the main project corporate restructuring
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The Main Project Corporate RestructuringTRANSCRIPT
CORPORATE RESTRUCTURING
1. INTRODUCTION TO CORPORATE RESTRUCTURING
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. Corporate
restructurings necessary when a company needs to improve its efficiency and profitability and
it requires expert corporate management. corporate restructuring strategy involves the dismantling
and rebuilding of areas within an organization that need special attention from the management
and CEO. The process of corporate restructuring often occurs after buyouts, corporate
acquisitions, takeovers or bankruptcy. It can involve a significant movement of an organization’s
liabilities or assets. A significant modification made to the debt, operations or structure
of accompany. This type of corporate action is usually made when there are significant problems
in a company, which are causing some form of financial harm and putting the overall business
in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and
improve the 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.
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2. MEANING & NEED FOR CORPORATE RESTRUCTURING
Corporate restructuring is one of the means that can be employed to meet the challenges which
confront business.
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 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 properties and 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.
Corporate restructuring is one of the means that can be employed to meet the challenges which
confront business.
Corporate restructuring involves restructuring the assets and liabilities of corporations, including
their debt-to-equity structures, in line with their cash flow needs in order to,
• Promote efficiency,
• Restore growth.
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3. OBJECTIVES OF CORPORATE RESTRUCTURING
Corporate restructuring is much more commonplace in the 21st century.
Corporate restructuring once was a much more rare occurrence than it is today. With technology,
communications and global networking evolving so rapidly, corporations must restructure almost
on an ongoing basis to keep up with the change. Some of the objectives of these restructuring
efforts include erasing debt, evolving with trends and responding to regulatory changes in
various industries.
1. Unloading Unprofitable Businesses
Some corporations have branches or businesses they own that are producing marginal profit or
even losing money. They may have purchased the company when it was doing well but trends
shifted, or perhaps it was part of another merger in which they acquired the weak business along
with a strong one. Whatever the reason, these parts of the business tend to be a drain on the
corporate profits and corporate resources. Corporations may restructure in order to put their best
resources into the parts of the business that make money and sell off or liquidate parts that don't.
2. Eradicating Debt
Many corporations have debt that threaten the viability of the business because the stock fell, the
price of materials rose or consumer demand faltered. These corporations must restructure in
order to pay the debts. This often includes employee layoffs, the selling of assets and a reduction
in benefits for employees who remain. The objective of this kind of corporate restructuring is to
rope the debt to equity ratio back to a number where the corporation can survive.
3. Responding to Changing Trends
Frequently a corporation's business model is based on a trend that has changed.For example, a
construction company may have to alter its business model to creating or retrofitting buildings
according to LEED standards. Likewise, a company whose business centered on telephones and
faxes has to face the change in how the world communicates. These changes often require
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corporate restructuring, selling old assets to buy new and putting people who understand the new
trends and technologies over those who have worked their way up in the old system.
4. Meeting Regulatory Change
Regulatory changes create a need for corporate restructuring. The deregulation of the banking
industry, for example, meant banks could suddenly sell products such as insurance and could
operate across state lines. This required a restructuring along with many mergers and
acquisitions. Regulatory changes resulting from the financial crisis of 2009 are leading to other
corporations' restructuring their businesses, particularly in financial services such banks,
mortgage companies and credit cards.
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4. PURPOSE OF CORPORATE RESTRUCTURING
Restructuring a business can make a business stronger.
When a company or organization is having financial difficulties, one of the tools available is to
implement a restructuring plan. Restructuring can mean anything from eliminating redundant
jobs to closing down departments and even entire facilities. Restructuring sometimes becomes
necessary for businesses to stay competitive. It is of paramount importance to have a business
restructuring plan prior to the restructure.
1. OOC Date
One aspect to include is the “out of cash” date for the business. At some point when a company
is in need of restructuring, it will run out of money unless there are changes made. Keeping the
OOC date at the forefront means you remain aware that the clock is running down.
2. Accounts
Another area to include in a business restructuring plan is overhauling the accounts receivable
department. Too often, a company will get into financial difficulty because of clients with
financial problems of their own. For this reason, having a strong accounts receivable policy will
make for a stronger restructuring process.
3. Personnel
Any business restructuring plan needs to examine where you can cut costs in terms of personnel.
Sometimes, this can be the hardest decision to make, but if a company is to survive, it must use
every cent to its fullest potential. If two workers are doing the job of one, someone needs to go.
If there are multiple locations to restructure, the plan should include the parent company. This
can mean letting people go from the executive level, where there are larger salaries and the more
costly retirement packages.
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4. Future
Your business restructuring plan needs to look to the future. This means putting core policies in
place geared toward survival and growth. To arrive at the restructuring necessary, the business
needs to operate at the most efficient level possible. This might include incorporating new
technologies that can eliminate redundant task processing.
5. Government
Just as businesses restructure, governments can do the same. Governments will often attack a
fiscal problem by going down the path of restructuring, and the same basic principles apply.
Businesses and governments both need to include fiscal responsibilities within the plans, as well
as an examination of the entire organizational structure, determining what you can eliminate or
consolidate.
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5. WHY BUSINESS FIRMS FAIL
Let’s see different reasons same makes failure to corporate:
• An imbalance of skills within the top echelon.
• A chief executive who dominates a firms operations without regard for the inputs of peers
• An inactive board of directors. The board of Directors lack of interest in the financial
position of the company may lead to insolvency.
• A deficient finance function within the firm’s management.
• The absence of responsibility for the chief executive officer.
Apart from the above mistakes the firm usually is vulnerable to several mistakes,
• Management may be negligent in developing effective accounting system
• The company may be unresponsive to change
• Management may be inclined to undertake an investment project that is
disproportionately large relative to firm size. If the project fails the probability of
insolvency is greatly increased.
• Finally the management may rely heavily on debt financing that even a minor problem can
place the firm in a dangerous position.
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6. FIVE PRINCIPLES OF CORPORATE RESTRUCTURING
Be Smart Get experts to help.
Restructuring is both an art and a science. Make sure to enlist help from experienced
restructuring specialists. From the financial and legal advisors to the claims and noticing agent,
these specialists should have experience in managing and dealing with the complexities of the
corporate restructuring process.
Be Quick Time is of the essence.
Recognized authorities in the restructuring industry can guide companies expeditiously in
negotiating and consummating transactions. From pre-planning to emergence, companies can
achieve their goals in a relatively quick period of time with strategic planning and agile
execution.
Be Prepared Organize information efficiently.
From the planning phase through execution, organization of company information is critical. All
key information should be clearly accessible to help expedite the process and easily locate the
required data. Data and other information needed during the process can include financial
statements, vendor listings, employee/retiree listings, contracts, real estate deeds, etc.
Be Transparent Disclosure is good.
Develop a strategic communications strategy to disclose forward progress to relevant
constituencies during the restructuring process– from employees and vendors to financial
institutions and the media. It is critical that you know what to say and how to say it, but it is also
vital to recognize the strategic relevance of your communications.
Be Sensitive Take stakeholders’ financial insecurities into consideration.
When dealing with financial matters of this scale, emotions run rampant. Be sensitive to the
needs of stakeholders and provide reassurance that their matter is one of significance and is
being addressed during the process.
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7. METHODS OF CORPORATE RESTRUCTURING
The important methods of Corporate Restructuring are:
1. Joint ventures
2. Sell off and spin off
3. Divestitures
4. Equity carve out (ECO)
5. Leveraged buy outs (LBO)
6. Management buy outs
7. Master limited partnerships
8. Employee stock ownership plans (ESOP)
1. Joint Ventures
Joint ventures are new enterprises owned by two or more participants. They are typically formed
for special purposes for a limited duration. It is a combination of subsets of assets contributed by
two (or more) business entities for a specific business purpose and a limited duration. Each of the
venture partners continues to exist as a separate firm, and the joint venture represents a new
business enterprise. It is a contract to work together for a period of time each participant expects
to gain from the activity but also must make a contribution.
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Reasons for Forming a Joint Venture
Build on company’s strengths
Spreading costs and risks
Improving access to financial resources
Economies of scale and advantages of size
Access to new technologies and customers
Access to innovative managerial practices.
2. Spin-off
Spinoffs are a way to get rid of underperforming or non-core business divisions that can drag
down profits.
Process of spin-off
1. The company decides to spin off a business division.
2. The parent company files the necessary paperwork with the Securities and Exchange
Board of India (SEBI).
3. The spinoff becomes a company of its own and must also file paperwork with the SEBI.
4. Shares in the new company are distributed to parent company shareholders.
5. The spinoff company goes public.
Sell-off:
Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or
General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation,
spin-off and so on.
3.Divestures
Divesture is a transaction through which a firm sells a portion of its assets or a division to
another company. It involves selling some of the assets or division for cash or securities to a
third party which is an outsider.
Divestiture is a form of contraction for the selling company. means of expansion for the
purchasing company. It represents the sale of a segment of a company (assets, a product line, a
subsidiary) to a third party for cash and or securities.
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Mergers, assets purchase and takeovers lead to expansion in some way or the other. They are
based on the principle of synergy which says 2 + 2 = 5! , divestiture on the other hand is based
on the principle of “anergy” which says 5 – 3 = 3!.
Among the various methods of divestiture, the most important ones are partial sell-off, demerger
(spin-off & split off) and equity carve out. Some scholars define divestiture rather narrowly as
partial sell off and some scholars define divestiture more broadly to include partial sell offs,
demergers and so on.
4. Equity Carve-Out
A transaction in which a parent firm offers some of a subsidiaries common stock to the general
public, to bring in a cash infusion to the parent without loss of control.
In other words equity carve outs are those in which some of a subsidiaries shares are offered for
a sale to the general public, bringing an infusion of cash to the parent firm without loss of
control. Equity carve out is also a means of reducing their exposure to a riskier line of business
and to boost shareholders value.
Features
It is the sale of a minority or majority voting control in a subsidiary by its parents to outsider
investors. These are also referred to as “split-off IPO’s”
A new legal entity is created.
The equity holders in the new entity need not be the same as the equity holders in the
original seller.
A new control group is immediately created.
5. Leveraged Buyout
A buyout is a transaction in which a person, group of people, or organization buys a company or
a controlling share in the stock of a company. Buyouts great and small occur all over the world
on a daily basis.
Buyouts can also be negotiated with people or companies on the outside. For example, a large
candy company might buy out smaller candy companies with the goal of cornering the market
more effectively and purchasing new brands which it can use to increase its customer base.
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Likewise, a company which makes widgets might decide to buy a company which makes
thingamabobs in order to expand its operations, using an establishing company as a base rather
than trying to start from scratch.
Features of Leveraged Buyout
Low existing debt loads;
A multi-year history of stable and recurring cash flows;
Hard assets (property, plant and equipment, inventory, receivables) that may be used as
collateral for lower cost secured debt;
The potential for new management to make operational or other improvements to the firm to
boost cash flows;
Market conditions and perceptions that depress the valuation or stock price.
6. Management buyout
In this case, management of the company buys the company, and they may be joined by
employees in the venture. This practice is sometimes questioned because management can have
unfair advantages in negotiations, and could potentially manipulate the value of the company in
order to bring down the purchase price for themselves. On the other hand, for employees and
management, the possibility of being able to buy out their employers in the future may serve as
an incentive to make the company strong.
It occurs when a company’s managers buy or acquire a large part of the company. The goal of an
MBO may be to strengthen the managers’ interest in the success of the company.
Purpose of Management buyouts
From management point of view may be:
To save their jobs, either if the business has been scheduled for closure or if an outside
purchaser would bring in its own management team.
To maximize the financial benefits they receive from the success they bring to the company
by taking the profits for themselves.
To ward off aggressive buyers.
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The goal of an MBO may be to strengthen the manager’s interest in the success of the company.
Key considerations in MBO are fairness to shareholders price, the future business plan, and legal
and tax issues.
7. Master Limited Partnership
Master Limited Partnership’s are a type of limited partnership in which the shares are publicly
traded. The limited partnership interests are divided into units which are traded as shares of
common stock. Shares of ownership are referred to as units.
MLPs generally operate in the natural resource (petroleum and natural gas extraction and
transportation), financial services, and real estate industries.
The advantage of a Master Limited Partnership is it combines the tax benefits of a limited
partnership (the partnership does not pay taxes from the profit – the money is only taxed when
unit holders receive distributions) with the liquidity of a publicly traded company.
8. Employees Stock Option Plan (ESOP)
An Employee Stock Option is a type of defined contribution benefit plan that buys and holds
stock. ESOP is a qualified, defined contribution, employee benefit plan designed to invest
primarily in the stock of the sponsoring employer. Employee Stock Option’s are “qualified” in
the sense that the ESOP’s sponsoring company, the selling shareholder and participants receive
various tax benefits. With an ESOP, employees never buy or hold the stock directly.
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8. ADVANTAGES AND DISADVANTAGES OF CORPORATE
RESTRUCTURING
Advantages of corporate restructuring
legal protection of the debtor from creditors
recovery of society based on the forgiveness of liabilities (debt elimination)
protection of assets (it is not possible for the creditors to proceed with the execution of
lien, distraint and legal proceedings are suspended and subsequently stopped)
providing time for the re-launch of the copmany (7-9 months)
maintenance of economic independence and legal personality of the debtor
preserving jobs etc.
unblocking of the debtor's bank accounts
the inability to count old liabilities with new liabilities that arose after the beginning of
the restructuring process (the company does not carry out old obligations after the
beginning of restructuring; others have to carry out obligations towards the restructured
company)
supervision of the administrator over the process of restructuring
after succesful restructuring, a company can operate without restrictions
greater satisfaction of creditors than during bankruptcy
relative and gradual satisfaction of creditors (distribution of liabilities over a longer
period of time)
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Disadvantages of corporate restructuring
During the restructuring process, the administrator approves the debtor's legal
actions (with the exception of common legal actions)
In case the restructuring plan is not approved, the company is
declared bankrupt (There is a possibility to replace a group disapproval with the
restructuring plan with a court decree)
In case the plan towards the creditor is not being fulfilled (even after additional
appeal) the plan becomes legally unenforceable towards this creditor
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9. CHARACTERISTICS OF CORPORATE RESTRUCTURING –
1. To improve the country’s 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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10.TYPES OF CORPORATE RESTRUCTURING
Business firms engage in a wide range of activities that include expansion, diversification,
collaboration, spinning off, hiving off, mergers and acquisitions. Privatization also forms an
important part of the restructuring process. The different forms of restructuring may include:
Expansion: Expansions may include mergers, acquisitions, tender offers and joint ventures.
Mergers per se, may either be horizontal mergers, vertical mergers or conglomerate mergers. In a
tender offer, the acquiring firm seeks controlling interest in the firm to be acquired and requests
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EXPANSION
Mergers & Acquisitions
Tender Offers
Joint Ventures
SELL – OFFs
Spin-Off
Split- Off
Equity Crave -Out
CORPORATE CONTROL
Premium Buy Back
Anti -Take Over’s
Standstill Agreements
CHANGE IN OWNERSHIP
Exchange Offer
Share Repurchase
Going Private
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the shareholders of the firm to be acquired, to tender their shares or stock to it. Joint ventures
involve only a small part of the activities of the companies involved.
Sell-Off: Sell-Off may either be through a spin-off or divestiture. Spin-Off creates a new entity
with shares being distributed on a pro rata basis to existing shareholders of the parent company.
Split-Off is a variation of Sell-Off. Divestiture involves sale of a portion of a firm/company to a
third party.
Corporate Control: Corporate control includes buy-backs and greenmail where the
management of the firm wishes to have complete control and ownership.
Change in Ownership: Change in ownership may either be through an exchange offer, share
repurchase or going public.
An example: Cesar Steel Announces Restructuring Plans
Cesar Steel Limited recently announced its restructuring plan through which the company plans
to reduce its interest burden. The company has also initiated several other steps including
increasing production and lowering operating costs as a part of its restructuring program. The
company also announced the development of a strategy addressing its debt burden-reduction and
lengthening the maturity period.
Other restructuring programs initiated by the company included:
Raising equity through rights issue
Reduction in usage of power
The company, subsequent to its restructuring program, expects to be in a position to make net
profits, declare dividends and enhance shareholder value.
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11.THE CHALLENGE OF CORPORATE RESTRUCTURING
Large-scale corporate restructuring made necessary by a financial crisis is one of the
most daunting challenges faced by economic policymakers. The government is forced
to take a leading role, even if indirectly, because of the need to prioritize policy goals,
address market failures, reform the legal and tax systems, and deal with the resistance
of powerful interest groups. The objectives of large-scale corporate restructuring are
in essence to restructure viable corporations and liquidate nonviable ones, restore the
health of the financial sector, and create the conditions for long-term economic
growth.
Successful government-led corporate restructuring policies usually follow a sequence.
First, the government should formulate macroeconomic and legal policies that lay the
foundation for successful restructuring. After that, financial restructuring must start to
establish the proper incentives for banks to take a role in restructuring and get credit
flowing again. Only then can corporate restructuring begin in earnest with the
separating out of the viable from nonviable corporations—restructuring the former
and liquidating the latter. The main government-led corporate restructuring tools are
mediation, incentive schemes, bank recapitalization, asset management companies,
and the appointment of directors to lead the restructuring. After achieving its goals,
the government must cut back its intervention in support of restructuring.
Tasks of Restructuring
Corporate restructuring on a large scale is usually made necessary by a systemic
financial crisis—defined as a severe disruption of financial markets that, by impairing
their ability to function, has large and adverse effects on the economy. The
intertwining of the corporate and financial sectors that defines a systemic crisis
requires that the restructuring address both sectors together.
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12. CATEGORY OF CORPORATE RESTRUCTURING
Corporate Restructuring entails a range of activities including Financial Restructuring and
Organization Restructuring.
Financial Restructuring
Financial Restructuring is the reorganization of the financial assets and liabilities of corporation
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 the means of allocating resources for new marketing campaign or the
launch of the 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.
Corporate Restructuring entails a range of activities including Financial Restructuring and
Organization Restructuring.
Organizational restructuring
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.
Some of the prime reasons for organizational restructuring are as follows:
Changing nature of the markets
The continuous innovations in technology, product, work processes, materials, organizational
culture and structure
Various actions of work force values, global competitors, demands and diversity
Ethical constraints and regulations
Individual transition and development of the business
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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 and
transfers the fixed costs of the company to variable costs.
Business Process Engineering
It involves redesigning the business process so that the business maximizes the operation and
value added content of the business while minimizing everything else.
Total Quality Management
The businesses now have started to realize that an outside certification for the quality of the
product helps to get a good will in the market. Quality improvement is also necessary to improve
the customer service and reduce the cost of the business.
The perspective of organizational restructuring may be different for the employees. When a
company goes for the organizational restructuring, it often leads to reducing the manpower and
hence meaning that people are losing their jobs. This may decrease the morale of employee in a
large manner. Hence many firms provide strategies on career transitioning and outplacement
support to their existing employees for an easy transition to their next job.
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13. BANK AND CORPORATE RESTRUCTURING
Weaknesses in financial and corporate sectors were at the heart of the Asian crisis. In a situation
where rapid financial liberalization had outpaced institutional capacities, vulnerabilities
accumulated and put at risk the solvency of large parts of the affected economies. Inadequate
regulation, weak supervision of financial institutions, poor accounting standards and disclosure
rules, outmoded laws, corporate recklessness and inferior governance all played their part.
Together, these factors seemed to legitimize investor panic that culminated in the disorderly
collapse of asset prices and exchange rates. Prompted in part by the terms of international
assistance packages, the affected economies have now embarked on the complex and time
consuming task of tackling these institutional deficits. This section reviews the progress made in
financial and corporate restructuring in the affected countries of Asia. To begin with, some
analytical background is provided and lessons from managing crises elsewhere are summarized.
Next, the approaches to restructuring that have been taken in Indonesia, Korea, Malaysia, and
Thailand are described. The Philippines, on the other hand, did not experience a systemic
banking crisis. Hence, the discussion of reforms in the Philippines is brief. Finally, progress to
date is evaluated.
RESTRUCTURING THE FINANCIAL SECTOR
Even after the foundation has been laid, corporate restructuring cannot begin to make
headway without substantial progress in restructuring the financial sector. The
draining of bank capital as part of the crisis will usually lead to a sharp cutback in
lending to viable and nonviable corporations alike, worsening the overall contraction.
Moreover, banks must have the capital and incentives to play a role in restructuring.
The first task of financial restructuring is to separate out the viable from the nonviable
financial institutions to the extent possible. To do this work, financing and technical
assistance from international financial institutions can be helpful, as in Indonesia
following the 1997 crisis.
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Nonviable banks should be taken over by the government and their assets eventually
sold or shifted to an asset management corporation, while viable banks should be
recapitalized. Banks should be directly recapitalized for normal operation or else, in
the absence of strong competitive pressures, they may impede recovery by
recapitalizing themselves indirectly through wide interest rate spreads. At the same
time the government should ensure that bank regulation and supervision is strong
enough to maintain a stable banking sector.
There is a degree of circularity here in that the separation of viable from nonviable
banks is helped by completion of the same task for corporations, which itself is aided
by financial restructuring. The best way to close this circle seems to be rapid
restructuring of the banks because a cutback in bank financing to corporations
amplifies the overall contraction, and has irreversible consequences—such as the sale
of assets too cheaply.
RESTRUCTURING THE CORPORATE SECTOR
Corporate restructuring can begin in earnest only when banks and market players are
willing and able to participate. As with the financial sector, the first task
is distinguishing viable from nonviable corporations. Nonviable corporations are
those whose liquidation value is greater than their value as a going concern, taking
into account potential restructuring costs, the "equilibrium" exchange rate, and interest
rates. The closure of nonviable firms ensures that they do not absorb credit or worsen
bank losses. However, the identification of nonviable corporations is complicated by
the poor overall performance of the corporate sector during and just after the crisis.
Viable and nonviable firms can be identified using profit simulations and balance
sheet projections, as well as best judgment.
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Liquidating nonviable corporations during a systemic crisis usually requires the
establishment of new liquidation mechanisms that bypass standard court-based
bankruptcy procedures. The bankruptcy code of the United States can be taken as the
standard minimal government involvement approach. In practice, however, this code
has a strong liquidation bias—some 90 percent of cases end in liquidation, and
reorganization takes a long time. Moreover, courts are usually unable to handle a large
volume of cases, lack expertise, and may be subject to the influence of vested
interests. Giving debtors protection from bankruptcy during mediation proceedings
allows corporations that are later judged to be viable to remain operating and enables
the orderly liquidation of nonviable corporations. If debtors are protected from
bankruptcy, however, monitoring of the corporations is needed to ensure that
incumbent managers do not hive off the most profitable assets. Liquidation can be
speeded up by special courts or new bankruptcy laws. Hungary introduced a tough
bankruptcy law in 1991 under which firms in arrears were required to submit
reorganization plans to creditors; if agreement was not reached, firms were liquidated.
Also, a standstill on payments to banks during negotiations allows cash-strapped
corporations to continue operation while their viability is being decided. Without
effective bankruptcy procedures, restructuring can be significantly slowed down, as
happened in many of the transition countries, in Mexico in 1995, and especially in
Indonesia after the 1997 Asian crisis.
The government must also decide on disposal of the assets of liquidated corporations.
Delays in asset disposal tie up economic resources, slow economic recovery, and
impede corporate restructuring.
Of course, the balance sheets of viable corporations must be restructured.
Restructuring will involve private domestic and foreign creditors, newly state-owned
creditors, and asset management corporations, as well as stakeholders such as unions
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and governments. Usually, balance sheet restructuring takes place through the
reduction of debt or through the conversion of debt into equity. Often minority
creditors slow debt restructuring by threatening to liquidate the debtor in an attempt to
force majority creditors to buy them out on favorable terms. This coordination
problem can be avoided by rules that allow less-than-unanimous creditor approval of
reorganization plans, which can be enforced by government moral suasion, by prior
creditor agreement to a set of principles, or through bankruptcy proceedings.
Early completion of relatively clear-cut transactions can jump-start the restructuring
program. Restructuring is often delayed by difficulties in valuing transactions because
of economic instability and unreliable corporate data.
Long delays in implementing bankruptcy reforms greatly slowed the large-scale
corporate restructuring efforts of the mid- and late 1990s. By early 2000, Mexico had
still not completed bankruptcy law reform, even though there had been a sharp drop in
bank claims on the private sector since the country's 1995 crisis. In East Asia,
ineffectual bankruptcy laws stymied corporate restructuring by allowing nonviable
firms to stay afloat, which not only precluded banks from collecting the underlying
collateral, but also acted as a disincentive for viable firms to repay their debt—further
hurting the banks. Delays in bankruptcy reform are due mainly to pressures from
groups and individuals who would be hurt by the liquidation of nonviable firms, as
well as by the time needed to bring up to speed legal systems faced with a sudden
increase in bankruptcy cases.
Transparency is one positive suggestion for bankruptcy reform: regular government
disclosure of all the aspects of restructuring can make clear the impediments put in the
way by vested interest groups, and thus lead to public pressure to accelerate reform.
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14. THE MAJOR REASONS FOR RESTRUCTURING
Changed Nature of Business
In today’s business environment, the only constant is change. Companies that refuse to change
with the times face the risk of their product line becoming obsolete. Because of this, businesses
experiment with new products, explore new markets, and reach out to new groups of customers
on a continuous basis. Businesses seek to diversify into new areas to increase sales, optimize
their capacity, and conversely shed off divisions that do not add much value, to concentrate on
core competencies instead.
All such initiatives require restructuring. For instance, expansion to an overseas market may
require changes in the staff profile to better connect with the international market, and changes in
work policies and routines to ensure compliance with export regulations. Starting a new product
line may require changes in the system of work, hiring new experts familiar in the business line
and placing them in positions of authority, and other interventions. Hiving off unprofitable or
unneeded business lines may require changes to retain specific components of such divisions that
the main business may wish to retain.
Downsizing
One common reason for restructuring a company is to downsize the workforce. The changing
nature of economy may force the business to adopt new strategies or alter their product mix,
making staff redundant. Similarly, cutthroat competition and pressure on margins from
competitors who adopt a low price strategy may force the company to adopt lean techniques, just
in time inventory, and other measures to cut input costs and achieve process efficiency.
In such situations, the organization will need to redo job descriptions, rework its team, group,
and communication structures and reporting relationships to ensure that the remaining workforce
does the job well. Very often, downsizing-induced restructuring leads to a flatter organizational
structure, and broader job descriptions and duties.
New Work Methods
Traditional organizational systems and controls cater to standard 9 AM to 5 PM office or factory
based work. Newer methods of work, especially outsourcing, telecommuting, and flex time
require new systems, policies, and structures in place, besides a change in culture, and such
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requirements may trigger organizational restructuring.
The presence of telecommuting employees, temporary employees, and outsourcing work may
require a drastic overhaul of performance management parameters, compensation and benefits
administration, and other vital systems. The newer work methods may, for instance, require
placing emphasis on the results rather than the methods, flexible reporting relationships, and a
strong communication policy.
New Management Methods
Traditional management science recommends highly centralized operations, and the top
management adopting a command and control style. The new behavioral approach to
management considers human resources a key driver of strategic advantage, and focuses on
empowering the workforce and providing considerate leeway to line managers in conducting
day-to-day operations. The top management intervenes only to set strategy and ensure
compliance; strategic business units receive autonomy in functioning.
Traditional management structures were bureaucratic and hierarchical. Of late, management
experts see wisdom in flatter organizations with wider roles and responsibilities for each member
of the team. Job flexibility, enlargement and enrichment are key features of such new structures,
but successful implementation requires changes in the communication and reporting structures of
the organization. While new organizations can start with such new paradigms, old organizations
have to restructure themselves to keep up with these best practices to remain competitive.
Quality Management
Competitive pressures force most companies to have a serious look at the quality of their
products and services, and adopt quality interventions such as Six Sigma and Total Quality
Management. Implementing new quality standards may require changes in the organization.
Most of the new quality applications strive to imbibe quality in the actual work process rather
than maintain a separate quality control department to accept or reject output based on quality
specifications.
In many cases, an organizational level audit precedes quality interventions, and such audits
highlight inefficiencies in the organizational structure that may impede quality in the first place.
For instance, reducing waste may require eliminating certain processes,
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Technology
Innovations in technology, work processes, materials and other factors that influence the
business, may require restructuring to keep up with the times. For instance, enterprise resource
planning that links all systems and procedures of an organizational by leveraging the power of
information technology may initially require a complete overhaul of the systems and procedures
first.
Such technology-centric change may be part of a business process engineering exercise that
involves redesigning the business processes to maximize potential and value added, while
minimizing everything else. Failure to do so may result in the company systems and procedures
turning obsolete and discordant with the times.
Mergers and Acquisitions
In today’s corporate world, where survival of the fittest is the maxim, mergers and acquisitions
are commonplace and any merger or acquisition invariably heralds a restructuring exercise. The
reasons for such restructuring accompanying mergers and acquisitions are many. Some of the
common reasons are:
Reconciling the systems and procedures of the merged organizations to ensure that the new
entity has consistency of approach.
Eliminating duplication of work or systems, such as two human resource or finance departments.
Incorporating the preferences of the new owners, and more.
Joint ventures may also require formation of matrix teams, special task forces, or a new
subsidiary.
Finance Related Issues
Very often, small and medium scale businesses have informal structures and reporting
relationships, and an ad-hoc style of decision-making. When such companies grow and want to
raise fresh funds, venture capitalists and regulations might demand a more professional set up,
with formal written-down structures and policies. A listed company may undertake a
restructuring exercise to improve its efficiency and unlock hidden value, and thereby show more
profits to attract fresh investors.
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Bankruptcy may force the business to shed excess flab such as workforce, land, or other
resources, sell some business lines to raise cash, and become lean and mean, to attract bail-outs
or some other rescue package. Companies may try to restructure out of court to avoid the high
costs of a formal bankruptcy.
Induce Higher Earnings
The two basic goals of corporate restructuring may include higher earnings and the creation of
corporate value. Creation of corporate value largely depends on the firm’s ability to generate
enough cash.
Divestiture and Networking
Companies, while keeping in view their core competencies, should exit from peripherals. This
can be realized through entering into joint ventures, strategic alliances and agreements.
Provide Proactive Leadership
Management style greatly influences the restructuring process. All successful companies have
clearly displayed leadership styles in which managers relate on a one-to-one basis with their
employees.
Empowerment
Empowerment is a major constituent of any restructuring process. Delegation and decentralized
decision making provides companies with effective management information system.
Reengineering Process
Success in a restructuring process is only possible through improving various processes and
aligning resources of the company. Redesigning a business process should be the highest priority
in a corporate restructuring exercise.
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15. FORMS OF CORPORATE RESTRUCTURING
Corporate restructuring changes the way a company approaches finances, technology or its
business focus.
Corporate restructuring is a general term used to describe major changes within a company.
These changes usually affect basic business practices, redetermining who makes the major
decisions in a company or how certain parts of its business plan are approached. The type of
restructuring depends on the elements of the business being affected and the reasons that the
restructuring is occurring.
Internal Restructuring
Corporate restructuring occurs based on the needs of the company. Internal restructuring
typically occurs as a result of business analysis that shows a need for greater efficiency in the
way business departments communicate and complete tasks. Sometimes a particular segment of
the business will start to fail, and the company will need to reallocate resources in order to
support it. Sometimes a business may have expanded to much, and needs to refocus on its core
abilities. At other times a business may need to restructure its financial position in order to
continue making profits. Often, restructuring plans are necessary simply to meet the constantly
change demands of technology that competitors are embracing. Not all reasons for restructuring
are negative, and many benefit employees as well as executives in the company.
Financial Restructuring
Financial restructuring deals with all changes the businesses makes to its debts and equity,
including mergers, acquisitions, joint ventures and other deals. Generally these occur when a
company joins or is bought by another company. Ownerships of the company, or at least some
interest in the company, is transferred to another organization or group of investors. Actual
business practices may remain unchanged.
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Technological Restructuring
Technological restructuring occurs when a new technology has been developed that changes the
way an industry operates. This type of restructuring usually affects employees, and tends to lead
to new training initiatives, along with some layoffs as the company improves efficiency. This
type of restructuring also involves alliances with third parties that have technical knowledge or
resources.
Restructuring Methods
Restructuring methods are typically divided into expansion, refocusing, corporate control, and
ownership structure. The last two, corporate control and ownership structure, apply mostly to
financial changes and affect ownership. Corporate control, for instance, is a method where the
company buys back enough shares to be able to make its own decisions again. Expansion occurs
with acquisition, mergers, or joint ventures. Refocusing can take many forms, including business
splits, sell offs of certain ventures, and general consolidation practices.
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16. THE EFFECTS OF A CORPORATE RESTRUCTURING
STRATEGY
Corporate restructuring is a legal maneuver employed by a company with too much debt and not
enough income or a business model that is proving unsuccessful. The effects of restructuring are
varied and range from nervous nail-biting from shareholders to employees wondering about job
security. A corporation with a well-honed restructuring strategy can mitigate these initial worries
and emerge a leaner company with a profitable business plan.
Find the Specific Problem
A corporate restructuring strategy must determine and effectively target the specific
challenge or problem the corporation is facing. This allows the corporation's rebuilding
efforts the best chance for success without hindering any parts of the company that are
currently working well. At its best, a restructuring is a highly targeted surgical strike that
fixes the problem without dismantling the whole company to do it. A restructuring strategy
that lacks direction can often cause more harm for a corporation by worsening an existing
problem and weakening functioning departments or business strategies.
Management Understanding
All levels of management must have an understanding of the corporation's overall
restructuring strategy. This allows managers to prepare employees for possible changes
within departments, and to develop new operational strategies to meet shifting corporate
priorities. Managers may also have to prepare for the possibility of difficult business
decisions resulting from corporation restructuring. Department sizes many shrink, causing
employee layoffs along with pay cuts for managers. Departments may also merge with other
departments in a corporation as a result of the restructuring. Managers must understand how
the corporation's new leadership structure operates in order to ensure that productivity stays
at a high level.
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Effects on Investors
Corporate restructuring makes investors nervous. This can cause a stock sell-off that
decreases the overall value of the corporation and exacerbates the underlying reason for the
restructuring. A corporation undergoing a restructuring must develop a proactive strategy to
communicate to investors all the positives that will come with reorganization. Investor funds
are a key component in the restructuring process. If a corporation loses a large number of
investors, it may experience difficulty raising capital needed to bring its restructuring plan to
fruition.
Improving Organizational Direction
A company emerging from a successful restructuring should have an improved
organizational direction with increased focus and streamlined operational costs. The
company's new direction should revolve around a set of specific business goals identified in
the very beginning stages of restructuring. Business goals could be as simple as turning a
profit, or as complex as dividing the corporation into several new companies, all with
specific business models and different product offerings.
Find the Specific Problem
A corporate restructuring strategy must determine and effectively target the specific
challenge or problem the corporation is facing. This allows the corporation's rebuilding
efforts the best chance for success without hindering any parts of the company that are
currently working well. At its best, a restructuring is a highly targeted surgical strike that
fixes the problem without dismantling the whole company to do it. A restructuring strategy
that lacks direction can often cause more harm for a corporation by worsening an existing
problem and weakening functioning departments or business strategies.
Management Understanding
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CORPORATE RESTRUCTURING
All levels of management must have an understanding of the corporation's overall
restructuring strategy. This allows managers to prepare employees for possible changes
within departments, and to develop new operational strategies to meet shifting corporate
priorities. Managers may also have to prepare for the possibility of difficult business
decisions resulting from corporation restructuring. Department sizes many shrink, causing
employee layoffs along with pay cuts for managers. Departments may also merge with other
departments in a corporation as a result of the restructuring. Managers must understand how
the corporation's new leadership structure operates in order to ensure that productivity stays
at a high level.
Effects on Investors
Corporate restructuring makes investors nervous. This can cause a stock sell-off that
decreases the overall value of the corporation and exacerbates the underlying reason for the
restructuring. A corporation undergoing a restructuring must develop a proactive strategy to
communicate to investors all the positives that will come with reorganization. Investor funds
are a key component in the restructuring process. If a corporation loses a large number of
investors, it may experience difficulty raising capital needed to bring its restructuring plan to
fruition.
Improving Organizational Direction
A company emerging from a successful restructuring should have an improved
organizational direction with increased focus and streamlined operational costs. The
company's new direction should revolve around a set of specific business goals identified in
the very beginning stages of restructuring. Business goals could be as simple as turning a
profit, or as complex as dividing the corporation into several new companies, all with
specific business models and different product offerings.
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17.CONCLUSION
Corporate restructuring on a large scale is potentially one of the most challenging tasks faced by
economic policymakers. The need for large-scale restructuring arises in the aftermath of a
financial crisis when corporate distress is pervasive. The successful completion of restructuring
requires a government to take the lead in establishing restructuring priorities, addressing market
failures, reforming the legal and tax systems.
For instance, in a Banking sector, the best way is to rebuild the financial company around
currently profitable and cash positive business units (like credit cards and short term personal
loans), while cutting all the unprofitable units (like Auto finance or long term business loans).
Some general lessons regarding large-scale corporate restructuring that can be drawn from the
experience of the countries examined in this pamphlet are as follows:
Governments should be prepared to take on a large role as soon as a crisis is judged to be
systemic.
Measures should be taken quickly to offset the social costs of crisis and restructuring.
Restructuring should be based on a holistic and transparent strategy encompassing corporate
and financial restructuring.
Restructuring goals should be stated at the outset, and sunset provisions embedded into the
enabling legislation for new restructuring institutions based on these goals.
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A determined effort to establish effective bankruptcy procedures in the face of pressures from
vested interest groups is essential.
Large-scale post-crisis corporate restructuring takes a minimum of five years to complete, on
average. Finally, crisis can ultimately boost long-term growth prospects both by weakening
special interests that had previously blocked change, and through the successful completion of
corporate restructuring.
18. WEBLIOGRAPHY
WEB SITES
www.valueadder.com
www.wisegeek.com
www.equitymaster.com
www.investopedia.com
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