Strategic Corporate and Financial Restructuring
Value Maximization in Financial Management
Creation and maximization of value (also called wealth) is the objective function of financial management. There are diverse ways by which value maximization occurs in a business firm. When the demand for goods and services is growing, firms tend to expand their business capacity and seize the opportunity of increasing demand. This could be done by constructing more production units or opening more operational units. Alternatively, expansion of business activity could also be made possible through the acquisition of other businesses. It is natural to acquire business units of a similar nature or those producing the same or similar goods and services. Sometimes, companies also expand their size of operations by taking over unrelated businesses that have no relation to the present business or businesses carried out.
Understanding Corporate Restructuring
Corporate Restructuring (CR) is a broader term which includes all other types of restructuring such as financial restructuring, debt restructuring, capital structure changes, and the product mix. There are two basic factors that necessitate corporate restructuring in the business world:
- Expansion and Diversification: When a business wants to expand or diversify its activities, it may opt for restructuring through acquisitions, mergers, takeovers, and joint ventures. This is mainly to maximize the value of the business.
- Economic Necessity: Corporate restructuring becomes a necessity when business conditions are unfavorable or there is a recession in the economy (as happened during the COVID-19 pandemic). In order to remain in business, certain actions like disinvestment, downsizing, or selling off the whole or part of the business may be resorted to.
Key Reasons for Corporate Restructuring
The following are the major reasons why companies and businesses resort to restructuring:
- Seizing Opportunities: To seize expanding business opportunities in the economy. When the economy is growing, many business opportunities arise.
- Policy Changes: Sometimes policy changes brought out by governments create new opportunities, such as the economic reforms initiated in India under different phases beginning in 1991.
- Technological Advancement: Advancements in technology create new opportunities for business. For example, advances in research in cell biology or stem cell research necessitate that biotechnology and pharmaceutical companies redefine their businesses.
- Managerial Efficiency: Companies resort to organizational changes to improve managerial efficiency. This may involve creating conglomerates or dividing a group into independent units. Sharing of assets or changes in ownership, as occurred in Reliance after the demise of Dhirubhai Ambani, may make it necessary for businesses to undergo restructuring.
Primary Types of Corporate Restructuring
Broadly speaking, the following are the different types of corporate restructuring:
- Financial Restructuring: This involves decisions pertaining to acquisitions, mergers, divestitures, leveraged buyouts, leveraged recapitalization, and the reorganization of capital.
- Technological Restructuring: This involves decisions pertaining to redesigning the business process through revamping existing technologies.
- Market Restructuring: This involves decisions regarding product mix and market positioning to suit changed situations.
- Organizational Restructuring: During the post-liberalization period, many Indian firms embarked on organizational restructuring programs by regrouping existing businesses into a few compact business units through decentralization, delayering, downsizing, outsourcing non-value-adding activities, and subcontracting.
The Role of Financial Restructuring
This is one of the major aspects of corporate restructuring. Nonetheless, every restructuring finally affects the financial profile of the company. Viewed in a larger context, financial restructuring is defined as the process of reorganizing the finances of the business unit in terms of assets and liabilities. It includes the rejig of capitalization, capital structure, cost of capital, debt-equity, and cash flow streams. Any measure intended to improve the financial health or condition of the firm can be covered under financial restructuring.
In recent times (2020), companies like NIIT, Engineers India, NTPC, Wipro, TCS, ONGC, NMDC, IOC, NALCO, NLC India, HCL Technologies, and Pidilite Industries have offered to buy back their own shares. Similarly, many companies are now moving towards paying off their debt, becoming zero-debt companies, and converting to equity-only companies. As per one estimate, the top 50 companies in India repaid their debt obligations to the extent of Rs. 59,600 crore during the first half of 2019-20.
Common Methods of Financial Restructuring
As noticed from the discussion above, there are many methods of financial restructuring. Quoted above are examples of just two variants: the buyback of shares and the repayment of debt. The following is a list of methods presently resorted to by companies in India:
- Buyback of shares
- Conversion of debt or preference shares into equity
- Corporate debt restructuring
- Leveraged buyouts
- Equity restructuring
- Divestiture
- Disinvestment
- Changes in capital structure