Restructuring

Restructuring

Discussion
Ask a question about 'Restructuring'
Start a new discussion about 'Restructuring'
Answer questions from other users
Full Discussion Forum
 
Encyclopedia
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Alternate reasons for restructuring include a change of ownership or ownership structure, demerger
Demerger
Demerger is a form of corporate restructuring in which the an entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition....

, or a response to a crisis or major change in the business such as bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

, repositioning, or buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...

. Restructuring may also be described as corporate restructuring, debt restructuring
Debt restructuring
Debt restructuring is a process that allows a private or public company – or a sovereign entity – facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its...

 and financial restructuring.

Executives involved in restructuring often hire financial and legal advisors to assist in the transaction details and negotiation. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations.

The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 and equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 holders to facilitate a prompt resolution of a distressed situation.

Steps:
  • ensure the company has enough liquidity to operate during implementation of a complete restructuring
  • produce accurate working capital forecasts
  • provide open and clear lines of communication with creditors who mostly control the company's ability to raise financing
  • update detailed business plan and considerations


Valuations in restructuring


In corporate restructuring, valuation
Valuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...

s are used as negotiating tools and more than third-party reviews designed for litigation avoidance. This distinction between negotiation and process is a difference between financial restructuring and corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...

.

The “London Approach”


Historically, Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

an bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

s handled non-investment grade lending and capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....

 structures that were fairly straightforward. Nicknamed the “London Approach” in the UK, restructurings focused on avoiding debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 write-offs rather than providing distressed companies with an appropriately sized balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

. This approach became impractical in the 1990s with private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

 increasing demand for highly leveraged capital structures that created the market in high-yield and mezzanine debt. Increased volume of distressed debt drew in hedge funds and credit derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

 deepened the market—trends outside the control of both the regulator and the leading commercial banks.

Characteristics

  • Cash management and cash generation during crisis
  • Impaired Loan Advisory Services (ILAS)
  • Retention of corporate management sometimes "stay bonus" payments or equity grants
  • Sale of underutilized asset
    Asset
    In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

    s, such as patent
    Patent
    A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

    s or brands
  • Outsourcing
    Outsourcing
    Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...

     of operations such as payroll and technical support to a more efficient third party
  • Moving of operations such as manufacturing to lower-cost locations
  • Reorganization of functions such as sales, marketing, and distribution
  • Renegotiation of labor contracts to reduce overhead
    Overhead
    Overhead may be:* Overhead , the ongoing operating costs of running a business* Engineering overhead, ancillary design features required by a component of a device...

  • Refinancing of corporate debt
    Debt
    A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

     to reduce interest payments
  • A major public relations
    Public relations
    Public relations is the actions of a corporation, store, government, individual, etc., in promoting goodwill between itself and the public, the community, employees, customers, etc....

     campaign to reposition the company with consumers
  • Forfeiture of all or part of the ownership share by pre restructuring stock holders (if the remainder represents only a fraction of the original firm, it is termed a stub
    Stub (stock)
    A stub is the stock representing the remaining equity in a corporation left over after a major cash or security distribution from a buyout, a spin-out, a demerger or some other form of restructuring removes most of the company's operations from the parent corporation...

    ).
  • Improving the efficiency and productivity through new investments, R&D and business engineering
    Business engineering
    Business Engineering is an interdisciplinary field of engineering that focuses on how complex businesses should be designed and managed.- Overview :...

    .

Results


A company that has been restructured effectively will theoretically be leaner, more efficient, better organized, and better focused on its core business with a revised strategic and financial plan. If the restructured company was a leverage acquisition, the parent company will likely resell it at a profit if the restructuring has proven successful.

External links


See also

  • Bankruptcy
    Bankruptcy
    Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

  • Chainsaw Al
  • Compromise agreement
    Compromise agreement
    In the United Kingdom, a compromise agreement is a specific type of contract, regulated by statute, between an employer and its employee under which the employee receives a negotiated financial sum in exchange for agreeing that he or she will have no further claim against the employer as a result...

  • Creditor
    Creditor
    A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...

  • Debt
    Debt
    A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

  • Demerger
    Demerger
    Demerger is a form of corporate restructuring in which the an entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition....

  • Downsizing
  • Insolvency
    Insolvency
    Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...

  • Layoff
    Layoff
    Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...

  • Presidential Task Force on the Auto Industry
    Presidential Task Force on the Auto Industry
    The Presidential Task Force on the Auto Industry is an ad hoc group of United States cabinet-level and other officials that was formed to deal with the financial bail out of automakers Chrysler Corporation and General Motors....

  • Spin-out
  • Stub (stock)
    Stub (stock)
    A stub is the stock representing the remaining equity in a corporation left over after a major cash or security distribution from a buyout, a spin-out, a demerger or some other form of restructuring removes most of the company's operations from the parent corporation...

  • Voluntary redundancy
    Voluntary redundancy
    Voluntary redundancy is a financial incentive offered by an organisation to its employees with the purpose of attracting volunteers to leave the organisation, due to downsizing or restructuring situations. The purpose is to circumvent union employee regulation laws.-Reasons:A Voluntary Redundancy...