Corporate restructuring is the process of significantly changing a company’s business model, management team or financial structure to address challenges and increase shareholder value. The restructuring may involve major layoffs or bankruptcy, though restructuring is usually designed to minimize the impact on employees, if possible. The restructuring may involve the company’s sale or a merger with another company. Companies use restructuring as a business strategy to ensure their long-term viability. Shareholders or creditors might force a restructuring if they observe the company’s current business strategies as insufficient to prevent a loss on their investments. The nature of these threats can vary, but common catalysts for restructuring involve a loss of Lesson 1 Corporate Restructuring – Introduction & Concepts 3 of market share, the reduction of profit margins or declines in the power of their corporate brand. Other motivators of restructuring include the inability to retain talented professionals and major changes to the marketplace that directly impact the corporation’s business model.
Internal reconstruction is a method of corporate restructuring where an arrangement is made by the company of the organization where in changes in the assets and liabilities are made to improve the financial position without liquidating the company or transferring the ownership to an external party, whereas external reconstruction is the one where an existing company is liquidated and taken over by another newly formed company and the transfer of assets and liabilities takes place, and the same is considered similar to amalgamation.
The accounting required for both internal reconstruction and external reconstruction is complex.
Internal reconstruction needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. On the other hand, external reconstruction can be done immediately without any need for permission from the court.
Corporate Restructuring aims at different things at different times for different companies and the single common objective in every restructuring exercise is to eliminate the disadvantages and combine the advantages. The various needs for undertaking a Corporate Restructuring exercise are as follows:
(i) to focus on core strengths, operational synergy and efficient allocation of managerial capabilities and infrastructure.
(ii) consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.
(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.
(iv) acquiring constant supply of raw materials and access to scientific research and technological developments.
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting the radical changes brought out by information technology.