Corporate Restructuring

CA Nazneen Hingora
Meaning
• Restructuring as per Oxford dictionary means “to give a new structure to, rebuild or
rearrange“.
• Corporate restructuring is defined as the process involved in changing the organization of
a business. Corporate restructuring can involve making dramatic changes to a business by
cutting out or merging departments. It implies rearranging the business for increased
efficiency and profitability. In other words, it is a comprehensive process, by which a
company can consolidate its business operations and strengthen its position for achieving
corporate objectives-synergies and continuing as competitive and successful entity.
Introduction
• When a company wants to grow or survive in a competitive environment, it needs to restructure
itself and focus on its competitive advantage.
• A larger company can achieve economies of scale. A bigger size also enjoys a higher corporate
status. Such status allows it to take advantage of raising funds at lower cost. Such reduction in the
cost of capital results into higher profits.
• Corporate Restructuring focuses on cost reduction and improving efficiency and profitability.
• Corporate Restructuring means rearranging the business of a company for increasing its efficiency
and profitability. Today, restructuring is not an option, but a conscious choice made by companies.
• Every corporate restructuring exercise aims at eliminating disadvantages and to combine
advantages. It plans to achieve synergy benefits through a well-planned restructuring strategy.
Benefits:-
Mergers, amalgamations and acquisitions are forms of inorganic growth strategy. Such
corporate restructuring strategies have one common goal viz. to create synergy. Such
synergy effect makes the value of the combined companies greater than the sum of the
two parts. Basically, synergy may be in the form of increased revenues and/or cost savings.
Corporate Restructuring aims at improving the competitive position of an individual
business and maximizing its contribution to corporate objectives.
Through mergers and acquisitions, companies hope to benefit from the following:
• Increase in Market Share – Merger facilitates increase in market share of the merged
company. Such rise in market share is achieved by providing an additional goods and
services as needed by clients. Horizontal merger is the key to increasing market share.
(Eg:- Idea And Vodafone)
• Reduced Competition – Horizontal merger results in reduction in competition. Competition is one of the most
common and strong reasons for mergers and acquisitions. (Eg:- HP and Compaq)
• Large size – Companies use mergers and acquisitions to grow in size and become a dominant force, as
compared to its competitors. Generally, organic growth strategy takes years to achieve large size. However,
mergers and acquisitions (i.e. inorganic growth) can achieve this within few months. (E.g. Sun Pharmaceutical
and Ranbaxy Pharmaceutical)
• Economies of scale – Mergers result in enhanced economies of scale, due to which there is reduction in cost
per unit. An increase in total output of a product reduces the fixed cost per unit.
• Tax benefits – Companies also use mergers and amalgamations for tax purposes. Especially, where there is
merger between profit making and loss-making company. Major income tax benefit arises from set-off and
carry forward provision u/s 72A of the Income-tax Act, 1961.
• New Technology – Companies need to focus on technological developments and their business applications.
Acquisition of smaller companies helps enterprises to control unique technologies and develop a competitive
edge. (E.g. Dell and EMC)
• Strong brand – Creation of a brand is a long process; hence companies prefer to acquire an
established brand and capitalize on it to earn huge profits. (E.g., Tata Motors and Jaguar)
• Domination – Companies engage in mergers and acquisitions to become a dominant player
or market leader in their respective sector. However, such dominance shall be subject to
regulations of the Competition Act, 2002. (E.g., Oracle and I-Flex Technologies)
• Diversification – Amalgamation with companies involved into unrelated business areas
leads to diversification. It facilitates the smoothening of business cycles effect on the
company due to multiplicity of businesses, thereby reducing risk. (E.g., Reliance Industries
& Network TV18)
• Revival of Sick Company – Today, the Insolvency and Bankruptcy Code, 2016 has created
additional avenue of acquisition through the Corporate Insolvency Resolution Process.
Need and Scope of Corporate
Restructuring:-
The various needs for undertaking a Corporate Restructuring exercise are as follows:-
a. Focus on core competence, operational synergy, cost reduction and efficient allocation of managerial
capabilities;
b. Balance utilization of available infrastructure and resources;
c. Economies of scale by expansion to exploit domestic and international markets;
d. Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy
company;
e. Acquiring constant supply of raw materials and access to scientific research and technological
developments;
f. Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and
improve return on capital employed;
g. Improve corporate performance to achieve competitive advantage by adopting the radical changes brought
out by information technology.
• The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and improving
efficiency (profitability).
• When a company wants to grow or survive in a competitive environment, it needs to restructure itself and
focus on its competitive advantage. The survival and growth of companies in this environment depends on
their ability to pool all their resources and put them to optimum use.
• A larger company, resulting from merger of smaller ones, can achieve economies of scale. If the size is bigger,
it enjoys a higher corporate status. The status allows it to leverage the same to its own advantage by being
able to raise larger funds at lower costs.
• Reducing the cost of capital translates into profits.
• Availability of funds allows the enterprise to grow in all levels and thereby become more and more
competitive.
Corporate Restructuring (Example)
ABC Limited has surplus funds but it is not able to consider any viable projects. Whereas XYZ Limited has
identified viable projects but has no money to fund the cost of the project. The merger of ABC LTD and XYZ
Limited is a mutually beneficial option and would result in positive synergies of both the Companies.
Dimensions of Corporate Restructuring:
Corporate restructuring, as stated above, is all pervasive encompassing all business and
management policies and practices-strategic, functional and operational.
1. Strategy Restructuring:
Strategy restructuring is about revisiting the firm’s existing vision, mission, objectives and
strategies and evaluating their effectiveness in the changed scenario. Thus, this kind of
corporate restructuring involves reviewing and modifying fundamental line of the firm’s
business, revisiting and adjusting current business portfolio, rethinking ways and means to
synergize organizational efforts and reviewing and modifying existing priorities for allocation
of resources. The underlying idea is to define what the firm should be doing in future.
2. Process Restructuring:
Process restructuring is concerned with appraisal of the effectiveness of the current work
process in the changed milieu so as to discern the specific processes that need modifications
or radical change. As such, management has to identify such in appropriate processes and
replace them by most innovative and cost effective processes through adoption of new
technology and produce a result of value to customers.
3. Organizational Restructuring:
Corporate strategy restructuring, to improve competitiveness of a firm, demands
transformation of existing structure, and organizational culture. Thus, existing structure of a
firm needs to be winnowed with reference to types of activities being performed,
assignment of these activities amongst various divisions and departments, assignment of
tasks and responsibilities to subordinates and delegation of authority, organizational
hierarchies, co-ordination of activities of various divisions and departments as also pattern of
communication among those in the structure, the development of informal as well as formal
relationships and resulting motivation.
All these aspects need to be examined with a view to determining their adequacy to cope
with change in corporate strategy. The structure of an organization affects cost of operations,
the speed with which it does things, the way it meets its customers’ needs of the people and
the way they behave.
4. Manpower Restructuring:
In competitive environment people have come to be acknowledged as powerful source of competitive
advantage because it is they who make the organizational processes and structure capable enough to achieve
the desired results. As such, people should be managed properly. Knowledgeable people cannot be managed
by theory X or Y. They cannot be managed as subordinates.
They must be managed in marketing way and need to be supported and mentored so that they give their best
to the organization.

5. Market Restructuring:
Market restructuring is about reviewing existing marketing strategy of the firm and assessing its effectiveness
in attracting and retaining customers, creating value for customers and improving its market share.
In heightened competitive landscape, focus has to be made on customer relationship management so as to
create, maintain and enhance strong bondage with customer’s loyalty.
Planning, formulation and execution of
various restructuring strategies
• Corporate restructuring strategies depends on the nature of business, type of diversification required
and results in profit maximization through pooling of resources in effective manner, utilization of idle
resources, effective management of competition etc.,.
• Planning the type of restructuring requires detailed business study, expected business demand,
available resources, utilized/idle portion of resources, competitor analysis, environmental impact etc.,
• The bottom line is that the right restructuring strategy provides optimum synergy for the organizations
involved in the restructuring process.
• It involves examination of various aspects before and after the restructuring process.
Important aspects to be considered while planning or
implementing corporate restructuring strategies
The restructuring process requires various aspects to be considered before, during and
after the restructuring.
They are
• Valuation & Funding
• Legal and procedural issues
• Taxation and Stamp duty aspects
• Accounting aspects
• Competition aspects etc.
• Human and Cultural synergies Based on the analysis of various aspects, a right type of
strategy is chosen.
Inorganic Growth in lieu of Organic
Growth
• Liberalization, Privatization and Globalization of Indian economy led to relaxation of licensing, inflow
of foreign investments, boost to private section, Govt. disinvestments etc. Due to these changes,
traditional businesses became dynamic, rise in cut-throat competition etc.
• Aligning business activities in line with the prime objective of maximizing shareholders’ wealth has
driven large corporate entities into taking various strategic decisions. Basically, organic growth strategy
relates to business or financial restructuring within the organization that results in higher customer base,
increased sales, better revenue etc. Organic growth does not result in any change of corporate entity.
• Inorganic growth strategy includes change in the corporate identity through
involvement/alliance/association with other entities.
• In an organic growth strategy, there is change in the business model, along with management styles,
financial structure etc.
• Mergers, demergers, disinvestments, takeovers, joint ventures, franchising, strategic alliances, slump
sale are some options that are adopted as a measure to achieve inorganic growth strategy.
 1. Merger:
Merger is the combination of two or more companies which
can be merged either by way of amalgamation or absorption.
The combining of two or more companies, is generally by
offering the stockholders of one company securities in the
Forms/ acquiring company in exchange for the surrender of their stock.

Types of Mergers may be

• Horizontal Merger: It is a merger of two or more companies
Corporate that compete in the same industry. It is a merger with a direct
competitor and hence expands as the firm's operations in the
Structuring: same industry. Horizontal mergers are designed to achieve
economies of scale and result in reduce the number of
- competitors in the industry. (Eg: Lipton India and Brookebond
and Bank of Madura and ICICI Bank.
• Vertical Merger: It is a merger which takes place upon the
combination of two companies which are operating in the
same industry but at different stages of production or
distribution system. (Eg: Reliance and Flag Telecom Group)
• Co generic Merger: It is the type of merger, where two companies are in the
same or related industries but do not offer the same products, but related
products and may share similar distribution channels, providing synergies for the
merger. (Eg:- Heinz and Kraft in 2015)
• Conglomerate Merger: These mergers involve firms engaged in unrelated type of
activities i.e. the business of two companies are not related to each other
horizontally nor vertically. In a pure conglomerate, there are no important
common factors between the companies in production, marketing, research and
development and technology. Conglomerate mergers are merger of different
kinds of businesses under one flagship company (Eg:-L&T and Voltas Ltd)
• Upstream merger: The upstream merger is an association of companies on a
parity basis. A fairly common variant of the upstream merger is the construction
of a vertically integrated company, i.e. the supplier unites with the consumer.
Godrej Soaps Ltd. with Gujrat Godrej Innovative Chemicals Ltd.
• Downstream Merger: ICICI Ltd. a parent co. merged with it's subsidiary co. ICICI
bank
2. Demerger:
It is a form of corporate restructuring in which the entity's business operations are segregated
into one or more components. A demerger is often done to help each of the segments operate
more smoothly, as they can focus on a more specific task after demerger.
3. Reverse Merger:
Reverse merger is the opportunity for the unlisted companies to become public listed company,
without opting for Initial Public offer (IPO).In this process the private company acquires the
majority shares of public company, with its own name.(Eg: Godrej Soaps Ltd. with Gujrat Godrej
Innovative Chemicals Ltd.)
4. Disinvestment:
Disinvestment means the action of an organization or government selling or liquidating an asset or
subsidiary. It is also known as "divestiture".
5. Strategic Alliance:
Any agreement between two or more parties to collaborate with each other, in order to achieve
certain objectives while continuing to remain independent organizations is called strategic alliance.
6. Takeover/Acquisition:
Takeover means an acquirer takes over the control of the target company. It is also known as
acquisition. Normally this type of acquisition is undertaken to achieve market supremacy. It may
be friendly or hostile takeover.
• Friendly takeover: In this type, one company takes over the management of the target
company with the permission of the board.
• Hostile takeover: In this type, one company takes over the management of the target
company without its knowledge and against the wish of their management.
7. Joint Venture (JV):
A joint venture is an entity formed by two or more companies to undertake financial activity
together. The parties agree to contribute equity to form a new entity and share the revenues,
expenses, and control of the company. It may be Project based joint venture or Functional based
joint venture.
• Project based Joint venture: The joint venture entered into by the companies in order to
achieve a specific task is known as project-based JV.
• Functional based Joint venture: The joint venture entered into by the companies in order to
achieve mutual benefit is known as functional based JV.
8. Franchising:
Franchising may be defined as an arrangement where one party (franchiser) grants another
party (franchisee) the right to use trade name as well as certain business systems and
process, to produce and market goods or services according to certain specifications. The
franchisee usually pays a one-time franchisee fee plus a percentage of sales revenue as
royalty and gains.
9. Slump sale:
Slump sale means the transfer of one or more undertaking as a result of the sale of lump
sum consideration without values being assigned to the individual assets and liabilities in
such sales. If a company sells or disposes of the whole or substantially the whole of its
undertaking for a predetermined lump sum consideration, then it results in a slump sale.
Instances of beneficial corporate restructuring:

1. L&T Ltd. demerged its cement division into a separate company Ultratech Cement Co. Ltd.
Later, the resulting company was transferred to Grasim Industries (Aditya Birla Group). Post
deal, L&T benefited from realized value of its cement division and focus on their core businesses
such as engineering and construction. Grasim Ind. was benefited through economies of scale,
increased capacity, overall competitiveness, multifunctional synergies and combined resource
pool.

2. Tata Steel Ltd. acquired overseas Corus Group Plc. that drastically improved the production
synergies for Tata Steel Ltd. Through the acquisition, Tata Steel Ltd. could combine its low-cost
production with the high quality of Corus. It resulted utilization of wide retail and distribution
network, technology transfer and enhanced R&D capabilities.
3. Dr. Reddy’s Laboratory Ltd. is known for their inorganic growth strategies. Since its formation
in 1984, it has acquired many companies such as Benzex Lab (1984), Meridian Healthcare
(2002), Falcon (2005), Betapharm (2006), DowPharma Small Molecules Business (2008), BASF
(2008), Alliance with GlaxoSmithKline (2009).

4. Piramal Healthcare transferred its undertaking (Formulation business) to Abbot Healthcare

on a slump sale basis. The deal was finalized for a lumpsum consideration. The deal also
contained a non-compete clause, which prohibited Primal group from entering in similar
formulation business. As per Section 50B of the Income Tax Act, capital gains arising from the
deal were taxed, without any indexation benefit (applicable for long term assets)

5. Bharti Airtel Ltd. acquired Zain Telecom (Africa business) through a leveraged buyout
strategy. The acquisition of Zain Africa International BV was majorly financed through
borrowed funds. Bharati Airtel formed a Special Purpose Vehicle (SPV) and the deal was
structured through the SPV. Hence, the Balance Sheet of Bharati Airtel was untouched.
However, as a guarantor for special purpose vehicles, Bharti Airtel assumes full responsibility.
Differences between Merger and Acquisition

Sr. Merger Acquisition

1 Merger occurs when two separate entities, come Acquisition refers to the purchase of one entity by
together to create a new, joint organization in another entity
which both are partners

2 One or more companies are dissolved and new No company is dissolved and no new company is
company maybe created created, i.e. both continue

3 In merger, two companies consolidate into a In acquisition, one company takes over all total
single entity with a new ownership and operational management control of another company
management structure.