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Forms Of Corporate Restructuring - Turnaround Strategies & Corporate Restructuring

   Posted On :  26.06.2018 09:28 pm

An organization can expand through mergers and acquisitions. In a merger a company joins with the other company to form a new organization Acquisitions occur between firms in the same basic industry.

Forms Of Corporate Restructuring
 
The important forms of restructuring are:
 
 
             Mergers & Acquisitions
 
             Tender Offers
 
             Joint Ventures
 
             Divestitures
 
             Spin-Offs
 
             Corporate Control
 
             Changes in Ownership Structure
 
             Exchange Offers
 
             Share Repurchases
 
             Leveraged Buy-outs
 
 

Mergers and Acquisitions

 
 
An organization can expand through mergers and acquisitions. In a merger a company joins with the other company to form a new organization Acquisitions occur between firms in the same basic industry. For example Nestle acquired Richardson Vicks (both in Consumer Products). The acquiring firm not only obtains new product and markets but also confronts legal problems, structural deficiencies and diverse values.
 
 
 

Tender offers

 
 
Alternatively a public Tender Offer may be made to the shareholders for purchase of shares. These are easy only when the shareholding by the management and directors is comparatively very low. In many Indian companies such shareholding is comparatively very low and, they are easily vulnerable to hostile takeovers.
 

Joint ventures

 
 
Joint ventures occur when an independent firm is created by at least two other firms. In an era of globalization, joint ventures have proved to be an invaluable strategy for companies looking for expansion opportunities globally.
 
 

Divestitures

 
Divestiture strategy involves the sale or liquidation of a portion of business, a major division profit centre of SBU. Divestment is usually a part of restructuring plan and is adopted when an unsuccessful turnaround has been attempted.
 

Spins offs

 
Spin - off refers to creation of new legal entity by the parent company. The existing shareholder of the parent company will be allocated shares in the new entity on a prorata basis. Unlike in a divestiture, the parent company does not receive any payment in case of a spin-off.
 
 
Spin-offs are resorted mostly for the purpose of better focus on different businesses. The new entity can develop its own strategies for the development of its business. The original parent, on the other hand, can now concentrate more on its core businesses. There are two variations of Spin-off: Split-off and split-up.
 
In the case of a Split-off, a portion of existing shareholders receives stocks in a subsidiary in exchange for parent company stock.
 
In the case of a Split-up, the entire firm is broken up in a series of spin-offs, so that the parent ceases to exist.
 

Corporate Control

 
There are several means of consolidating and enhancing corporate control. “Premium buy-backs represent the repurchase of a substantial stockholder’s ownership interest at a premium above the market price (called greenmail). Often in connection with such buy-back, a standstill agreement is written. This represents a voluntary contract in which the stockholder agrees not to make further attempts to take over the company in the future. When a standstill agreement is made without a buy-back, the substantial stockholder is simply agrees not to increase his or her ownership which presumably would put him or her in an effective control position.
 
Anti-takeover amendments seek to make an acquisition of the company more difficult or expensive. These include (1) supermajority voting provisions requiring a high percentage (for example, 80 percent) of stockholders to approve a merger, (2) staggered terms for directors which can delay change of control for a number of years, and (3) golden parachutes which award large termination payment to existing management if control of the firm is changed and management is terminated.
 
The proxy contest is a dubious way by which the management of a company seeks to undermine the control position of the ‘incumbents’ or existing board of directors. This is sought to be achieved by an outside group, referred to as dissidents or insurgents obtaining representation on the board of defectors of the company.
 

Changes in Ownership Structure

 
The ownership structure of a firm may be changed due to various reasons. As a firm grows the ownership structure may undergo change. For example, a sole proprietorship may be converted into a partnership, when a partnership firm grows and when more ownership capital needs to be brought in a private limited company may be formed.
 

Exchange Offers

 
Exchange offer may involve exchange of debt or preferred stock for common stock, or conversely, of common stock for more senior claims. Several cases of turnaround involve exchange of debt for equity. For example, the government loan to a public or joint sector unit may be converted into equity. Such a measure helps to reduce the interest burden and reduces cash outflow by loan repayment also.
 

Share Repurchase

 
Buy-back of shares by a company help tilt the management control. If the company buys back shares from those who hold substantial shares it could tilt the control in favour of the promoters, although the percentage of shares they hold does not increase. Buy back of shares can also guard against take-overs to some extent. It can also help stabilize the share prices. A major objection to the buy back of shares is that it provides scope for manipulation of share prices by the management.
 

Buy-Outs

 
Management buy-out may involve the purchase of a division of a company or even a whole company by a new entity formed specifically for this purpose. When such a purchase is financed by large debt (i.e., highly leveraged) it is referred to as Leveraged buy-out(LBO). LBOs are very risky because of the high interest burden and loan repayment obligation. A default in repayment would aggravate the interest burden and cash flow problem. LBOs have landed many companies is serious crisis. 
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