Corporate Restructuring

Prof Ashish K Mitra

 Restructuring can be defined as a strategy by which

a firm changes it - business structure or financial
structure.
Firms use restructuring strategies in response to
changes in external & internal environment, to
create value for its stakeholders.
Business (or Operational) restructuring refers to
outright or partial purchase or sale of companies,
businesses ,product lines, or downsizing by closing
unprofitable / non strategic facilities. Restructuring
can lead to radical changes in composition of the
businesses. Often organizational structure change could
be done to improve efficiency, cut costs . Asset
restructuring also could be done to improve
productivity of assets
Financial restructuring refers to actions taken by
the firm to change its total debt or equity structure.

 The success of GE highlights the importance of

restructuring in a competitive business environment.
As CEO, Jack Welch during 1981-2001, sold 350
businesses for a total of $23.8 b and acquired some 900
businesses worth $105.5b. Under Welch, restructuring
became a continuous process, resulting in greater
efficiencies , growth and globalization of operations.
In Europe & US, between 1960s & 1990s, diversification
by Companies to an unmanageable extent led to
bureaucratic inefficiencies, plummeting performance and
sharp fall in stock prices.
As a result many became soft targets for hostile takeovers.
Firms often undertook to restructuring to come out of
mess.

FORMS of RESTRUCTURING

Expanding operations
Merger & Acquisitions
Joint Ventures ( range of Strategic Alliances)
Tender Offers ( a firm buys controlling interest in another
firm)
Asset acquisition ( could be tangible and /or intangible assets)

Contraction (Sell Offs )

Spin offs (creation of separate legal entity with independent
power) (only shares are transferred or exchanged)
Split offs
Split-ups

Divestiture - sale of a part of a firm to a third party for money

Equity Carve-outs sale of a part of firm to outsiders through
equity offering giving them ownership

 Changes in ownership structure:

exchange offers
share repurchase,
going private,
Leveraged buyouts( LBO)

Corporate Control:

premium buybacks,
standstill agreement,
anti-takeover amendments
proxy contests

 Merger two or more companies combine into a

single company. Merger can take place by way of
amalagmation or Absorption
Amalgamation : two merging companies after merger
loose their individual identity & a new company is
formed. This generally applies to firms of some what
equal sizes. Eg: merger of Brooke Bond india Ltd with
Lipton India Ltd to form Brook Bond Lipton India Ltd.
Absorption: Fusion of a company (often smaller) with a
larger company. After merger smaller company ceases to
exist. Eg ICICI bank & Bank of Madura

Asset Acquistion buying tangible assets (like a

manufacturing unit) or intangible assets ( like
brands) of another company. Eg; Laffarge bought
physical assets of cement division of TISCO. HUL
(then HLL) bought Lakme brand from Tata group.

 A takeover refers to the acquisition of a certain

block of paid-up equity capital of a company with
the intention of acquiring control over the affairs
of the target company.
Takeovers are seen as strategy of faster route to
growth and expansion of business.
After the take over, the target company remains a
separate entity ie; it is not merged with the
acquirer.
Three types of takeovers : negotiated or friendly
takeover, Open market or hostile takeover, and
bail-out takeover

Tender Offer
In a Tender Offer, a firm which intends to acquire
a controlling interest in another firm , basically
asks the shareholders of the target firm to submit
(tender) their shares in the firm at a given price.
Bear Hug approach : in this approach , a
company communicates in writing with the
directors of target company regarding its
acquisition proposal (putting pressure). The directors are
required to make a quick decision on the proposal.
If the acquiring company does not get the
approval of the directors, then it can directly
appeal to the stock holders through tender offer.

 If the company obtains a favorable response to

the tender offer, the acquiring company can gain
control over the company and replace the directors
who did not cooperate in the takeover effort. This
then will be referred as hostile takeover.
A target company , to avoid being taken over, may
join hands with another company ( referred to as
White Knight) with which it would like to form
association.
Target company can also go for defensive
measures against takeover attempt, by some form
of defensive tactics such as offering shareholders
a large cash dividend financed by debt . Golden
Parachute features for top managers in another tactics.

Example of some hostile takeovers / Attempts

in the past
India Cements Rassi Cements
Arun Bajoria ( Hooghly Jute Mill)
Bombay Dying
Abhishek Dalmia GESCO Corporation
Mahindra Reality & Infrastructure
Shaw Wallace Gammon India
Oracle vs Yahoo

Sell-Offs
There are two major types of sell-offs
Divestiture : involves the sale of a portion of a firm
to a third party for money ( very rarely securities).
Since the buyer is an existing firm, no new legal
entity is created.
The two main reason for divestures are the assets
being divested are worth more as part of the buyers
organization than as part of the sellers or the assets
are actively interfering with other profitable
operations of the seller.( Sale of TOMCO by Tatas to
HLL , sale of ITC classic by ITC to ICICI bank)
Efficiency gains, refocus on core business, wealth
transfers and tax reasons could be other reasons for
divestures.
Can Divestiture be involuntary?

Spin-Offs: Spin-Offs results in a creation of

a separate legal entity The shares of the new
spun-off unit are distributed among the existing
shareholders of the parent company on a prorata basis. As a result a separate new publicly
held independent company emerge.
The new entity has the power to make independent
decisions. It can develop policies and strategies
which are different from those of parent
companies.
In spin-offs only shares are transferred or
exchanged and no money is transacted.

Motive for Spin-off ?

 There are two types of Spin-Offs

Split-offs : existing shareholders receive stock
in the subsidiary in exchange for the stocks of
the parent company
Split-ups: The entire firm is fragmented into a
series of spin-offs. The parent company no
longer exist.

Spin off , Split ups, Equity Carve outs

NIIT Ltd -- NIIT Ltd , NNIT
Technologies (Spin off )
Godrej Soaps- GCPL, Godrej Industries
(split up in 2001)
HP--- Agilent Technologies ( equity carve
out)
GM - Delphi Automotive Component (equity
carve out , thereafter full divestiture)

Ford Visteon (equity carve out , thereafter full divestiture)

Equity Carve-out
Equity carve-out is a variation of divestiture. In
this a portion of wholly owned subsidiary of the
firm or portion of a firm is sold to the outsiders
through an equity offering, giving them ownership
of the previously existing firm. Equity carve-out
results in a new legal entity.
The sale can be made either through a secondary
offering by the parent company or through a
primary offering by the subsidiary itself.

Restructurings at AT &T during last 25 years

Yr

1984
1993
1996
1996
1996
1997
1998

Type

Subsidiary

Effect

Spin off 7 Baby Bells

1 share each bbell for 10 AT&T shr
Eqt carveout AT&T Capital 14% eqty sale to public ($10.5m)
Divest
AT&T Capital sold completely $2.2 b
Eqt carvout Lucent Tech
18% public offer ( raised $3b)
Spinoff
Lucent Tech AT&T sh holder 0.324 Lucent sh
Spinoff
NCR
0.0625 sh of NCR for 1 AT&T sh
Divest
Universal card Sold to Citi Corp $3.5 b

 As firms Change their strategies, they also

need to change the organizational structure
Organizational Restructuring
Horizontal structure As firms grow they may
need to adopt Multidivisional structure to help
in effective allocation of resources, strategic
planning, monitoring & controlling
Vertical Structure- Forward and backward
integration of businesss lead to vertical
relationship within a firm.

Numerator and Denominator Management -as

expressed by Hamel & Prahalad

During economic downturns, Two alternatives for

maintaining profitability levels:
Denominator management reduce head count, stringent
cost cutting, reduce investments and sell assets under a
denominator driven belt-tightening program
Numerator management seeking ways of increasing
revenues , improving productivity and increase net profit ,
rather than the denominator oriented approach of cutting
investment and reducing head counts.
Hamel & Prahlad say regardless of business cycle,
talented CEOs are devoted to adopting numerator driven
business strategy.