The term ‘corporate restructuring’ generates spine-tingling thoughts of mass layoffs and financial collapses. While it's true that it often takes place during economic downturns, the process of internal reorganization encompasses a wide variety of procedures that may be undertaken for a number of different reasons.
Corporate restructuring refers to the process of reconfiguring a company’s hierarchy, internal structure, or operations procedures. Companies undergo restructuring to achieve certain aims, such as to become more competitive or to respond to changes in the market.
This post explores what corporate restructuring is and how it functions.
Different Approaches to Corporate Restructuring
There are multiple ways to approach corporate restructuring. Ultimately, the strategy you pursue depends on the specific needs and goals of your organization.
Organizational restructuring involves changing a company's internal hierarchy.1 The process may result in the elimination of certain roles and the merging of others. The company may create new jobs, departments, and teams while eliminating others, which might cause shake-ups in working relationships. Companies typically undertake all of these changes with the end goal of enhancing productivity, efficiency, and communication.
Operational restructuring refers to the practice of streamlining routine processes.2 This may involve embracing automation technology and/or eliminating redundant procedures. The business may outsource certain tasks for cost-saving purposes or to allow the company to focus its energy more intensely on core processes.
To divest of something simply means to get rid of it. A divestiture involves the sale or spinning off of underperforming or non-core assets, subsidiaries, or divisions.3 This may include selling heavy machinery, real estate, or intellectual property to raise cash. A business operating in multiple markets may spin off certain departments in order to focus on its core offering. For example, a company that owns both pencil and pen factories may establish the pencil division as a separate company to enhance operational efficiency.
Mergers and Acquisitions (M&A)
The mergers and acquisitions process involves two parties joining to create a single company. One or both parties commonly restructure to accommodate the new business.4 They may merge, reduce, or eliminate departments and roles with similar functions. For example, after an M&A, the new company likely won't need all of the marketing staff from both companies. In anticipation of this, companies may reorganize their internal hierarchies after the sale has been completed, ensuring a smooth and profitable integration.
Joint Ventures and Strategic Alliances
A joint venture or strategic alliance bears some superficial similarity to an M&A. However, these processes are less invasive and don't entail an actual sale or joining of the two companies. Instead, they are partnerships in which two or more businesses choose to pair or share resources to assist with specific business goals.4
Financial restructuring seeks to enhance a company's financial health.4 Common methods include:
- Debt restructuring: A company consolidates its debt or negotiates lower interest payments
- Debt for equity swaps: A company sells equity in exchange for debt reduction from its creditors
- Equity financing: A company issues new equity to raise capital
Why Do Businesses Restructure?
Businesses restructure for varied reasons, one of the most common of which is to cut costs.5 Methods for achieving this goal include:
- Eliminating redundant processes
- Consolidating debt
- Streamlining and optimizing routine operations
Businesses might also reorganize in anticipation of an acquisition or merger. The process allows a company to integrate into its new partner business more efficiently.6
In the event of an industry-wide change, businesses may restructure to stay competitive. This may take the form of an organizational change designed to enhance efficiency by modifying the internal structure of the business. For example, a company may embrace a flat hierarchy, split up, or consolidate departments.6 A business might also adjust its internal structure to ensure regulatory compliance with new legislation.7
The Corporate Restructuring Process
Corporate structuring often takes months to see through from beginning to end. While the actual process can be quite complex and involves a large number of internal and external stakeholders, you can simplify it down to four broad steps.
Identify Your Objectives
Prior to undertaking any course of action, it's important to articulate exactly why your company is going to be restructured.
- General Motors underwent corporate restructuring in 2009 to shed its debt, cut operating costs, and become more competitive8
- Proctor and Gamble restructured between 2012 and 2015 with the intention of recentering its efforts on core business holdings9
- Eastman Kodak undertook reorganization efforts in 2012 as part of its bankruptcy proceedings;10 it divested its legacy systems and turned its focus toward growth areas
Once you know what you're trying to accomplish, planning the process is a simple matter of working backward to produce a roadmap. You should always be as specific as possible when determining your objectives. Rather than simply stating that you need to reduce your operating costs, for instance, set a target amount for those costs.
Form a Plan
Outline each strategy and action that you intend to perform in pursuit of your goals. For example, if you're undertaking a divestiture corporate restructuring, identify each piece of equipment that you intend to sell. It's also a good idea to draw up a short list of potential buyers. Ask your compliance department for assistance to help you stay on the right side of the law.
Set it in Motion
Implementation can take many forms. Depending on the corporate restructuring strategy that you intend to pursue, you may need to issue new equity, sell existing assets, hire, conduct layoffs, create new organizational guidelines, and more.
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- Retrieved on April 5, 2023, from glaisyers.com/5-different-forms-of-corporate-restructuring-to-consider
- Retrieved on April 5, 2023, from deloitte.com/ch/en/pages/financial-advisory/solutions/operational-restructuring.html
- Retrieved on April 5, 2023, from corporatefinanceinstitute.com/resources/valuation/divestiture-overview
- Retrieved on April 5, 2023, from portebrown.com/newsblog-archive/corporate-restructuring-strategies
- Retrieved on April 5, 2023, from investopedia.com/terms/r/restructuring.asp
- Retrieved on April 5, 2023, from ilo.org/wcmsp5/groups/public/---ed_emp/documents/publication/wcms_142327.pdf
- Retrieved on April 5, 2023, from imf.org/external/pubs/ft/issues/issues31
- Retrieved on April 12, 2023, from reuters.com/article/us-autos-gm-plan-sb-idUSTRE51H04D20090218
- Retrieved on April 12, 2023, from reuters.com/article/procter-gamble-results-idUSL4N0Q745T20140801
- Retrieved on April 12, 2023, from reuters.com/article/kodak-bankruptcy-idCNL2N0F11RC20130625