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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.
Meaning and 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 corporate restructuring may take place and what it can mean for the company.
Purpose of Corporate Restructuring
To enhance the share holder value, The company should continuously evaluate its:
Portfolio of businesses,
Ownership &Asset arrangements to find opportunities to increase the share holder’s 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
To improve the company’s Balance sheet, (by selling unprofitable division from its core business).
To accomplish staff reduction ( by selling/closing of unprofitable portion).
Changes in corporate management.
Sale of underutilized assets, such as patents/brands.
Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.
Moving of operations such as manufacturing to lower-cost locations.
Reorganization of functions such as sales, marketing, & 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.
Financial restructuring is the process of reshuffling or reorganizing the financial structure, which primarily comprises of equity capital and debt capital. Financial restructuring can be done because of either compulsion or as part of the financial strategy of the company. This financial restructuring can be either from the assets side or the liabilities side of the balance sheet. If one is changed, accordingly the other will be adjusted.
Debt restructuring is the process of reorganizing the whole debt capital of the company. It involves reshuffling of the balance sheet items as it contains the debt obligations of the company. Debt restructuring is more commonly used as a financial tool than compared to equity restructuring. This is because a company’s financial manager needs to always look at the options to minimize the cost of capital and improving the efficiency of the company as a whole which will in turn call for the continuous review of the debt part and recycling it to maximize efficiency.