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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