UDBS

Department of Finance

FN 301: Financial Analysis

Topic 9: Corporate Restructuring

and Financial Information

University of Dar es
Salaam Business School “Knowledge for Management Excellence”
Food for Thought

What is
restructuring?

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 Corporate Restructuring
 Is a process of redesigning one or more
aspects of a company.
 Restructuring is the process through which
an organization radically changes the
contractual relationships that exist among
its creditors, shareholders, employees, and
other stakeholders.

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 Corporate Restructuring Cont…
 It is the corporate management term
for the act of reorganizing the legal,
ownership, operational, financial or
other structures of an organization for
the purpose of making it more
profitable and efficient.

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 Corporate Restructuring Cont…
 Corporate Restructuring is a comprehensive
process by which a company can
consolidate its business operations and
strengthen its position for achieving its short-
term and long-term corporate objectives
 Corporate Restructuring is vital for the
survival of a company in a competitive
environment.
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 Corporate Restructuring

 The process of reorganizing a

company may be implemented due to
a number of different factors:
positioning the company to be more
competitive,
surviving a currently adverse
economic climate,
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 Corporate Restructuring
 Factors Cont…
acting on the self-confidence of the
corporation to move in an entirely
new direction

Restructuring could be considered as

making alterations to some extent to the
7 existing structure
 Corporate Restructuring Cont…
Reasons for Restructuring
The three primary reasons:
1. To address poor financial performance.
Declining/stagnating sales, accounting
losses, or a falling stock price are usually
the warnings. In extreme cases such poor
performance may cause the company to
default on its debt, resulting in bankruptcy.
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 Corporate Restructuring Cont…
Reasons for Restructuring Cont…
2. To support a new corporate strategy or
to take advantage of a business
opportunity. In an equity spin-off, for
example, a diversified firm's businesses are
split apart into independent entities, each
with its own common stock.

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 Corporate Restructuring Cont…
Reasons for Restructuring Cont…
2. Spin-offs can make sense when a high-
growth business is being held back by a
bureaucratic corporate parent, or when it
no longer makes sense for a company to be
vertically integrated.

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 Corporate Restructuring Cont…
Reasons for Restructuring Cont…
2. In this case, restructuring may be
necessary when the stock market is valuing
the entire company for less than what its
separate businesses would be valued for if
they were separate, independently-traded
companies.

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 Corporate Restructuring Cont…

Reasons for Restructuring Cont…

2. Restructuring is thus, required to
correct a large error in how the
company is valued in the capital
market.

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 Corporate Restructuring Cont…
Reasons for Restructuring Cont…
3. To correct a large error in how the
company is valued in the capital market. In
large diversified companies that operate in
many different businesses even if the
businesses may be well-run, investors may
place too low a value on the overall
portfolio.
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 Corporate Restructuring Cont…

Reasons for Restructuring Cont…

3. Note: Restructuring tools like tracking
stock, stock buybacks, or leverage buyouts,
can be used to reduce this kind of value
gap.

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 Corporate Restructuring Cont…
Other Needs of Corporate Restructuring
 To expand the business or
operations of the company.
 To carry on the business of the

company more economically or

more efficiently
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 Corporate Restructuring Cont…
Other Needs of Corporate Restructuring
Cont…
 To focus on its core strength

 Cost Reduction, by deriving the benefits of

economies of scale.
 To obtain tax advantages by merging a

loss-making company with a profit-making

company
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 Corporate Restructuring Cont…
Other Needs of Corporate Restructuring
Cont…
 To have access to better technology.

 To improve the debt-equity ratio.

 To have a better market share.

 To overcome significant problems in a

company

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 Corporate Restructuring Cont…
Other Needs of Corporate Restructuring
Cont…
 To become globally competitive.
 To eliminate competition between

the companies.
 To act in the public interest

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 Corporate Restructuring Cont…

 Corporate Restructuring may have a

single objective or multiple objectives;
amongst them, there must be a
dominant objective in addition to other
important objectives for a successful
corporate restructuring

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 Corporate Restructuring Cont…
Objectives
 Growth

 Technology

 Government policy

 To reduce dependency on others

 Economic stability

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 Corporate Restructuring Cont…

Strategies Include:
 Organizational structuring,

 Financial restructuring, and

 Portfolio restructuring,

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 Corporate Restructuring Cont…

Strategies Cont…
 The choice of which strategy to use will

depend on the area the organization

has to improve, i.e. profitability,
performance, or operation.

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 Corporate Restructuring Cont…
Strategies Cont…
 The basic nature of restructuring is a

zero-sum “game”. It reduces financial

losses, while reducing tensions between
debt and equity holders to facilitate a
prompt resolution of a distressed
situation or a situation that requires
change.
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 Corporate Restructuring Cont…

Strategies Cont…
 Restructuring is an on-going process.

It is a valuable tool for an

organization to use in an attempt to
maintain their goals and objectives.

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 Corporate Restructuring Cont…

Organizational Restructuring Strategy

 The terms downsizing, redesign and

layoffs are often used.

 Will normally change the levels of

management in the company, effect the

span of control or shift product
boundaries.
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 Corporate Restructuring Cont…

Organizational Restructuring Strategy

Cont…
 There is also a change in production
procedures and compensation
associated with this strategy.

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 Corporate Restructuring Cont…

Organizational Restructuring Strategy

Cont…
 Reduction in the work force is the main
by-product that accompanies
organizational restructuring and is the
reason for the least positive impact on
organizational performance
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 Corporate Restructuring Cont…

Financial Restructuring Strategy

 is identified by changes in the firm's

capital structure.
 Changes can include debt for equity

swaps, leverage buyouts (LBOs), or

some form of recapitalization.

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 Corporate Restructuring Cont…

Financial Restructuring Strategy Cont…

 In the form of a LBO, there is an

immediate influx of free cash flows,

organizational efficiency is enhanced
and the company refocuses on the
core business.

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 Corporate Restructuring Cont…

Financial Restructuring Strategy Cont…

 Additionally, long-term performance

of the organization is significantly

improved after the LBO. Note: that
LBOs of divisions have greater
improvement in efficiency than when
the entire company is acquired.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy

 Companies involved in acquisitions,

divestitures, or spin-offs are mainly

using a portfolio restructuring
strategy.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 This type of strategy includes selling

off those business units that are

drawing down operations or spinning
off business units to raise more
capital.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 A sell-off is the sale of a business or

subsidiary of the parent company to

another firm outside the group,
generally resulting in a payment of
cash to the parent.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 In theory, sell-offs are the least

complex of restructuring structures.

 Acquirers can usually be divided into

two groups: strategic buyers and

financial buyers.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Strategic buyers are those who are

interested in acquiring a business for

strategic purposes, e.g., increasing
market share, creating economies of
scale or exploiting synergies;

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 they are typically companies

engaged in the same business, and

therefore competing with, the business
or company under consideration.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 financial buyers are those who are

interested in acquiring a business to

secure a financial return in the short-
to medium-term before selling the
business or otherwise exiting the
investment.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Financial buyers are likely to be buyout

firms.
 Buyout firms raise funds in order to be

able to take equity stakes in companies

through funding and assisting with
management buyouts (MBOs) and
leveraged buyouts (LBOs).
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Buyout firms generally focus on

established companies with potential

to grow after transformation.
 Non-core divisions and subsidiaries of
large public companies are their
typical targets.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 A spin-off (or demerger) often

consists of the distribution of a

subsidiary's stock to the parent
company's existing shareholders.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Spin-offs are a means to unlock the

value of a subsidiary and transfer

that value directly to the parent
company's shareholders.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 It is especially useful for a subsidiary

that does not completely fit with the

parent company's core activities or
would otherwise benefit from being a
stand-alone company.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Split-off is a variant of a spin-off. In

a split-off, a parent company

distributes shares it owns in a
subsidiary to its shareholders in
exchange for their shares of the
parent.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 A split-off is a way to create value for the

parent's shareholders by reducing the

parent's outstanding shares.
 Reducing the parent's shares outstanding
increases the earnings and cash flow per
share and, thereby, the value of the
remaining shares.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 A split-up is a form of split-off where a

parent company is broken up into two or

more independent companies.
 In the split-up, a parent company is often
liquidated and the parent company's
shareholders become shareholders of
each of the new independent companies.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 The organization's objective is to regain

its perspective on the core business.

 Portfolio restructuring has the best

results when the firm uses the spin-off

strategy and count on subsequent
mergers rather than sell-offs.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Other methods of divesting a subsidiary

include corporate splits and tracking

stocks. Corporate splits are commonly
used to effect intra-group corporate
restructurings and to prepare a business
for divestiture.
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 The corporate split procedure makes it

easier for companies to split business units

into new companies (or existing companies).
 Corporate splits facilitate the participation
of strategic partners who can provide
necessary capabilities.

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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 A tracking stock is a specialized option

for a parent company to realize hidden

value in a business unit or subsidiary
while retaining control of the unit or
subsidiary concerned.

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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 In theory, tracking stock can create many
benefits for both the parent company and
the subsidiary.
 A tracking stock does not require the parent

company to make the tax, legal, governance

and organizational changes required for an
spin-off, e.g., no separate board of directors
is required.
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 This provides the main appeal to the

parent company over other alternatives.

The advantages to using tracking stocks
include:
1. The parent company continues to
control the business unit and maintain
ownership of its assets;
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
2. A tracking stock can raise capital on
attractive terms;
3. A publicly listed tracking stock
establishes a market value for the
business to which management
compensation programs can be tied;
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
4. A tracking stock preserves the
operating benefits of a single,
integrated corporation; and
5. The parent company may use the
tracking stock as acquisition currency.

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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 The disadvantages of a tracking stock

include the following:

1. The parent company issuing a tracking
stock must create financial "firewalls"
between the business and the rest of its
operations;
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
2. The parent company will shoulder the
administrative burden in connection with
a tracking stock;
3. A company that issues a tracking stock
creates the potential for a conflict at the
board level between the interests of the
two sets of shareholders;
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

4. Investors may not give as much value
to the tracking stock as if shares
represented a direct ownership interest
in the assets of the tracked business.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

Tracking stocks are often terminated
when the circumstances and objectives of
the business and/or parent company
change and consequently the parent
company decides to sell, spin-off or spin-
in the tracked business.
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
Spin-in is the acquisition of minority shares in
majority-owned subsidiaries.
Majority-owned subsidiaries become wholly-
owned subsidiaries. In many cases spin-ins are
executed with the aim of implementing group-
wide restructuring and are followed by further
divestitures.
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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 Last but not least, a joint venture can be

used as a means of acquiring or exiting

a business in two stages.
 In the first stage, a parent company and

its partner company create a joint

venture company.
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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 In the second stage, the parent

company sells its remaining shares of

the joint venture to the partner after a
certain period of time.

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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 When well crafted, joint ventures (JVs) can

achieve many of the same objectives for the

parent company as an acquisition of the
other company, including access to the
resources and capabilities of the joint
venture partner, but at a lower cost and
without many of the risks associated with an
61 acquisition.
 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Consequently, the parent can increase

the value of a subsidiary by way of a

JV. Successful JVs are often followed
by IPOs.

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Joint ventures also are used as a

means of divesting a business. The first

step is the creation of a JV with a
strategic partner.
 Often the strategic partner controls a

major stake (i.e., over 50%) in the JV

63 company.
 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 The second step is the acquisition of

the minority shares of the JV company

by the strategic partner

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 To achieve value-building growth,

companies must develop and maintain

balanced business portfolios. No
growth can be achieved without
having strong core businesses;

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 Corporate Restructuring Cont…

Portfolio Restructuring Strategy Cont…

 Cash flows generated by core

businesses are essential to fund for

growth initiatives.
 Strong core businesses alone do not
guarantee value-building growth.

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 Corporate Restructuring Cont…
Portfolio Restructuring Strategy Cont…
 To develop and maintain balanced

portfolios, one need to nurture promising

options while reviewing frequently the
growth potential of each business and
divesting quickly underperforming
businesses with diminishing potential or
distracting noncore businesses.
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 Corporate Restructuring Cont…

 Growth initiatives call for funds,

management time and other resources.

 Divestitures of underperforming or non-

core businesses can often release tied-
up resources and thus can create
capacity for growth.
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 Corporate Restructuring Cont…

The two cornerstones of successful

divestitures are:
1. Deliberate use of interim solutions to
an eventual exit; and
2. Laying the groundwork for creating a
stand-alone entity.

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 Corporate Restructuring Cont…

Symptoms of Restructuring Include:

 The market(s) perception about the

organization is deteriorating.
 The company has difficulties in paying

or is unable to pay off its debts.

 Sales are declining.

 Stock price is falling.

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 Corporate Restructuring Cont…
Symptoms Cont…
 New skills and capabilities are

required to meet operational

requirements.
 Accountability for results are not clearly

communicated and measurable resulting

in subjective and biased performance
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appraisals.
 Corporate Restructuring Cont…

Symptoms Cont…
 Parts of the organization are

significantly over or under staffed.

 Organizational communications are

inconsistent, fragmented and inefficient.

 Technology and innovation are creating

changes in workflow and production

72 processes.
 Corporate Restructuring Cont…
Symptoms Cont…
 Significant staffing increases or decreases.

 Personnel retention and turnover is a

significant problem.
 Workforce productivity is stagnant or
deteriorating.
 Morale is deteriorating.

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 Corporate Restructuring Cont…

The methodology is basically based on a

strategic planning process. This consists of
three phases
1. The Diagnostic Phase. Diagnosis of the
company through Strategic Appraisal
and Due Diligence (Financial,
Operational, Macro-Environment, Legal).
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 Corporate Restructuring Cont…

2. The Planning Phase. Preparation of

the Strategic Improvement Plan. Define
corporate objectives and strategies.
3. The Implementation Phase.
Restructuring, including monitoring of
progress and revisions of the previous
phases.
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 Corporate Restructuring Cont…

The Process
 As companies are coming under

more pressure to create

shareholder value they will become
engaged in divestitures of
underperforming business units or
subsidiaries
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 Corporate Restructuring Cont…

The Process Cont…

 The typical corporate restructuring

process calls for an organization to

stabilize its financial situation,
return to profit and then focus on
growth.
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 Corporate Restructuring Cont…

The Process Cont…

 If companies incur excessive debts

and suffer from deteriorating cash

flows, short-term measures will
need to be taken immediately to
generate cash for debt payments
and stabilize the financial situation.
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 Corporate Restructuring Cont…
The Process Cont…
 To release cash (and thus reduce debts),

organizations can sell off fixed assets or

underperforming businesses and
rationalize working capital, e.g.,
accelerate debtor collections, extend
creditor payments or reduce inventories.

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 Corporate Restructuring Cont…
The Process Cont…
 The priority in this phase (financial

restructuring), is to stabilize financial

situations.
 In parallel, companies will need to

strengthen their core businesses so that

they can generate enough cash to finance
subsequent growth initiatives;
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 Corporate Restructuring Cont…
The Process Cont…
 No growth initiatives can commence without
having strong core businesses. To improve
profitability in core business, companies must
redesign and streamline business processes.
Such efforts can be extended to the entire
supply chain; business rebuilding.

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 Corporate Restructuring Cont…

The Process Cont…

 This involves the whole range of the

organization’s business activities,

including strategies and individual
business processes (financial and
operational restructuring).

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 Corporate Restructuring Cont…
The Process Cont…
 When organizations have improved the

efficiency of their core businesses

sufficiently, they are poised to shift
emphasis from short-term profitability to
long-term profitable growth.

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 Corporate Restructuring Cont…

The Process Cont…

 To sustain growth, companies need to

launch new products and develop new

markets; value-building growth.
 Growth initiatives usually take several
years to yield results.

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 Corporate Restructuring Cont…
The Process Cont…
Important to Note:
 Restructuring is more likely to be

successful when management first

understands the fundamental
business/strategic problem(s) or
opportunity that their organization
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faces.
 Corporate Restructuring Cont…

The Process Cont…

 The decisions that management will have

to take as part of implementing a

restructuring plan are critical to whether
the restructuring succeeds or fails.
 Time is of essence.

 People need certainty.

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 The Process Summary

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 Corporate Restructuring Cont…
Common obstacles include:
 Denial in acknowledging the problems;

Organizations have tended to restructure

only reactively in response to pressure and
when action has become unavoidable.
 Saving jobs; Observed mostly in
governmental organizations characterized
by lifetime employment and seniority-based
88 promotion employment security
 Corporate Restructuring Cont…
Common obstacles Cont…
 Internal politics and long-held tradition;

Restructuring efforts can fail because

the initiatives are not followed group-
wide and are changed shortly after
announcement, when politics and
tradition stand in the way
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 Corporate Restructuring Cont…
Common obstacles Cont…
 Arrogance; Executive management

believes that it knows how to solve the

problems without outside help often
ignoring changing market dynamics

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 Corporate Restructuring Cont…
Common obstacles Cont…
 Executives' disregard for shareholder

value; Organizations divest their

businesses, those businesses are often
incurring heavy losses as a result of
several years of poor performance;

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 Corporate Restructuring Cont…
Common obstacles Cont…
 Executives can be reluctant to divest

underperforming businesses, even

when they know that the divestiture
will maximize the value for
shareholders.

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 Corporate Restructuring Cont…
Successful Restructuring
Key factors include:
 Setting specific short- and long-term
objectives to be achieved;
 Planning growth scenarios after
restructuring in advance;
 Defining core businesses and focusing on

them;
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 Corporate Restructuring Cont…
Successful Restructuring Cont…
Key factors Cont…
 Developing a restructuring plan toward
superior shareholder value;
 Demonstrating leaders' commitments to
restructuring;
 Sharing a restructuring plan across the

group organizations
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 Corporate Restructuring Cont…
Successful Restructuring Cont…
Key factors Cont…
 Setting objective criteria to identify
candidates for restructuring;
 Assessing restructuring alternatives and
selecting the best option;
 Finding the right partners to complete the

transactions;
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 Corporate Restructuring Cont…
Successful Restructuring Cont…
Key factors Cont…
 Executing restructuring in a swift and
intensive manner;
 Monitoring the progress of a restructuring
plan on a regular basis;
 Involving external advisors in the

restructuring process.
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 Corporate Restructuring Cont…
Prior to restructuring:
 Make sure that the organization’s owners,

leadership team and directors are

personally protected.
 When the organization is in trouble or

under restructuring, it is vulnerable to

lawsuits from creditors and others wanting
to cash-in on its distress.
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 Corporate Restructuring Cont…
Prior to restructuring Cont…
 The organization should make sure that its

top leaders are protected by a Directors’

and Officers’ policy.
 Real estate planning should be encouraged

to help protect personal assets against

personal lawsuits. By knowing that everyone
is “safe”, the organization can focus and
98 devote all efforts against restructuring.
 Corporate Restructuring Cont…
Prior to restructuring Cont…
 Oversee all cash collections and

payments. The CEO must take complete

control of cash (How? Depends on the
size and existing structure of the
organization). If cash is controlled it
cannot be overspent.
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 Food for Thought

What do you
think should be
the Measuring
Results of
Restructuring?
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 Corporate Restructuring Cont…

Measuring Results
 Results can be measured by one of

two performance standards, i.e.

market performance or accounting
performance

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 Corporate Restructuring Cont…
Measuring Results Cont…
Market performance
 The market performance standard addresses
the stock price of the organization following
a restructuring.
 Changes attributed to restructuring action

are short term indicators of how the

restructuring has effected the organizations
10performance.
2
 Corporate Restructuring Cont…
Measuring Results Cont…
Accounting Performance
 Financial ratios are used to calculate
restructuring performance.
 A comparison is made on financial ratios ROI

(Return of Investment) and ROE (Return on

Equity) of pre-restructuring and post-
restructuring data over several periods and
10years.
3
 Corporate Restructuring Cont…
Measuring Results Cont…
Accounting Performance
 The results using this method take longer

to obtain but can give a clearer picture

to whether the restructuring objectives
have been met.

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