Types of Restructuring
Chapter 2 cont....
2.3 Restructuring Types
The broad types of Restructuring are displayed in the diagram. Each of these can be further classified into various types or methods of restructuring depending upon the objectives to be achieved.
2.3.1 Portfolio & Asset Restructuring
Broadly, these types of restructuring affect distinctly the asset base or the product / service portfolios of the organizations in consideration, as also the power and control related issues. Also, these types of restructuring initiatives are usually undertaken to enhance the profitability of the both companies in a mutually rewarding situation - as in a Merger scenario . or either of the dealing parties . as in the case of Acquisitions . or even certain objective decisions as the divestments of certain businesses to ensure growth and sustainable development.
I. Mergers & Amalgamations: It is a combination of two or more business enterprises into a single enterprise. Usually mergers occur in a friendly setting where executives from the respective companies participate in a due diligence process to ensure a successful combination of all parts. The Shareholders of each company must agree to it prior to undertaking it. Mergers can be of three types; namely:
a). Horizontal Mergers: A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy. E.g. the Daimler Chrysler Merger.
b. Vertical Mergers: A merger between two companies producing different goods or services for one specific finished product. By directly merging with suppliers, a company can decrease reliance and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire company. Vertical Mergers can be in the form of Forward Integration of Business [E.g. A manufacturing company entering in the Direct Marketing Function . which was not its foray in the erstwhile times) or in the form of Backward Integration of Business [E.g. A manufacturing company also focussing on the producing the required raw materials and managing its supply chain activities on its own . which was not its foray earlier].
c. Conglomerates: This type of merger involves mergers of corporates in related as well as unrelated businesses to achieve three objectives; a. Product Extension b. Entry into new Geographic Markets c. Entry into unrelated yet profitable businesses. E.g. most big business houses such as Reliance Industries, Aditya Birla Group, etc. undertake such mergers to expand their businesses.
Benefits of undertaking Mergers & Amalgamations:
- Entry into new businesses
- Asset / Competencies Acquisitions
- Development of New Capabilities
Issues in undertaking Mergers & Amalgamations:
i. Selection and Financial Analysis of the Target Firm (the
company to be merged with).
ii. Valuation of the Target Firm
iii. Establishing the Basis of Exchange
iv. Rightsizing the new entity
v. Maintaining Employee Productivity
vi. Reorganizing the organization
Some Corporate Examples:
ICICI Bank Limited and Bank of Madurai, Proctor & Gamble
and Gillette, Dabur and Balsara, etc.
