Restructuring is the corporate management term for the act of
reorganizing the legal, ownership, operational, or other structures of a
company for the purpose of making it more profitable, or better organized for
its present needs. Other reasons for restructuring include a change of
ownership or ownership structure, demerger, or a response to a crisis or
major change in the business such as bankruptcy, repositioning, or buyout.
Restructuring may also be described as corporate restructuring, debt
restructuring and financial restructuring.
Executives involved in restructuring often hire financial and legal advisors
to assist in the transaction details and negotiation. It may also be done by a
new CEO hired specifically to make the difficult and controversial decisions
required to save or reposition the company. It generally involves financing
debt, selling portions of the company to investors, and reorganizing or reducing
operations. The basic nature of restructuring is a
zero-sum game. Strategic restructuring reduces financial losses, simultaneously
reducing tensions between debt and equity holders to facilitate a prompt
resolution of a distressed situation. Corporate debt restructuring is the
reorganization of companies’ outstanding liabilities. It is generally a mechanism
used by companies which are facing difficulties in repaying their debts. In
the process of restructuring, the credit obligations are spread out over longer
duration with smaller payments. This allows company’s ability to meet debt
obligations. Also, as part of process, some creditors may agree to exchange
debt for some portion of equity. It is based on the principle that
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. This process tries to resolve the
difficulties faced by the corporate sector and enables them to become viable
again. Steps:
Ensure the company has enough liquidity to operate during implementation of a
complete restructuring Produce accurate working capital
forecasts Provide open and clear lines of
communication with creditors who mostly control the company's ability to raise
financing Update detailed business plan and
considerations Valuations in restructuring
In corporate restructuring, valuations are used as negotiating tools and more
than third-party reviews designed for litigation avoidance. This distinction
between negotiation and process is a difference between financial
restructuring and corporate finance. Restructuring in Europe
= The "London Approach" = Historically, European banks handled
non-investment grade lending and capital structures that were fairly
straightforward. Nicknamed the "London Approach" in the UK, restructurings
focused on avoiding debt write-offs rather than providing distressed
companies with an appropriately sized balance sheet. This approach became
impractical in the 1990s with private equity increasing demand for highly
leveraged capital structures that created the market in high-yield and
mezzanine debt. Increased volume of distressed debt drew in hedge funds and
credit derivatives deepened the market—trends outside the control of
both the regulator and the leading commercial banks.
Characteristics Cash management and cash generation
during crisis Impaired Loan Advisory Services
Retention of corporate management in the form of "stay bonus" payments or equity
grants Sale of underutilized assets, such as
patents or brands Outsourcing of operations such as
payroll and technical support to a more efficient third party
Moving of operations such as manufacturing to lower-cost locations
Reorganization of functions such as sales, marketing, and distribution
Renegotiation of labor contracts to reduce overhead
Refinancing of corporate debt to reduce interest payments
A major public relations campaign to reposition the company with consumers
Forfeiture of all or part of the ownership share by pre-restructuring
stock holders Improving the efficiency and
productivity through new investments, R&D and business engineering.
Results A company that has been restructured
effectively will theoretically be leaner, more efficient, better
organized, and better focused on its core business with a revised strategic
and financial plan. If the restructured company was a leverage acquisition, the
parent company will likely resell it at a profit if the restructuring has proven
successful. References
External links Infoworld - "HP to slash 14,500 jobs in
major restructuring move" CBC News - "Stelco unveils restructuring
plan" Web site of the TRACE Project, a large
scale European trade union project that has created a mass of resources,
training materials, etc about restructuring
Web site of the MIRE Project including thematic analysis and 30 case studies
European Restructuring Toolbox on Anticipedia web site of the European
Commission Health in Restructuring: Innovative
Approaches and Policy Recommendations See also
Bankruptcy Chainsaw Al
Compromise agreement Creditor
Debt Demerger
Downsizing Insolvency
Layoff Presidential Task Force on the Auto
Industry Spin-out
Stub Voluntary redundancy