The corporate restructuring includes various forms of collaborations, such as takeovers, mergers and acquisitions, spin-offs, leveraged buyouts etc. It refers to an alteration or change in the asset mix, ownership, business mix and alliance with another company with an aim to increase shareholder value. Thus, there is a change in the business capacity and the portfolio of the business is related in order to increase the performance of the company. Mergers and Acquisitions (M & A) are popular in all forms of corporate restructuring.
Characteristics of Corporate Restructuring:
- There is a change in the capacity of the business.
- There is a change in the capital structure, there is called capital restructuring.
- The ownership[ of the business changes, this is known as ownership restructuring.
- When the company diversifies itself into a new venture or when there is divestment, outsourcing, band acquisition then it is called business restructuring.
- When a firm acquires it sells the asset along with ownership then it is called asset restructuring e.g. Receivables factoring, securitization of debt, leasing back of assets and sales of assets.
Objectives of Corporate Restructuring:
- The key objective is to increase the value/wealth of the shareholders. The company must evaluate its ownership, asset and capital mix along with the business portfolio to explore opportunities to increase the value of the shares.
- Another objective is to focus on the core strength of the company.
- Restructuring is done to achieve economies of scale, by gaining access and expanding to the global market.
- Another motive is to attain operational synergy and effective distribution of infrastructure and management capabilities.
- Restructuring is done to reduce the cost of capital.
- With restructuring, a company can ensure an adequate and constant supply of raw materials.
- Corporate restructuring is done to rehabilitate and survive a sick company by adjusting the losses of the dying company with the gains of a healthy company.
- Strategically it is done to get on edge over the competitors, e.g. Walmart takes over Flipkart.
Forms of Corporate Restructuring:
1. Merger:
2. Consolidation:
3. Amalgamation:
Forms of Amlgamtion:
Amalgamation in the Nature of Merger: Here, the assets and liabilities are polled in along with this, the interests of the shareholders of the business are also amalgamated. All the assets and liabilities and no adjustments are required to be made in the book value.
Amalgamation in the Nature of Purchase: When the conditions required for the amalgamation in the nature of a merger are not satisfied then, this method is used. Here one company purchases or acquires another company and the company which has been purchased doesn't have proportionate shares in the equity capital of the newly amalgamated company.
4. Acquisition:
It is a process where business firms or companies acquire control over other business firms. The company which has been purchased or acquired is known as the target company. The acquirer gets the right to know the control of the policy and management decision of the target company, although the identity of the target company remains intact. One must note, that in merger, consolidation or absorption a company takes over another company and merges the operations with its own. However acquisition, actually acquires the control of the business operations, assets and liabilities by combining its business.
5. Divestiture:
When a company sells all the assets and claims of its business in exchange for cash and not against equity capital, then it is termed divestiture. The term divestiture is often called 'slump sale' as described by the Income-tax Act, 1961. The term assets are the combination of all investment, current assets, capital work progress and all fixed assets. However, the divest company does not take over the unsecured and secured loans. Generally, cash is chosen for consideration and not equity shares because
- The divesting company requires cash to repay the unsecured loans and unsecured loans. Divesting company is one that is selling its assets, while the divested company is purchasing these assets.
- The divesting company also requires cash to inject money into the failing business or to start another business.
6. Demerger:
It is a form of corporate restructuring which is the opposite of a merger. Here, the companies decide to sell the assets, divisions and product lines to outsiders and work separately. Companies use it as a technique to consolidate and restructure their business in order to create more value for the shareholders. In this, the company selling the asset wants to create more value for the investors. A part of the business unit is sold at a higher price in comparison to its net worth some of the reasons for the demerger. It includes
Selling Cash Cows: This means that the companies may reach a saturation point by exploiting 'cash cows'. Hence, they sell these units to invest the money in the 'stars' so that higher returns can be generated.
Disposing Unprofitable Activities: With demerger, the company can remove unproductive and loss-making activities or units and focus on strategic activities.
7. Spin-Off:
When a company forms a new company from an existing single entity then it is a spin-off. Usually, the company that has been formed is a subsidiary company. There is no change in the ownership of the companies. The parent company allocates the shares to the company that has been spun off. This is done with no cash consideration.
Thus, the spin-off has various advantages which are explained below
- The shareholders will be able to easily identify the value of the company because of separation.
- The management can easily monitor which company is not performing well and quick managerial actions can improve the performance.
- Now, the shareholders will have securities of two companies, i.e. the parent and its subsidiary.
- The operational efficiency of the two units will increase because of more concentrated investments.
- It helps in the allocation of key resources to growth avenues, which leads to increased profits.
8. Split Off:
- Continue holding shares in the existing cooperation.
- Exchange all of its shares or some of its shares for gaining control over the subsidiary company.
9. Sell-Off:
10. Carve Out:
11. Split Up:
12. Reduction in Capital:
13. Buyback of Shares:
- The company buying back it shares should not issue fresh capital (except bonus issue) for the next 1 year.
- The company should explicitly tell the amount that it will use to buy back the security. It must also take the approval of the shareholders before such a buyback.
- The company should not raise loans or borrow to finance buyback.
- The share that has been bought back will cease to exist and cannot be offered /issued again.
- Buying back of shares should be done only out of the general reserve.
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