Friday, January 28, 2011

Introduction to Corporate Restructuring

DEFINITION

a. Corporate restructuring can be defined as any change in the business capacity or portfolio that is carried out by an inorganic route or

b. Any change in the capital structure of a company that is not a part of its ordinary course of business or

c. Any change in the ownership of or control over the management of the company or a combination thereof.

a.1 Any change in the business capacity or portfolio carried out by inorganic route.

  • Tata Motors launched Sumo and later, Indica-leading to an expansion of its

business portfolio. However, these products were launched from Tata Motor’s

own manufacturing capacity in through an organic route. Hence, it would not

qualify as ‘corporate restructuring’

  • Tata Motors acquisition of Jaguar Land Rover from Ford, through Jaguar Land

Rover Limited is ‘corporate restructuring’

  • Grasim’s acquisition of Larsen & Toubro’s (L&T) cement division through

UltraTech Cement Limited is an example of ‘corporate restructuring’

a.2 Change in the business portfolio could also be in the nature of reduction of business handled by a company.

In the case of Grasim and L&T, the demerger of L&T’s cement business into UltraTech

Cement Limited was reduction of its business portfolio and thus, amounted to ‘corporate restructuring’ of L&T.

b. Any change in the capital structure of a company that is not in the ordinary course of its business.

This can be further explained with the help of the following diagram:

(a) Car finance loan

(b) Scheduled repayment of a term loan, etc. keeps on changing the debt-equity ratio within planned or targeted range. Such changes do not qualify as Corporate Restructuring.

(a) An initial public issue

(b) Follow-on public issue

(c) buy-back of equity shares may alter the capital structure of a Company permanently. Such activities are not in the ordinary course of business of a company- amounts to corporate restructuring

(a) Borrowing of a significant amount as term loan

(b) Issue of five year nonconvertible debentures, etc. Such changes may alter the debt-equity ratio significantly but still these do not qualify as leading to corporate restructuring.

Capital structure refers to the debt equity ratio, i.e., the proportion of debt and equity in the total capital of a company.

· This capital structure is never static and changes almost daily.

· If the debt/equity ratio fluctuates within a targeted or planned range, such changes in the capital structure do not amount to ‘capital restructuring’.

· Borrowing of a significant amount of term loan or an issue of five year non-convertible debenture does not qualify to be called ‘corporate restructuring’.

· An initial public issue, or a follow-on public issue or buy-back of equity shares would permanently alter the capital structure of a company and thus, would amount to ‘corporate restructuring’

c. Any change in the ownership of a company or control over its management

a) Merger of two or more companies belonging to different promoters

b) Demerger of a company into two or more with control of the resulting company passing on to other promoters

c) Acquisition of a company

d) Sell-off of a company or its substantial assets

e) Delisting of a company

All these would qualify to be called exercises in ‘corporate restructuring’.

III. THE ACTIVITIES OR CHANGES WHICH ARE NOT TERMED

‘CORPORATE RESTRUCTURING’

(a) Initial creation of a company

Here, an instructor should explain the concept and distinguish between

- a limited company

- a proprietary concern and a company

- a partnership firm and company

- a private company and a public company

Its various examples are:

1. Incorporation of a limited company

2. Conversion of a proprietary concern into a company

3. Conversion of a partnership firm into a company

4. Conversion of a private company into a public company

(b) Change in the internal command structure or hierarchy: The command structure of an organization or its hierarchy simply means the reporting relationships among the employees, managers, top management and their various functions.

  • Functional organization
  • Divisional organization
  • Matrix organization

With businesses having become more complex along with the acceptance of newer concepts of organization building such as tutorship, mentorship, etc., the hierarchies have stopped strictly falling into one of the three types mentioned above.

Any migration of an organization from functional to divisional or to matrix type or to any new or hybrid type or vice-versa would not be a case of ‘corporate restructuring’.

(c) Change in the business process

Re-engineering is the fundamental rethinking and redesign of business processes to achieve dramatic improvement in critical, contemporary measures of performance such as, cost, quality, service and speed.

Thus, It refers to the radical redesigning of business processes and not to the ownership and control or to the capital structure of the organization.

(d) Downsizing

It is another form of organizational change in which the business organization substantially cuts down on its manpower, recurring cost and/or capital expenditure, either as an objective itself or as a result of re-engineering.

(d) Other Activities: Since there is no standard definition of corporate restructuring, activities such as outsourcing, enterprise resource planning, total quality management, licensing, etc., have not been termed as corporate restructuring activities.

IV. MAIN FORMS OF CORPORATE RESTRUCTURING

Major Forms of Corporate Restructuring:

  • Merger
  • Consolidation
  • Acquisition
  • Divestiture
  • Demerger (spin-off/split-up/split-off)
  • Carve-Out
  • Joint Venture
  • Reduction of Capital
  • Buy-back of Securities
  • Delisting of Securities/Company

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