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Corporate Restructuring

Meaning: “To give a new structure, to rebuild or rearrange” Restructuring is corporate management
term for the take action of incompletely dismantling or else reorganizing a company for the purpose
of making its well-organized and consequently more profitable.

Need for corporate restructuring


Corporate restructuring may also get place as a result of the acquisition of the business by new
owners. The acquisition may be in the type of a leveraged buyouts, a hostile takeover, or a merger
of some form that keeps the business whole as a subsidiary of the controlling company. When the
restructuring is due to a hostile takeover, corporate raider often apply a dismantling of the company,
selling-off properties and other assets in order to make a profit from the buyout. What remains
following this restructuring may be a minor entity that can carry on functioning, although not at the
level possible before the takeover took position.

Characteristics of Corporate Restructuring


1. To improve the company’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 management.
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 company with consumers.

Main forms of corporate restructuring

• Merger
• Consolidation
• Acquisition
• Divestiture
• Demerger
• Joint venture
• Reduction of capital
• Buy-back of securities
• Delisting of securities
• Carve out

• Merger
Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all the assets as
well as liabilities of the merged company or companies.

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• Consolidation or amalgamation
Consolidation or amalgamation is the act of merging many things into one. In business, it often
refers to the mergers of many smaller companies into much larger ones.

• Acquisition
In business, a takeover is the purchase of one company (the target) by another (the acquirer,
or bidder).

• Divestments
The partial or full disposal of an investment or asset through sale, exchange, closure or
bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in
large lots over a short time period.
Divesture is a deal through which a company sells a section of its assets or a division to
another company. It involves selling some of the assets or separation for cash or securities to a third
party which is an outsider. Divestiture is a form of reduction for the selling company. means of
expansion for the purchasing company. It represents the sale of a section of a business (assets, a
product line, a subsidiary) to a third party for cash and or securities.

• Joint Venture

Joint ventures is a business enterprise for profit, in which two or more parties share responsibilities
in an agreed manner, by providing risk capital technology patent trademark brand name to access to
market.

• Reduction of capital
This is a legal process u/s 100 to 104 of the Companies Act, 1956 .There are three ways of doing it
* By extinguishing or reducing the liability in respect of share capital not paid up( since
not called as yet).
* By writing off or canceling the capital which is lost.
* By paying off or returning excess capital that is not

• Buy-back of securities

The company is having excess cash.The company does not have any further investment proposal for
capacity creation. In such a phase the stock market is quite bearish and the interest rate comes
down, so the idle cash does not fetch any good returns.

• Delisting of securities

When we refer to delisting of a company as a form of corporate restructuring, we are mainly


referring to delisting of its equity shares from all stock exchanges.Required by the company.

• Equity carve outs

A agreement in which a parent company offers some of a subsidiaries common stock to the general
public, to bring in a cash combination to the parent without loss of control. In other words equity
carve outs are those in which a number of of a subsidiaries shares are offered for a sale to the
general public, bringing an combination of cash to the parent firm without loss of control. Equity
carve out is also a way of reducing their contact to a riskier line of business and to increase
shareholders value.

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Methods of corporate restructuring

1. Joint ventures
2. Sell off
3. Spin off
4. Divestitures
5. Equity carve out
6. Share repurchase
7. Leveraged buy outs
8. Management buy outs
9. Master limited partnerships
10. Employee stock ownership plans

1. Joint Venture

Joint ventures is a business enterprise for profit, in which two or more parties share responsibilities
in an agreed manner, by providing risk capital technology patent trademark brand name to access to
market.

2. Spin-offs

Spin-offs are a method to get rid of underperforming or non-core company divisions that can draw
down profits. The common definition of spin-offs is when a division of a business or organization
becomes an independent business

Spin-out
"spin-out" business takes assets, intellectual property, technology, and/or existing products from the
parent company. Some times the management team of the new company is from the same parent
company.
Spilt off

Spilt off is a transaction in which some, but not all, parent company shareholders receive shares in a
subsidiary, in return for relinquishing their parent company’s share. In other words a number of
parent company shareholders receive the subsidiary shares in come back for which they must give
up their parent company shares.

Split up

Spilt up is a transaction in which a corporation spin-offs all of its subsidiaries to its shareholders &
ceases to exist. -The whole firm is broken up in a series of spin-offs. -The parent firm no longer
exists and -Only the new offspring survive.

3. Sell-off

In a strategic planning process, which a company can take decision to concentrate on core business
activities by selling off the non core business divisions.

4. Divestments

The partial or full disposal of an investment or asset through sale, exchange, closure or
bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in
large lots over a short time period.

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5. Equity carve outs

A agreement in which a parent company offers some of a subsidiaries common stock to the
general public, to bring in a cash combination to the parent without loss of control. In other words
equity carve outs are those in which a number of of a subsidiaries shares are offered for a sale to the
general public, bringing an combination of cash to the parent firm without loss of control. Equity
carve out is also a way of reducing their contact to a riskier line of business and to increase
shareholders value.

6. Share Repurchase

A program by which a company buys back its own shares from the marketplace, reducing the
number of outstanding shares. This is usually an indication that the company's management thinks
the shares are undervalued.

7. Leveraged Buyout – LBO

The acquisition of another company using a significant amount of borrowed money (bonds or
loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as
collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged
buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

8. Management buyout (MBO)

Management buyout (MBO) is a form of acquisition where a company's existing managers


acquire a large part or all of the company.
The purpose of such a buyout from the managers' 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. They may also want to maximize the financial benefits they receive from
the success they bring to the company by taking the profits for themselves. This is often a way to
ward off aggressive buyers.

9. Master Limited Partnership – MLP.


A type of limited partnership that is publicly traded. There are two types of partners in this type of
partnership: The limited partner is the person or group that provides the capital to the MLP and
receives periodic income distributions from the MLP's cash flow, whereas the general partner is the
party responsible for managing the MLP's affairs and receives compensation that is linked to the
performance of the venture.

10. Employee Stock Ownership Plan (ESOP)

Employee Stock Ownership Plan (ESOP) is an employee benefit plan. The scheme provides
employees the ownership of stocks in the company. It is one of the profit sharing plans. Employers
have the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides
for tax benefits to the employers.

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