corporate restructuring 2009
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22 ACR Vol. 17 (1&2), 2009
CORPORATE RESTRUCTURING: A BOON FOR COMPETITIVE ADVANTAGE
G.C. Nag R. D. Pathak
Whenever you see a successful business, someone once made a courageous decision - Peter F. Drucker
Corporate restructuring is needed to counter challenges in competitive business environment. Most of the organizations carry out corporate restructuring as per the need of the business. Some do it through mergers, acquisitions, and some by demergers as well. While some others make structural changes and carry out resource optimization in the organization. This paper examines different types of successful corporate restructuring practiced by three leading Indian companies and identifies the tools and techniques behind their successes.
Keywords: Restructuring, Challenges, Merger, Demerger, Competitive, Advantage
Restructuring refers to multidimensional process. However, the term corporate restructuring is used here for operational restructuring as long term strategy of business. Operational restructuring is an ongoing process, which includes improvement in efficiency and management, reduction in staff and wages, sales of assets (for example, reduction in subsidiaries), enhanced marketing efforts, and so on with the expectation of higher profitability and cash flow1. Rising competition, breakthrough technological and other changes, rising stock market volatility, major corporate accounting scandals have increased the responsibility to managers to deliver superior performance and enhance market value to shareholders. The companies which fail to deal with the above successfully may lose their independence, if not face extinction.
According to a study by the Harvard Business School2, corporate restructuring has enabled thousands of organizations around the world to respond more quickly and effectively to new opportunities and unexpected pressures, thereby re-establishing their competitive advantage.
In India, corporate houses have recently witnessed an increase of restructuring in different organizations. The main reasons for the sudden impetus to restructure in India are as follows: a) deshackling of strict MRTP3 provisions and new government policy of relicensing b) increased competition is another key element for giving rise to corporate restructuring. c) mounting pressure on margins have necessitated higher volume of business, resulting in mergers and acquisitions or the grand concentration of strategy has led to demergers of non profitable businesses, and d) all round resource optimization in existing businesses to
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streamline operational profit and to stay fit in competition. However, some organizations have done their restructuring through acquisition and mergers and some through demergers. There is also corporate restructuring done through changes in corporate structure and optimization of resources including financial structuring. When the market price of shares are rising, the companies like to use their shares to acquire other companies. Acquisition is a process of taking over companies and merging with the entity in order to improve the margin. Here the advisors of the company may suggest and encourage mergers after taking over the other company. Demerger is a process of corporate restructuring in which single or multiple business units are spun off as a new entity. Demerger is just the opposite of merger. In a market of falling prices, mergers and initial public offers are less popular and the merchant banks, who normally earn their fees from corporate activity, start to look at demerger possibilities of their clients4. A framework of corporate restructuring shown in Figure 1 below explains all about corporate restructuring
FIGURE- 1 A Frame work of Corporate Restructuring
Corporate Restructuring Financial Operational Restructuring Restructuring
Acquisition Reorganization Working Credit Capital Restructuring
Merger Weak Legal and Regulatory Jurisdiction Balance Demerger Sheets
Resource Debt Equity Optimization Voluntary Workouts
There were various corporate restructurings in India during the last few years. However, this paper deals with successful corporate restructuring of three Indian companies which immensely enhanced the shareholders market value and strengthened their competitive edge in recent times. These are Reliance Industries Ltd., Larsen and Toubro Ltd., and Siemens Ltd.
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For example, the acquisition, merger, and demerger of Reliance Industries Ltd. like their acquisition of IPCL5 mergers of Reliance Petrochemicals Ltd., and the recent demergers of four entities like Reliance Communication Ventures Ltd., Reliance Energy Ventures Ltd., Reliance Natural Resources Ventures Ltd., and Reliance Capital Ventures Ltd. which spun off from Reliance Industries Ltd. (RIL), and were perhaps the most prominent restructurings in recent times.
Even the recent demerger of the cement division of Larsen and Toubro Ltd. (L&T), named Ultratech Cement Ltd., seems to be one of the L&Ts grand strategies to concentrate more on infrastructure, engineering, energy and turnkey businesses. Other kinds of restructuring through structural changes, to improve sales and profit, or all round optimization of products, processes and systems in Multinational like Siemens Ltd. are worthy examples of successful restructuring in Indian industry. This article discusses in detail the tools and techniques used by these companies for successful restructuring in their organization.
The entire research was carried out into four stages, and each stage was approximately of three months duration. The first stage was solely devoted to exploratory studies. The second stage was on annual company report surveys. The third was on operational study, and the fourth was on action research. The objectives of the multilayer studies were i) to obtain insights as to why restructuring in organizations is necessary ii) what relationship exists between restructuring and competitive advantage iii) examining samples of three successful companies like Reliance Industries Ltd., Larsen and Toubro Ltd., and Siemens Ltd. which practiced restructuring processes successfully iv) drawing inferences if restructuring could lead to shareholders market value as well as competitive advantage.
CASE OF RELIANCE INDUSTRIES LIMITED (RIL)
At the age of 16, a young man left his rural Gujarat village for the Arabian Peninsula in 1949. His first job was pumping gas at Yemen. Soon he demonstrated his entrepreneurial spirit and managed to negotiate for people whose insurance claims had been rejected, splitting the settlements he managed to negotiate. He returned to India in 1958 with $3,150 (in those days) and set up a trading company to export spices to Yemen. It was then called Reliance Commercial Corporation. The entrepreneur of this company was Shri Dhirubhai Ambani. By the late 1960s, with 70 employees, Reliance was manufacturing textiles with four wrap-knitting machines. To explore the need of the society, Dhirubhai applied his innovative spirit when most corporate bosses were content to sit behind Indias walls of protectionism and rake in profits from obsolete, overpriced goods. For example, to overcome the wholesalers monopoly of the cloth market, he set up a chain of franchises. Today the Vimal brand of textiles is one the industrys top sellers. At the starting stage, banks often spurned him; hence, he turned to small investors to fund his expansion plans into synthetics and petrochemicals.
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Reliance was one of the first Indian companies to go public in 1977. On 27th June 1985, the name of the company was finally changed, from Reliance Textile Industries Ltd. to Reliance Industries Ltd. Then there was no looking back. The company continued to satisfy its shareholders through big bonuses and hefty dividends. When India instituted market reforms in 1991, RIL was perfectly placed; it was lean, with state-of-the-art facilities, and a cadre of capable and competent managers. At this moment RIL was not very concerned about competition from Indian companies. That is why Dhirubhai Ambani once said, My real competitors are DuPont, Shell and ICI. Hence RILs next challenge was to meet its international competitors. By the mid 90s, RIL aggressively diversified into telecommunication, power, finance, and transportation.