Strategic Financial Management - Corporate Restructuring - Introduction - Notes - Finance, Study notes for Business Administration. Banaras Hindu University

Business Administration

Description: Introduction To Corporate Restructuring, 2meaning Of Corporate Restructuring, Reasons For Corporate Restructuring, Types/Forms Of Corporate Restructuring , Joint Ventures, Strategic Alliances , Sell-Off, Hive-Off, Demergeror Corporate Splitsor Division, Equity Carveout, Leveragedbuyout(Lbo), Restructuring, Diversification
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Before knowing the meaning and forms of corporate restructuring it is better to
know the different forms of business organisation and how an entrepreneur
structures his/her organisation. Entrepreneur who is planning to start an
organisation either for manufacturing products or providing services need to
select the right form of business organisation. This is possible for those
entrepreneurs who are having knowledge about the advantages and disadvantages of
different forms of business organisations. There are four main forms of business
organisations, viz., sole proprietorship, partnership, cooperative society, and company
(public and private). Each of this form has its own advantages and disadvantages. At
the same time entrepreneur also determines the financial structure also. But the
same form of business organisation and financial structure may not be suitable for
changing business environment. Therefore, there is a need to restructure their
It is very difficult for any firm to survive without restructuring the firm in the growing
stages. It may be possible to run a firm successfully for a short period, but in the long
run it may not be possible without restructuring because business environment
changes. Scanning of business environment helps in identifying business
opportunities and threats. Corporate restructuring is necessary whenever there is
change in business environment. For example, with liberalization, privatization,
and globalisation (LPG) many firms felt that there are lots of profitable
investment opportunities, and it also means increasing competition. A firm that feels
globalisation is opportunity for the firm, then it need to leverage the benefits, which
require lot of funds and resources, and also need to go for restructuring. On the other
hand a firm that feels globalisation or liberalization or privatization is as competition, it
has to compete with the new competitors, by manufacturing products at high quality
and sell at reasonable prices, but it needs
more technological support and needs more funds. So firm need to go for
Today, restructuring is the latest buzzword in corporate circles. Companies are
vying with each other in search of excellence and competitive edge,
experimenting with various tools and ideas. Many firms try to turn the business around
by cutting jobs, buying companies, selling off or closing unprofitable divisions or
even splitting the company up. And the changing national and international
environment is radically changing the way business is conducted. Moreover, with the
pace of change so great, corporate restructuring assumes paramount importance. It is
because profitable growth is one of the objectives of any business firm. Maximization
of profit is possible either by internally, by change of manufacturing process,
development of new products, or by expanding the existing products. On the other
hand company would be able to maximize profit by externally merging with other
firm or acquiring another firm. The external strategy of maximizing profit may
be in the form of mergers, acquisitions, amalgamations, takeovers, absorption,
consolidation, and so on.
Put in simple words the concept of restructuring involves embracing new ways of
running an organization and abandoning the old ones. It requires organisations to
constantly reconsider their organisational design and structure, organisational
systems and procedures, formal statements on organisational philosophy and may also
include values, leader norms and reaction to critical incidences, criteria for rewarding,
recruitment, selection, promotion and transfer.
Restructuring is the corporate management term for the act of partially
dismantling and reorganizing a company for the purpose of making it more
efficient and therefore more profitable. It generally involves selling off portions of the
company and making severe staff reductions. Restructuring is often done as part of a
bankruptcy or of a takeover by another firm, particularly a leveraged
buyout by a private equity firm. It may also be done by a new CEO hired
specifically to make the difficult and controversial decisions required to save or
reposition the company.
It indicates to a broad array of activities that expand or contract a firm‘s
operations or substantially modify its financial structure or bring about a
significant change in its organisational structure and internal functioning. It
includes activities such as mergers, buyouts, takeovers, business alliances, slump sales,
demergers, equity carve outs, going private, leverage buyouts (LBOs),
organisational restructuring, and performance improvement initiatives.
There are a good number of reasons behind corporate restructuring. Corporate
restructure their firms with a view to:
1 Induce higher earnings
2 Leverage core competencies
3 Divestiture and make business alliances
4 Ensure clarity in vision, strategy and structure
5 Provide proactive leadership
6 Empowerment of employees, and
7 Reengineering Process
1. Induce Higher Earnings: The prime goal of financial management is to
maximize profit there by firm‘s value. Firm may not be able to generate constant
profits throughout its life. When there is change in business environment, and
there is no change in firm‘s strategies. The two basic goals of corporate
restructuring may include higher earnings and the creation of corporate value.
Creation of corporate value largely depends on the firm‘s ability to generate
enough cash. Thus corporate restructuring helps to firms to increase their profits.
2. Leverage Core Competence: Core competence was seen as a capability or skill
running through a firm‘s business that once identified, nurtured, and developed
throughout the firm became the basis for lasting competitive advantage. For
example Dell Computer built its first 10-year of unprecedented growth by creating
an organisation capable of the speedy and in expensive manufacture and
delivery of custom-built PCs. With the concept of organisational learning
gaining momentum, companies are laying more emphasis on exploiting the rise
on the learning curve. This can happen only when companies focus on their core
competencies. This is seen as the best way to provide shareholders with increased
3. Divestiture and Business Alliances: Some times companies may not be able to run
all the companies, which are there in-group, and companies which are not
contributing may need to be divested and concentrate on core competitive business.
Companies, while keeping in view their core competencies, should exit from
peripherals. This can be realised through entering into joint ventures,
strategic alliances and agreements.
4. Ensure Clarity in Vision, Strategy and Structure: Corporate restructuring should
focus on vision, strategy and structure. Companies should be very clear about their
goals and the heights that they plan to scale. A major emphasis should also be
made on issues concerning the time frame and the means that influence their
5. Provide Proactive Leadership: Management style greatly influences the
restructuring process. All successful companies have clearly displayed
leadership styles in which managers relate on a one-to-one basis with their
6. Empowerment of Employees: Empowerment is a major constituent of any
restructuring process. Delegation and decentralised decision making provides
companies with effective management information system.
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Dave1231 - University of Santo Tomas

thanks for the info

11/05/13 14:47
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