Types of Turnaround Management

The present business scenario is one wherein constant change is the name of the game. For any firm to survive in any industry there has to be constant monitoring and improvement of its systems and operations. When a firm faces severe cash crisis or a consistent downtrend in its operating profits or net worth, it is on its way to becoming insolvent. The slide cannot be prevented unless appropriate actions, both internal and external, are initiated to change the future prospects. This process of bringing about a revival in the firm’s fortunes is what is termed as “Turnaround Management”.

The various types of turnaround managements are as follows:-

·        The Management Process Turnaround-

 It means that the principal factors that were changed to accomplish the turnaround were management process. Since the reason for decline was management problems, the principal reason for turnaround must be correction of management weaknesses that caused decline. A management process turnaround, to be successful must include something much more fundamental than correcting management declines. Fundamentally, the whole culture of the organization must change.

·        The Economic or Business Cycle Turnaround-

The second major type of turnaround is the economic or business cycle turnaround which affects cyclical industries such as real estate .a great deal. Economic improvement, however, cam be a big boost in an otherwise dismal scene. Good management processes, rather than economics or industry trends, are the key.

·        The Competitive Environment Turnaround-

 The market forces i.e., demand, supply and the competition is the basis for this type of turnarounds. Although economic and competitive factory definitely affect the performance of the company, the economic cycle good performers astonishingly outperform the laggards.

·        The Product Breakthrough Turnaround-

 Product breakthroughs can take two major forms: (a) breakthroughs in consumer tastes and (b) technical or scientific breakthroughs. In both cases, timing is critical and reliance on a product can make or break.

·        Government-Related Turnaround-

 Usually, these turnarounds account for only a small fraction of total turnaround. These are related to a major change in government procurement policies i.e., the dissolution of contracts; a major shift in regulation, such as environmental controls; or direct government assistance

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Turnaround Management Strategies

A turnaround is to produce a noticeable and endurable improvement in performance, to turnaround the trend of results from down to up, from not good enough to clearly better, from underachieving to acceptable, to losing to winning. Turnaround management gained prominence when there were incidences of corporate decline at global scale that caused organizational failure. Turnaround can be explained as business firm that faces financial disaster or action taken to prevent the occurrence of that financial disaster.

There are 5 strategies related to turnaround management. These are:-

(a) Human Resource Strategies- The strategies of human resource play a vital role in turning around the sick complex organsiations. The turnaround action pertaining to human resource necessitates people intervention and involvement at all levels. Firms experiencing negative trends of performance typically resort to retrenchment as their most prominent turnaround strategy. The strategies pursued under human resource are: staff reductions, massive re-training of employees, changes in the managerial cadre, including professionalization, financial incentives for employees, information dissemination to all levels, organisational restructuring, including decentralization, and building a new culture within the organisation.

(b) Financial Strategies- The objective of financial strategy in turnaround management is to develop and use the financial competencies of the business as an asset to enhance the competitiveness of the business. Organisations adopt several such financial strategies as reduction in the par value of shares, obtaining loans at low rates of interest, postponement of maturity of debts, and conversion of debt into equity

(c) Marketing Strategies- The role and importance of innovative marketing strategies in corporate turn around has been highlighted by several researchers. The marketing oriented business is customer centric, generates and disseminates market intelligence. Switching from production orientation to market orientation is a critical element in the turnaround because lack of sensitivity towards customer needs and change of tastes were considered to be the major reasons for the decline in sales, fall in market share and accumulation of losses. Initially, it is an elimination process based on the simple criterion of financial performance.

(d) Production/Operations Strategies- Strategies must be selected with due consideration for the specific crisis situation. Scare resources, time pressure and other relevant factors viz., reasons for change, the ways of routine action and the cost of the change influence the type of the strategy. Operating strategies are cures for operating causes while strategic problems should be addressed by the strategic remedies. However, operational failures are rarely addressed with strategic turnaround actions.

(e) Corporate Planning Strategies- Planning is for future course of action either for short-term (annual planning) or a long- term focus (expansion, diversification, research and development and so on). In the context of turnaround management, sickness and downturn are attributed to improper planning. Changes in planning have been considered under long- term when the existing products and services had limited acceptability in the market. Strategic orientation i.e., re-focusing on the core activities, expansion and diversification of business activities are of long-term in nature.

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Techniques of Turnaround Management

There are different techniques that can be applied to cause a repositioning. The four main techniques are known as Retrenchment, Repositioning, Replacement and Renewal:

1.     Retrenchment

The Retrenchment strategy of the turnaround management describes wide-ranging short-term actions, to reduce financial losses, to stabilize the company and to work against the problems, that caused the poor performance. The essential content of the Retrenchment strategy is therefore to reduce scope and the size of a business through Shrinking Selective Strategy. This can be done by selling assets, abandoning difficult markets, stopping unprofitable production lines, downsizing and outsourcing. These procedures are used to generate resources, with the intention to utilize those for more productive activities, and prevent financial losses. Retrenchment is therefore all about an efficient orientation and a refocus on the core business. Despite that many companies are inhibited to perform cutbacks, some of them manage to overcome the resistance. As a result they are able get a better market position in spite of the reductions they made and increase productivity and efficiency. Most practitioners even mention, that a successful turnaround without a planned retrenchment is rarely feasible.

2.      Repositioning

The repositioning strategy, also known as "entrepreneurial strategy", attempts to generate revenue with new innovations and change in product portfolio and market position. This includes development of new products, entering new markets, exploring alternative sources of revenue and modifying the image or the mission of a company.

3.     Replacement

Replacement is a strategy, where top managers or the Chief Executive Officer (CEO) are replaced by new ones. This turnaround strategy is used, because it is theorized that new managers bring recovery and a strategic change, as a result of their different experience and backgrounds from their previous work. It is also indispensable to be aware, that new CEO’s can cause problems, which are obstructive to achieve a turnaround. For an example, if they change effective organized routines or introduce new administrative overheads and guidelines. Replacement is especially qualified for situations with opinionated CEO’s, which are not able to think impartial about certain problems. Instead they rely on their past experience for running the business or belittle the situation as short-termed. The established leaders fail therefore to recognize that a change in the business strategy is necessary to keep the company viable. There are also situations, where CEO’s do notice that a current strategy isn’t successful as it should be. But this hasn’t to imply, that they are capable or even qualified enough to accomplish a turnaround. Is a company against a Replacement of a leader, could this end in a situation, where the declining process will be continued. As result qualified employees resign, the organisation discredits and the resources left will run out as time goes by.

4.     Renewal

With a Renewal a company pursues long-term actions, which are supposed to end in a successful managerial performance. The first step here is to analyze the existing structures within the organization. This examination may end with a closure of some divisions, a development of new markets/ projects or an expansion in other business areas. A Renewal may also lead to consequences within a company, like the removal of efficient routines or resources. On the other hand are innovative core competencies implemented, which conclude in an increase of knowledge and a stabilization of the company value

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Process of Turnaround Management

Turnaround Management is about business restructure and renewal.  Often, a turnaround management strategy is employed when the business is under financial stress.  However, it is not necessary to wait until the situation becomes too dire to commence a turnaround strategy.  In fact it is preferable to commence the process before it could be too late.

To help understand how turnaround management works, below is an outline of the 5 step process involved.  Having a good understanding of this process will make it easier to identify if and when, it should be applied.

Step 1 – Define & Analyse

During this stage the definition of performance problems within the business are clearly outlined.  It is particularly important during this step that any areas of financial stress within the business are identified and a thorough analysis undertaken.

The objective of this is to arrest any further decline in the business while continuing to trade and avoid insolvency.

Step 2 – Scope & Strategy

Once the business has been stabilised, it is now time to commence a strategic planning process.  The first part of this is to scope the strengths, weaknesses, opportunities and threats (SWOT analysis) of the business.

It is important during this stage to not only look internally (strengths and weaknesses) but to strategically analyse the external environment (opportunities and threats) as well.

From the SWOT analysis, the long term vision, mission and objectives for the business can be defined.  Knowing where the business is heading then allows the development of a strategic plan.

Step 3 – Link & Action

Now it is time to take the strategic plan and develop an action plan.  This is a list of actions and tasks complete with time frames that must be undertaken to ultimately achieve the business objectives.

The tasks are the daily, weekly and monthly activities to be done and with this strategic planning process, each one will be contributing to the overall mission.

Step 4 – Implement

This step is not just about implementing the action plan, but also ensuring coaching and support of all staff.  Without this critical step, all the planning can go to waste.

It is important that employees are aligned with the overall vision for the business.  This is achieved through communication, consultation and coaching on a regular basis.

Step 5 – Review

With all the planning and implementation in place, it is now time to conduct regular reviews.  This ensures not only that continual improvement is achieved but also helps to identify any corrective actions that may be needed.

In effect, turnaround management is very similar to the strategic planning process; however the first step of identifying areas of stress in the business is critical.  For any business where this stress is already occurring, applying the above process, in consultation with a turnaround management expert, will not only ensure the business turnaround but also the opportunity to improve and develop well into the future.

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Stages of Turnaround Management

Turning around a troubled entity is complex. There are many stakeholders: a nervous board, a thin-skinned management team and worried employees are just the beginning. There are customers who might run for the exits, partners second guessing their alliances. Public companies need to deal with the stock market expectations while private companies have private equity investors on their heels. If things are really bad, then the business needs to deal with lenders, creditors and potentially courts. Here are the five major stages of the turnaround process:

Stage 1: Situation Analysis

Your objective is to determine the severity of the situation. Is the business viable? Can it survive? Should it be saved? Are there sufficient cash resources to fuel the turnaround? This analysis should culminate in formulating a preliminary action plan that shows what is wrong, what potential solutions exist, key strategies to turn the entity in a positive direction, and a cash flow forecast (at least 13 weeks) to understand cash usage.

Important steps at this stage: Identify what product and business segments are most profitable, particularly at the gross margin level, and eliminate weak and nonperformers. Make certain that all functional areas (sales, production) are working to support the goals of their counterparts.

Stage 2: Management Change

It is important to select a CEO who can successfully lead the turnaround. This individual must have a proven track record and the ability to assemble a management team that can implement the strategies to turn the company around. This individual most often comes from outside the company and brings a special set of skills to deal with crisis and change. She will stabilize the situation, implement plans to transform the company, and then hire a replacement.

It is essential to eliminate obstructionists who may hamper the process. This could require replacing some or all of top management. This will undoubtedly mean also replacing some of the board members who did not keep a watchful eye.

Stage 3: Emergency Action

You have to gain control of the situation, particularly cash, and establish breakeven. Centralize cash management to ensure control. If you stop cash bleed, you enable the entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition. Usually you have to raise cash immediately. Review the balance sheet for internal sources of cash such as collecting accounts receivable, and renegotiating payments against accounts payable. Sell unprofitable business units, real estate, and unutilized assets. Secure asset-based loans if needed. Restructure debt to balance the amount of interest payments with a level a company can afford.

Lay off employees quickly and fairly. It is much better to cut deeply all at once, than to make small cuts repeatedly. Remaining employees can focus on work if they have (relative) job security.

Stage 4: Restructuring

The goal is to create profitability through remaining operations. Stress product line pricing and profitability. Restructure the business for increased profitability and return on assets and investments. At this stage your focus should change from cash flow crisis to profitability. Fix the capital structure and renegotiate the long and short term debt.

Incentive-based management will drive employees to get involved smartly. Create teams of employees to identify and rework inefficiencies and promote profitability. There are only two ways to increase sales. Sell existing product to new customers. Sell new products to existing customers.

Stage 5: Stabilization and Re-growth

Now its time to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.

This could be time to restructure long term-financing at more reasonable rates now that the company is stable and on a growth path

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Ingredients of Turnaround Management

The incidences of corporate decline have been increasing globally causing organizational failure and in this regard turnaround management to be one of the most important topics addressed by business education and research in recent years. A turnaround can refer either to a business firm that faces financial disaster or action taken to prevent the occurrence of that financial disaster. The true nature of turnaround is a firm whose recent past or projected future financial performance unacceptable to the owners / creditors. The turnaround malaise is dissected into its four stages of progressive virulence using the analogy of restoration of physical health to the restoration of fiscal health.

Due to management inefficiency, most of the corporate fail to identify the problems and therefore delay in taking precautionary measures affecting the owners, employees, customers, suppliers and the economy. To restore the organisation on its normal course, a corporate turnaround is essential. Organizational turnaround is influenced not only by good management practices but also by shifts in organization. The impact of such shifts on organizational performance especially in public sector organizations has neutral or negative effects on performance but the extent of organizational strategy as well as environment influence turnaround success.

Good management practices, favorable shifts in external environmental variables, and changes in organizational inertia are all contribute to turnaround success besides organizational performance which can be influenced strongly by both organizational choices and external constraints. It is therefore, apparent to study and differentiate the seeds of business decline of the declining firms viz., internal as well as external. While most of the external signals of business failure cannot be fully controlled by the firms on the other hand the internal events are believed to be extremely important because the management has a direct control over them.

Few of the key ingredients of turnaround are:

        i.            a dynamic change agent with a strong sense of mission, preferably from outside the organisation,

      ii.            credibility building through some outstanding performance,

    iii.            mobilization of the rank-and-file by getting them involved in the organisation's goals and activities,

    iv.            quick pay-off projects for some immediate relief,

      v.            reprieve from serious external pressures, especially those relating to industrial relations, finance, key inputs, stakeholders, etc.

    vi.            mobilization of external resources and utilisation of environmental opportunities,

  vii.            strengthening of mechanisms to influence the environment, such as marketing, and public relations,

viii.            selective changes in the product mix, concentrating on high pay-off products,

     ix.            selective strengthening of management functions and systems, especially the financial control system,

       x.            motivating managers through participation, autonomy, challenging tasks, accountability, example setting, etc.

     xi.            coordination through regular review meetings and face- to-face interaction and

   xii.            performance control through goalsetting and fixing of responsibility, often creating profit and cost centres

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Turnaround Management

Times of corporate distress present special strategic management challenges. In such situations a firm may be in bankruptcy or nearing bankruptcy. Often turnaround consultants are brought into the company to devise and execute a plan of corporate renewal, assuming that the firm has enough potential to make it worth saving.

Turnaround management is a process which aims at corporate renewal. It uses analysis and planning to save distressed companies and return them to solvency, and to identify the reasons for failing performance in the market, and rectify them. Turnaround management involves management review; root failure causes analysis, and SWOT analysis to determine why the company is failing. Once all these analysis is completed, a long term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency.

Before a viable turnaround strategy can be formulated, one must identify the root cause or causes of the crisis. Few of the causes which may create trouble for the company can be:

·        Revenue downturn caused by a weak economy

·        Overly optimistic sales projections

·        Poor strategic choices

·        Poor execution of a good strategy

·        High operating costs

·        High fixed cost that decreases flexibility

·        Insufficient resources

·        Unsuccessful R&D projects

·        Highly successful competitor

·        Excessive debt burden

·        Inadequate financial controls

Business restructuring and performance improvement require multidisciplinary resources and change management skills, acting quickly to minimize disruption to the operations.

Turnaround management is the systematic and rapid implementation of a range of measures to correct a seriously unprofitable situation. It might include dealing with a financial disaster or measures to avoid the highly likely occurrence of such a disaster.

 When firms are doing so badly that failure seems imminent then turnaround management can restore performance and profitability. The increasing competition, rapid advances in technology and rising complexity of the business conditions accompanied by blend of customers and employees, the challenges for any corporate have been rising. Only a timely response to this situation can save organizations.

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Risk Associated in Corporate Restructuring

A corporate restructure is often associated with a failing business model or major job cuts. While the restructure may help the company move forward and improve business, the process comes with some fallout for both the company and the employees. Anticipating these disadvantages and potential difficulties helps you deal with them to reduce the negative impact.

Employee Uncertainty

Restructuring often causes employees to panic and wonder how the changes will affect their job security. When the news gets out that the company is restructuring, some employees may begin looking for new employment. The stress of the restructuring sometimes takes away from the staff's focus on their actual work. Employees become even more worried if the company isn't forthcoming with details about the restructure. While you might not have the option of sharing all of the details ahead of time, a sense of transparency that allows employees to have some idea of what's happening may put your employees at ease.

Investor Reactions

Depending on the size and funding of your company, investor reactions are sometimes negative to a restructuring situation. If your investors oppose the restructure or fear they'll lose money, you now have another issue to handle during the process. For companies that are publicly traded, a negative reaction to the restructure can result in dropping stock prices. Educating investors on the specifics of the restructuring plans and keeping them informed may help reduce their concerns.

Loss of Assets

In some cases, the corporate restructure involves downsizing the workforce, facilities or product lines. This means you're forced to choose the employees who you'll let go. With the employees who leave, you also lose the experience, skills and knowledge of company projects that those staff members possess. Prioritizing the staffing and facility needs going forward helps you decide how to handle the loss of various assets.

 Decreased Public Image

As your company restructures, your public image may begin shifting. The restructuring potentially leaves customers and the public in general questioning the future of the company. If you decrease your staff, you risk even greater public scrutiny, particularly in tough economic times when many people are already unemployed. Hiring a public relations consultant can help you keep your public image under control when going through a restructure.

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Advantages of Corporate Restructuring

Corporate restructuring is a process in which a company changes the organizational structure and processes of the business. This can happen through breaking up a company into smaller entities, through buy outs and mergers. When a company uses one of these methods, it could strengthen the company or it could create more problems than it is worth. Restructuring is a process that should be approached with careful consideration of its advantages and disadvantages. Some of the benfits of corporate restructuring are as follows:-

Increasing Value of Parts

One of the main reasons that businesses use corporate restructuring is to divide the business up for sale. If a company is trying to sell as a conglomerate, it will likely get lower offers from investors. When the company is split up into separate parts, it can often get better offers for those individual parts. This can increase the value of the company as a whole and help get a higher sales price for the business.

Reduce Costs

Another benefit of restructuring a company is to reduce business costs. For example, a company could merge with another company that is very similar and use economies of scale to run more efficiently. It could cut back on employees and equipment to streamline business operations. In this way, the company can expand its reach without adding too much to the overhead of the business. If handled correctly, the company can add significant value for its shareholders.

Costs of Restructure

Even though you can reduce long-term costs by restructuring the business, the process of restructuring can be expensive in itself. When a company restructures itself, it must pay legal fees and other costs associated with the restructure. If a company merges with another company, it will also have to come up with the money to buy the other company. If the restructure does not work out, it could cost the company dearly and ultimately lead to its demise.

Hurt Employee Relations

When a company goes through a corporate restructure, it can significantly hurt its relations with employees. Employees fear change and when they are scared of being downsized, it can affect morale. In many of these moves, companies have to release some of the workforce. This can affect the loyalty of employees and it could hurt the company in the long run. When employees do not know if they will be one of the unlucky few who get released, it can create tension

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Key Considerations in Restructuring

It goes without saying that reorganizing a well-established company is likely to be difficult, emotional and complex.  After all, restructuring is a classic example of change management.  It involves lengthy, often emotionally charged, discussions on what’s working, what is not working, and what needs to work better.  Additionally, restructuring a business demands thorough cross-examination from a variety of perspectives and stakeholders. Plus, there are constraints and existing commitments that limit what you can do.  Employees will be impacted, some of whom may no longer have a job following the restructure. And ideally, any changes that are made should have minimal impact on customers.

However, reorganization is about more than just the end result and implementing new, fresh and shiny business processes. How the business actually goes about making the changes is just as important as the changes themselves. If one is planning to restructure his company or make organizational changes in the near future, here are five things to consider before you begin.

Profit growth has come to a screeching halt. If your business historically has had growing (or at least consistent) profit margins that then start shrinking for an extended period of time, there is a problem. This is a sign that you need to audit you Cost of Goods Sold, salary to revenue ratio, and overall expenses. Some or all of these things are causing your net operating income to shrink. Regularly examining the books will help mitigate any surprises.

Turnover is high. This includes both employee and client turnover. Both need to be watched closely. If your customers start leaving it probably means they are no longer satisfied with your products or services and are willing to try other providers. There are many internal and external factors that come in to play. Building great relationships with your customers and constantly seeking new ways to make their lives better will ensure long lasting partnerships.

Morale is low. There are countless issues that can negatively affect morale. But some of the major themes include poor management, broken promises, constructive feedback being ignored, cancerous team members being allowed to remain at the company, or favoritism. When management realizes that drastic change is needed, it is quite common that the team has been begging for this change for some time. So management needs to make sure they are listening to their team members and applying that feedback towards making improvements in the way the company does business. Don't get into a "too little too late" situation.

Old systems no longer work. The processes that work when your company has ten employees are not the same ones that will be needed when you have fifty. It's not to say that systems must be increasingly complex as the company grows. In fact it's quite the opposite. As your company grows it is typical to change or at least improve upon existing processes every few years.

Inefficiencies are rampant: When a company becomes inefficient it has probably outgrown processes that used to work. The answer to more business or customers for inefficient companies is more people. And more people means higher payroll which decreases profit. Efficient companies however can keep growing and adding more business without having to continually hire more staff. Many times it is as simple as improving systems or adding software to streamline internal operations.

Team members are overworked: This also involved inefficiencies. If people feel overworked it doesn't necessarily mean you need to hire more people and spread out the work. There may be better ways to do things or people might be spending too much time on the wrong things. Whatever it is, it needs to be fixed or those people will leave, increasing turnover, and negatively affecting morale.

Others are underutilized: Again, there are many factors to be considered. If some people are overworked and others are underutilized you should probably audit the existing teams and structure. You may be overstaffed in some areas and understaffed in others. But don't assume either. Collect plenty of information and let the data direct your decisions.

The industry is evolving. If you are doing business the exact same way you were ten years ago, you are probably falling behind. Technology improves. Industries change. Economies shift. Economic changes for example might increase your costs of doing business which means you probably need to increase your pricing or find new vendors with lower costs. Either way, good companies pay constant attention to what's happening in their industry and the world around them.

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Types of Corporate Restructuring

Corporate restructuring or business restructuring has gained popularity with big and small business houses across the globe. It has become an ideal strategy to meet the expansion or contraction needs of an organization. The different types of Corporate Restructuring are as follows:-

Mergers / Amalgamation- Merger is combination of two or more companies which can be done either by way of amalgamation or by way of absorption. Amalgamation is the process where two or more companies dissolve their identity to form a new entity. Absorption, the other type of merger, is nothing but dissolution of a company’s identity into other company’s identity. As the name suggest, in absorption a company absorbs other company to form a new larger entity.

Acquisition and Takeover- An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. When an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.

Divestiture- Divestiture means an out sale of all or substantially all the assets of the company or any of its business undertakings / divisions, usually for cash (or for a combination of cash and debt) and not against equity shares. In short, divestiture means sale of assets, but not in a piecemeal manner. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

Demerger (spin off / split up / split off)- Demerger is also a type of corporate restructuring which results in formation of two entities. The entity which undertakes demerger is termed as Demerged Company and the new entity formed is called as Resulting Company. Companies adopt demerging strategy to sell subsidiaries or to get rid of non-profit making division of company. Demerger takes place in the form of spin off, split off, split up, sale off, etc. In spin-off, company distributes its shareholding in subsidiary to its shareholders thereby not changing the ownership pattern. For example, Air India formed Air India Engineering Services Limited by spinning off its engineering department. Split-off is the form of demerger where shareholders of existing company form a new company to takeover specific division of existing company. When existing company is dissolved to form few new companies, it is called as Split-up. Sell-off takes place when company sells its non-profit making division

Reduction of Capital- Reduction of Capital is a process by which a company is allowed to extinguish or reduce liability on any of its shares in respect of share capital not paid up, or is allowed to cancel any paid-up share capital which is post or is allowed to pay-off any paid –up capital which is in excess of its requirements.

Joint Ventures- Joint Venture is an entity formed by two or more companies for a specific period with a specific objective. Joint ventures are useful for a company to enter into new segment of market. Joint venture creates a new entity, however Strategic Alliance allows companies to remain independent while perusing agreed goal.

Buy back of Securities-Buy-back is also used as restructuring strategy so as to increase earning per share of the company. Strategy used to increase market price of share is called as Subdivision of shares, which is also type of corporate restructuring.

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Restructuring of Company

Restructuring is a type of corporate action taken when significantly modifying the debt, operations or structure of a company as a means of potentially eliminating financial harm and improving the business. When a company is having trouble making payments on its debt, it will often consolidate and adjust the terms of the debt in a debt restructuring, creating a way to pay off bond holders. A company restructures its operations or structure by cutting costs, such as payroll, or reducing its size through the sale of assets.

A company may restructure as a means of preparing for a sale, buyout, merger, change in overall goals or transfer to a relative. Perhaps the business has a failed product or service and does not bring in enough revenue for covering payroll and debts. As a result, depending on agreement by shareholders and creditors, the company may sell its assets, restructure its financial arrangements, issue equity for reducing debt, or file for bankruptcy as the business maintains operations.

If a company may planning to restructure may opt for any following procedure:

It can consider hiring a turnaround specialist as either an interim manager or a consultant to help with restructuring. An outsider often brings objectivity and a fresh point of view.

Analyze the extent of the problems. Is the profit picture merely ailing or is it terminally ill? Is the company's core business still financially viable?

Develop a restructuring plan and present it to the board of directors, management and employees. It may also be advisable to show the plan to certain outsiders, such as bankers and other creditors, and to major vendors.

Start at the top. Replace weak members of top management and the board of directors. Then reduce management layers. Unprofitable companies are often bloated with middle managers.

Investigate the possibility of restructuring debts or acquiring bridge loans to finance the restructuring costs.

Identify the most profitable customers. These aren't necessarily the biggest accounts. Concentrate on buyers who make few demands on the customer-service department, rarely return products and require only minimal marketing attention to prompt repeat orders.

Prune less-profitable product lines and increase financial and employee investment in more-profitable areas. Withdraw completely from unprofitable markets.

Close some facilities to reduce overhead. Consolidate divisions to eliminate duplicate administrative functions, and/or sell off underperforming divisions of the company.

Lay off employees or reduce some jobs from full to part time. Although this is one of management's most painful tasks, it's often essential for improving the profit picture.

Outsource costly services. Paying a flat fee to have selected services performed may reduce expenditures associated with in-house employees.

Move part--or all--of the company to another state (or country) to obtain lower employee wages, reduced power rates and/or special tax incentives.

Form a partnership with another company to share administrative services or technical expertise.

Investigate the latest technology for streamlining operations and/or improving products. Auto response voice-mail programs can handle phone inquiries. Robotic production components are becoming increasingly sophisticated and cost-effective.

Schedule personnel meetings to deal with the questions and concerns of remaining employees. After restructuring, the company's management will need to explain new procedures and financial projections.

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Types of Merger

The term merger has not been defined per se in any of the Acts including the Companies Act, 2013 or the Income Tax Act, 1961. A merger is a combination of two companies where one corporation is completely absorbed by another corporation. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment. There are various types of mergers that can take place. Some of these are:-

1. Horizontal mergers: In horizontal mergers two firms operating in same industry or producing ideal products combines together to form one firm. The main objectives of horizontal mergers are to benefit from economies of scale, reduce competition, achieve monopoly status and control the market.

2. Vertical merger: A vertical merger can happen in two ways. One is when a firm acquires another firm which produces raw materials used by it. For e.g., a car manufacturer acquires a steel company, a textile company acquires a cotton yarn manufacturer etc.

There is another form of vertical merger which happens when a firm acquires another firm which would help it get closer to the customer. For e.g. a consumer durable manufacturer acquiring a consumer durable dealer etc.

3. Conglomerate merger: Conglomerate merger occurs when two firms operating in industries unrelated to each other combine together. In this case, the new business of the target company is entirely different from those of the acquiring company. For e.g. a car manufacturer merging with a cement manufacturer, a textile company merging with a software company etc.

4. Concentric merger: It refers to combination of two or more firms which are related to each other in terms of customer groups, functions or technology. For eg., combination of a computer system manufacturer with a UPS manufacturer.

5. Forward merger: In a forward merger, the target merges into the buyer. For e.g., when ICICI Bank acquired Bank of Madura, Bank of Madura which was the target, merged with the acquirer, ICICI Bank.

6. Reverse merger: In this case, the buyer merges into the target and the shareholders of the buyer get stock in the target. This is treated as a stock acquisition by the buyer.

7. Subsidiary merger: A subsidiary merger is said to occur when the buyer sets up an acquisition subsidiary which merges into the target.

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Fast Track Mergers

Merger and amalgamation are the essential keys which helps companies in expansion and diversification of their business and to achieve their under lying objectives.  Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, Mergers is the combination of two companies to form one, while Acquisitions is one company taken over by the other. M&A is one of the major aspects of corporate finance world. The reasoning behind M&A generally given is that two separate companies together create more value compared to being on an individual stand. With the objective of wealth maximization, companies keep evaluating different opportunities through the route of merger or acquisition.

Fast Track Merger is a new concept introduced under the Companies Act, 2013. The whole process takes 3-5 months for the complete merger. Unlike regular mergers the approval of high court is not required under the fast track merger. Only regional directors, Registrar of Companies and Official Liquidator are the authorities whose approval is required. Fast track merger are for Small Companies and merger of Holding companies with its wholly owned Subsidiary Companies.

Section 233 of Companies Act, 2013 read with Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 deals with the procedure of Fast Track Merger.

Section 233 states that notwithstanding the provisions of section 230 and section 232, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and it’s wholly owned subsidiary company or such other class or classes of companies as may be prescribed.

Under the procedure for fast track mergers, the notice of the proposal to the Registrar, official regulators and persons affected by the merger has to be sent within thirty days. They can provide their objections and suggestions. The merger proposal has to be approved by member holders of 90% shares at the general meeting and majority representing nine-tenths in value of the creditors at the meeting convened by giving 21 days notice. The notice to the meeting to members and creditors has to be accompanied by merger scheme and declaration of solvency.

The transferee company has to file merger scheme (within 7 days of meeting) and declaration of solvency with ROC. Objections of ROC or official liquidator have to be communicated to Central Government within 30 days in writing. Central government has time period of 60 days after receiving merger proposal to file objections before tribunal which will consider whether the scheme is appropriate for fast track merger or not.

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Cross Border Merger

The enforcement of the relevant provisions pertaining to Cross Border Mergers contained in the Companies Act, 2013 by the Ministry of Corporate Affairs with corresponding provisions in Companies (Compromises, Arrangements and Amalgamation) Rules, 2016, including insertion of the Rule 25A and introduction of draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 has ushered in infinite opportunities of partnerships in the form of mergers, consolidations, acquisitions etc. As per the notified provisions, prior approval of the Reserve Bank of India is requisite to go ahead with such mergers. And the draft Regulations issued by the RBI provide that cross-border merger shall be deemed to be approved by the RBI if it is accordance with the draft Regulations.

Section 234 of the Companies Act, 2013 provides for scheme of mergers and amalgamations between Companies registered under the said Act and Foreign Companies. However, in case of outbound mergers only Companies which are incorporated in the Jurisdictions of such Countries which are notified by the Central Government are eligible. Apart from complying with the provisions stipulated under Section 230 to 232 of the Companies Act, 2013 read with the rules made thereunder the following additional compliances in case of outbound mergers are enumerated in Rule 25A of Companies (Compromises, Arrangements and Amalgamation) Rules, 2016:-

• Prior approval of RBI is mandatory in case of cross border mergers.
• In terms of the said rule Valuation in case of cross border merger, the following must additionally be ensured:
• The foreign company is required to ensure that valuation is conducted by valuers who are members of a recognized professional body in the jurisdiction of such foreign company.
• The valuation is conducted in accordance with internationally accepted principles on accounting and valuation.
• A declaration in relation to the above-mentioned points are submitted along with the application to the RBI seeking approval for such merger or amalgamation

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