a consensus-style culture that was proving to be a sharp disadvantage in the

fast growing Internet business era.

Restructuring Activity by the New Ceo .Carleton S. Fiorina


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Fiorina began by demanding regular updates on key units. She also injected the much-

needed discipline into HP's computer sales force. Sales compensation was tied to performance and the bonus period was changed from once

a year to every six months. To boost innovation and new product development, Fiorina increased focus on

"breakthrough" projects. She started an incentive program that paid researchers for each

patent filing. Fiorina developed a multiyear plan to transform HP from a "strictly hardware company" to

a Web services powerhouse. To achieve this plan, Fiorina dismantled the decentralized

organization structure. Fiorina reorganized the units into six centralized divisions. She expected the new structure

to strengthen the collaboration, between sales & marketing executives and productdevelopment engineers thus helping to solve the customer problems faster. This was the

first time a company with thousands of product lines and scores of businesses had

attempted a front-back approach, a strategy that required laser focus and superb

coordination.

Negative Repercussions

1. Earlier HP's product chiefs had run their own operations from designing of the product to providing sales and support. In the new set-up, they had a very limited role.

2. In the new structure, the back end product designers would not be able to stay close enough to

the customers to deliver products as per their requirements.

3. While productivity linked commissions to the sales force were intended to boost revenues and

profitability, they only helped in raising sales for low margin products that did little for corporate

profits.

4. The new structure did not clearly assign responsibility for profits and losses. There was less

financial control and more disorder.

5. With employees in 120 countries, redrawing the lines of communication and getting personnel

from different divisions to work together was proving very troublesome.

6. The front back reorganization had created confusion internally.


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7. These changes had affected employee morale. Many employees had lost faith in Fiorina?s

ability to execute her restructuring plans.

Analysis

What went wrong at HP?

Improper Implementation of Restructuring Strategies - Sweeping changes were initiated in a

very short span of time without allowing employees time to understand the changes in the spirit in

which they were introduced & adjust to the same.

Improper Allocation of Authority & Lack of Coordination - This can be substantiated by the

following reasons:

With no authority to set sales forecast, back-end managers were unable to allocate the

R&D funds effectively. At the same time, if the back-end colleagues came up with the wrong products - because of

their lack of close association with the customers - the front-end sales representatives had

trouble meeting their forecast, thereby not being able to contribute positively to the

corporate financial objectives.

Top down Management Approach & Autocratic style of Leadership by C. FIORINA -

According to some analysts, the major reason for the shortfall in HP's revenues was Fiorina's

aggressive management restructuring.

Improper Timing: The time chosen for initiating Business Restructuring was inappropriate as

there was a global slowdown in the technology sector.

Lack of Prioritization - Fiorina was accused of being over-ambitious and trying to tackle all of HP?s problems together at the same time.

Improper Timing: The time chosen for initiating Business Restructuring was inappropriate as

there was a global slowdown in the technology sector.


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3.3 Comparative Analysis

Lucent Technologies HPEmployee Involvement in Implementation

enabled the employees to accept the change

easily. It ensured greater cooperation to the

management from the employees.

Sweeping changes were initiated in a very short

span of time without allowing employees time to

understand the changes in the spirit in which they

were introduced & adjust to the same.

Decision making process became very easy and

quick.

Decision making though extremely quick washighly efficient but hardly effective in the long

run.Prioritized the need to restructure HR activities

firstLack of Prioritization

Participative Management restructuring Aggressive Management restructuringAligned their working closely with senior

managers

Front Back reorganization made work together

was proving very troublesome

Case Study: Business Model of Napster

Pages: Page 1 Page 2

The Napster brand has had a varied history. Its initial incarnation was as the first widely used

service for free peer-to-peer (P2P) music sharing. The record companies mounted a legal

challenge to Napster due to lost revenues on music sales which eventually forced it to close. Butthe Napster brand was purchased and its second incarnation offers a legal music download service

in direct competition with Apples iTunes.
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The original Napster

Napster was initially created between 1998 and 1999 by a 19 year old called Shawn Fanning while

he attended Bostons Northeastern University. He wrote the programme initially as a way of

solving a problem for a friend who wanted to find music downloads more easily online online. The

name Napster came from Fannings nickname.

The system was known as Peer to Peer since it enabled music tracks stored on other Internet users

hard disks in MP3 format to be searched and shared with other Internet users. Strictly speaking,

the service was not a pure P2P since central services indexed the tracks available and their

locations in a similar way to which instant messaging (IM) works.

The capability to try a range of tracks proved irresistible and Napster use peaked with 26.4 million

users worldwide in February 2001.

It was not long before several major recording companies backed by the RIAA (Recording

launched a lawsuit. Of course, such action also gave Napster tremendous PR and millions of users

used the service. Some individual bands also responded with lawsuits. Rock band Metallica found

that a demo of their song I disappear began circulating on the Napster network and was
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eventually played on the radio. Other well-known artists who vented their ire on Napster included

Madonna and Eminem. However, not all artists felt the service was negative for them. UK band

Radiohead pre-released some tracks of their album Kid A on to Napster and subsequently became

Number 1 in the US despite failing to achieve this previously.

Eventually as a result of legal action an injunction was issued on March 5th 2001 ordering Napster

to cease trading of copyrighted material. Napster complied with this injunction, but tried to read a

deal with the record companies to pay past copyright fees and to turn the service into a legal

subscription service. In the following year, a deal was agreed with German media company

Bertelsmann AG to purchase Napsters assets for $8 million as part of agreement when Napster

filed for Chapter 11 bankruptcy in the United States. This sale was blocked and the web site

closed. Eventually, the Napster brand was purchased by Roxio, Inc who used the brand to rebrandtheir PressPlay service.

Since this time, other P2P services such as Gnutella, Grokster and Kazaa prospered which have

been more difficult for the copyright owners to purse in court, however, many individuals have

now been sued in the US and Europe and the associations of these services with spyware and

adware has damaged these services, which has reduced the popularity of these services.

New Napster in 2008

Fast Forward to 2008 and Napster now has around 830,000 subscribers in the United States,

Canada and United Kingdom who pay up to 14.95 each month to gain access to about 1.5 million

songs. The company is seeking to launch in other countries such as Japan through partnerships.

Revenue for financial year 2008 is expected to exceed $125 million, representing growth of 17%.

The online music download environment has also changed with legal music downloading

propelled through increasing adoption of broadband, the success of Apple iTunes and its portable

music player, the iPod which by 2005 had achieved around half a billion sales.

Napster gains its main revenues from online subscriptions and permanent music downloads. The

Napster service offers subscribers on-demand access to over 1 million tracks that can be streamed


43/51

or downloaded as well as the ability to purchase individual tracks or albums on an a la carte basis.

Subscription and permanent download fees are paid by end user customers in advance either via

credit card, online payment systems or redemption of pre-paid cards, gift certificates or

promotional codes. Napster also periodically licenses merchandising rights and resells hardware

that its end users use to store and replay their music.

BBC estimated that the global music market is now worth $33 billion (18.3 billion) a year while

the online music market accounted for around 5% of all sales in the first half of 2005. Napster ,

quoting Forrester Research estimates that United States purchases of downloadable digital music

will exceed $1.9 billion by 2007 and that revenues from online music subscription services such as

Napster will exceed $800 million by 2007.

BBC reports Brad Duea, president of Napster as saying: The number one brand attribute at the

time Napster was shut down was innovation. The second highest characteristic was actually free.

The difference now is that the number one attribute is still innovation. Free is now way down on

the list. People are able to search for more music than was ever possible at retail, even in the

largest megastore.

The Napster online music service

Napster subscribers can listen to as many tracks as they wish which are contained within the

catalogue of over 1 million tracks (the service is sometimes described as all you can eat rather

than a la carte). Napster users can listen to tracks on any compatible device that includes

Windows Digital Rights Management software, this includes MP3 players, computers, PDAs and

mobile phones. Duea describes Napster as an experience rather than a retailer. He says this

because of features available such as: Napster recommendations Napster radio based around

songs by particular artists Napster radio playlists based on the songs you have downloaded

Swapping playlists and recommendations with other users

iTunes and Napster are probably the two highest profile services, but they have a quite different

model of operating. There are no subscribers to iTunes, where users purchase songs either on a per

track basis or in the form of albums. By mid 2005, over half a billion tracks had been purchased on

Napster. Some feel that iTunes locks people into purchasing Apple hardware, as one would expect


44/51

Duea of Napster says that Steve Jobs of Apple has tricked people into buying a hardware trap.

But Napsters subscription model has also been criticised since it is service where subscribers do

not own the music unless they purchase it at additional cost, for example to burn it to CD. The

music is theirs to play either on a PC or on a portable player, but for only as long as they continue

to subscribe to Napster. So it could be argued that Napster achieves lock-in in another form and

requires a different approach to music ownership than some of its competitors.

Napster Strategy

Napster describe their strategy as follows. The overall objective is to become the leading global

provider of consumer digital music services. They see these strategic initiatives as being

important to achieving this:

Continue to Build the Napster Consumer Brand as well as increasing awareness of the

Napster brand identity, this also includes promoting the subscription service which

encourages discovery of new music. Napster (2005) say We market our Napster service

directly to consumers through an integrated offline and online marketing program

consistent with the existing strong awareness and perception of the Napster brand. The

marketing message is focused on our subscription service, which differentiates our offering

from those of many of our competitors. Offline marketing channels include television(including direct response TV), radio and print advertising. Our online marketing program

includes advertising placements on a number of web sites (including affiliate partners) and

search engines Continue to Innovate by Investing in New Services and Technologies this initiative

encourages support of a wide range of platforms from portable MP3 players, PCs, cars,

mobile phones, etc. The large technical team in Napster shows the importance of this

strategy. In the longer-term, access to other forms of content such as video may be offered.

Napster see their ability to compete depend substantially upon our intellectual property.

They have a number of patents issued, but are also in dispute with other organizations over

their patents. Continue to Pursue and Execute Strategic Partnerships Napster has already entered

strategic partnerships with technology companies (Microsoft and Intel), hardware


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companies (iRiver, Dell, Creative, Toshiba and IBM), retailers (Best Buy, Blockbuster,

Radio Shack, Dixons Group, The Link, PC World, Currys, Target), and others (Molson,

Miller, Energizer, Nestle).

Continue to Pursue Strategic Acquisitions and Complementary Technologies This is another

route to innovation and developing new services.

Advantages and Disadvantages of Corporate Restructuring

Corporate restructuring is a process in which a company changes the organizational structure and processes of the business. This can happen through breaking up a company into smaller entities,

through buy outs and mergers. When a company uses one of these methods, it could strengthen the

company or it could create more problems than it is worth.

Increasing Value of Parts

One of the main reasons that businesses use corporate restructuring is to divide the business up for

sale. If a company is trying to sell as a conglomerate, it will likely get lower offers from investors.

When the company is split up into separate parts, it can often get better offers for those individual

parts. This can increase the value of the company as a whole and help get a higher sales price for

the business.

Reduce Costs

Another benefit of restructuring a company is to reduce business costs. For example, a company

could merge with another company that is very similar and use economies of scale to run more

efficiently. It could cut back on employees and equipment to streamline business operations. Inthis way, the company can expand its reach without adding too much to the overhead of the

business. If handled correctly, the company can add significant value for its shareholders.

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