Restructuring is a process by which a firm does an analysis of itself at a point of time and alters what it owes and owns,

refocuses itself to specific tasks of performance improvements. Restructuring will radically alter a firms capital structure , asset mix and organization so as to enhance the value of the firm. Corporate restructuring involves any substantial change in a companys financial structure, or ownership or control, or business portfolio, designed to increase the value of the firm.

Recession
Global competition Technological break through IT revolution Managerial innovations Deregulations of economies

Expansion in International trade

Revival of sick units

Corporate restructuring Techniques

Expansion Techniques Mergers Takeovers Joint Venture Strategic alliance Franchising IPRs Holding Companies Take over by reverse bid

Divestment Techniques

Other Techniques

Sell-off (Hive off) De merger (spin off) Slump sale Management buy out Leverage buy out Liquidation

Going private Share repurchase Management buy in Reverse merger Equity carve out

The terms merger and amalgamation are used interchangeably to denote the situation where 2 or more companies, keeping in view their long term business interest, combine into one economic entity to share risks and financial rewards.

Take over is a business strategy whereby one company acquires control over the other company either directly or indirectly by controlling management. It is a strategy for acquiring control over other business to consolidate and acquire large share of the market.

Joint venture is form of business combination in which two unaffiliated business firms contribute financial and / or physical assets, as well as personnel , to a new company formed to engage in some kind of economic activity, such as production or marketing of a product. The partners in joint venture will provide risk capital, technology, patent, trade mark, brand names and allow both partners to reap benefit at agreed share.

Joint venture is a part of business strategy enabling a firm to enter into a new market, acquire finance, technology, patent and brand names.

Strategic alliance is defined as association to further the common interests of the members.

Strategic alliance is an arrangement or agreement under which two firms cooperate with each other in order to achieve some commercial objectives. The motive behind strategic alliance is to reduce cost, technology sharing, product development, market access, availability of capital risk sharing etc.
The strategic alliances are in the shape of Joint ventures, Franchising, supply / purchase Agreements etc.

Franchising provide immediate access to business operations and technology in profitable fields of operations Examples are marketing and distribution agreements for goods and services. ( KFC etc) Franchises are becoming a key mechanism for technological, marketing and services linkages between enterprises within a country as well as globally.

The worth of a company lies more in its intangible assets ( Patents, trade marks, brands, copy rights etc, ) than tangible assets ( Land, building, plant and machinery)

Patents, trade marks and strong brands lead to higher sales, economies of scale and profits.

A holding company enjoys controlling interest in the subsidiary by acquiring substantial voting power in the form of acquisition of equity shares carrying voting rights. When the holding company acquires 100 % voting power in the subsidiary, it is called Wholly owned subsidiary . The holding company is also called a parent company. Consolidated financial statements are prepared for the whole group ( holding + subsidiary )

Normally a big company takes over a small company. But when a small company which is cash rich company takes over a big company which is sick it is called Reverse Bid.

The take over by reverse bid enables the acquirer to exploit the economies of scale.

In strategic planning process, a company can take decision to concentrate on core business activities by selling off the non core business divisions. A sell off is a sale of part of the organization to a third party under following circumstances:

To come out of shortage of cash and severe liquidity Problems: To concentrate on core activities only. To protect the company from take over activities by selling off the desirable division to the bidder.

To improve the profitability of the firm by selling off loss making divisions. To increase efficiency of men, machine and money. To reduce business risk by selling off the high risk activities.

De merger is not just opposite of merger.

The real meaning of de merger means for strategic reasons, a conglomerate is splitted into two or more independent units. Assets and liabilities of conglomerate are transferred to these independent units.
For example XYZ company deals in Cement , textile and chemical sectors. If textile is not doing well ( or exceptionally good) it is splitted into a separate legal entity. De merger is also called as SPIN OFF or Hiving off

When a company sells or disposes the whole or substantially the whole of the undertaking for a predetermined lump sum amount as a sale consideration is called slump sale. The acquirer may be interested in purchase of an undertaking or part of it as a going concern. While fixing the price the value of individual assets not counted and liabilities are not separately considered while fixing the slump price.

Management buy out is a purchase of the company by its present management when the owners are trying to sell it off to the outsiders. In MBO the management may purchase whole or a part of the business from its owners.

As management knows in side out organization ( strength / weaknesses )

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The MBO is financed partly by the managers from their personal resources and rest by borrowing from the bank / venture capitalist

Leverage buy out is defined as The acquisition of an operating company with the funds derived primarily from debt financing, by a small group of investors. The debt is secured against the asset of the company. Some time junk bonds are also issued for this purpose. In LBO program, the acquiring group consist of small number of persons, organization sponsored by BUY OUT SPECIALISTS or INVESTMENT BANKERS.

In case of technological obsolescence, lack of market for companies product, financial losses, cash shortages, lack of managerial skills , the owner may decide to liquidate the company enabling to stop further aggravation of losses.

In a restructure program, the management of widely held company may decide to go private by purchase of stock from the outside public and delisting the shares in the stock market where share they are traded. Advantages to the Co. are : Avoidance from the predators to bid the company. Avoidance of listing fees of the stock exchanges Avoidance in fall in share price. Saving in expenses / formalities for A/c circulation Secrecy can be maintained.

Buying back of shares is method of FINANCIAL ENGINEERING. It is a procedure by which the company go back to the share holders and offer them to purchase back the shares from them.

Following are 3 methods:

1. Tender Method: The company fixes and announces a price at which it is prepared to buy back a fixed number of shares from the share holders.

2. Open Market purchase through Stock Exchange: The company purchase shares from the open market through stock exchanges for cancellation till it reaches the predetermined level fixed by the company.
3. DUTCH AUCTION METHOD under which share holders are invited to quote a range of prices and the number of shares at each price level they would be interested in offering for buy back. Based upon the information the company will accept the offer and purchase share from them.

To improve the share holder value, enabling share holders to utilize the funds in better options. To increase the EPS of the remaining share holders. It is used as a defense mechanism It improves the intrinsic value of the shares. To improve the market price of the share. To avoid unnecessary diversification or buying growth through costly acquisitions

The funds required for buy back of shares can be generated through following sources:

Internal sources retained profits / cash Selling off temporary investments By raising debentures / bonds By obtaining credit from commercial banks

The management team who have got special skills will search out and purchase business, to their interested areas, which has considerable potential but that has not been run to its full advantage.

The MBI is reverse of MBO.

In case of MBI the management of other concerns acquire the majority of the share of the company resultantly the original management has to leave the concern.

In case of reverse merger the smaller company having cash resources for the sake of taking tax advantage purchases a big concern. The take over by a small concern would be more appropriate it had the better record and more promising future.

In such cases a 100 % holding company sells to the public about 20 % of equity in its Wholly owned subsidiary and retains about 80 % of the subsidiary stock to preserve its ability to file a consolidated tax return. This type of transaction is also called a partial public offering or spin out. Equity carve out is type of corporate securitization, which is issuance of public securities backed by assets that have been segregated from the remaining assets of the company. By creating such securities, and a liquid market for trading them, a corporation can potentially reduce investor risk and increase the value of the firm as a whole.

Restructuring: Actions taken by management to make organization more Balanced and profitable in order to achieve its objectives in a more simplified manner. Examples are mergers, amalgamation, take over , divestment, expansion joint venture etc Financial restructuring involves activities like:

Buy back of own shares (Treasury stocks) Issue of sweat equity shares (Fresh issuance) Redemption of shares Issue of convertible debentures / preference shares Consolidation / split up of share value Issue of bonus shares Issue of deep discount bonds etc.

Financial: Decisions relating to Acquisitions, Mergers, Joint Ventures and Strategic Alliance. Also deals with decisions for restructuring the capital base and raising Finance for the new projects. Technological: This involves investment in R & D and also alliances with overseas companies to exploit technological strengths.

Marketing: This involves decisions regarding the product market segments where the company plans to operate based on its core competencies.
Manpower: This involves establishing internal structure and processes for improving the capability of the people in the organization to respond to the changes.

Reduced number of players in the market Emerging of new look companies Healthy economic state of nation Social discontent

The Financial reorganization refers to the restructuring of company by affecting change in the capital structure for achieving balanced operative results. The financial reorganization is carried out by bringing balance in debt in equity (short term / long-term) adjustment in Capital gearing in order to:
To reduce recurring financial charges. To increase EPS To improve market value of share

Project cost over run - funds shortage

Technological obsolescence (Old assets) Accumulated losses In sufficient working capital Financing of Fixed assets with short term funds Investment in non core business / assets Over gearing enhanced financial risk

Poor current ratio

In adequate return on capital employed