What is Business Restructuring

Chapter 1 - Introduction

With liberalization and opening up of the Indian economy since the middle of 1991,

Indian corporate sector felt the need to reposition itself quickly in order to effectively respond to emerging competition and also exploit the opportunities that were expected to unfold in the coming years. It thereby became essential that Indian companies should reposition themselves through a series of well planned restructuring initiatives that would help them overcome not only the business weakness [viz. lack of customer focus, diversified portfolio, unprofitable product lines, outdated technologies, poor productivity, huge overheads, etc.] but also build new capabilities to exploit emerging opportunities.

1.1 What is Business Restructuring

Restructuring is the corporate management term for the act of partially dismantling or otherwise reorganizing a company for the purpose of making it more efficient and therefore more profitable.

This term is used in many different ways. First of all, restructuring is a profound change in the ways company operates. Therefore, it is basically associated with a major business modification, concerning personnel downsizing and asset revaluation. Decision to undertake business restructuring may encompass a broad range of activities and include acquisition & divesture of lines of business and assets, acquiring controlling shares in other companies, alteration in capital structure through a variety of financial engineering initiatives, and also effecting internal streamlining and business process re-engineering to improve efficiency and effectiveness of the firm.

Characteristics

• Retention of corporate management sometimes "stay bonus" payments or equity grants
• Sale of underutilized assets, such as patents or brands
• Outsourcing 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
• Refinancing of corporate debt to reduce interest payments
• A major public relations 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).
  

1.2 Need/ Reasons/Purpose of Restructuring

Business restructuring is a means towards an end. It is a tenacious, longdrawn out process that is embarked upon to achieve identified business goals provided by the corporate vision. Companies experiencing a major restructuring are generally doing poorer than expected and wish to increase future earnings by writing down their assets.

If a firm is operating in an environment where changes in competition, technology, product, customer mix and cost of financing are minimal or if the firm is in a steady or dominant position in the industry, there may not be a need for the firm to restructure. With the onset of competition, rapid obsolescence in technology, skills and product market and rising volatility in money and capital market, the steady state is virtually non-existent.

Overnight, companies that were known to dominate the respective industries for decades have begun to under perform and are showing signs of extinction. The reasons can be traced to:

• Absence in growth segments of the market.
• Lack of economies of scale.
• Poor efficiency in operations.
• Changes in business structures . both domestic and global.
• Declining competitiveness of the product, technology and value creation process.
• High cost structure and high cost of capital. 7. Mismanagement of fixed and working capital.
• Lack of funds to support brand and distribution network.
• Changes in environment in areas like technology, competition, regulations etc.
• It can prevent a competitor from establishing a similar position in that industry.
• It offers a special timing advantage because it enables a firm to leap ahead in the process of expansion.
• It may entail less risk and even less cost
• In a saturated market simultaneous expansion and replacement (through a merger) makes more sense than creation of additional capacity through internal expansion.
• Changes in government policy regulating a given industry.

Hence restructuring becomes crucial whenever there is a major shift in the business environment, which is beyond the control of the firm. Such restructuring, given the volatility of present day business environment has to be a continuous process.