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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