BUSINESS RESTRUCTURING

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. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and improve the business Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.

IMPORTANCE OF BUSINESS RESTRUCTURING:

In todays world, along with increasing focus on globalization and liberalization, there is free competition among businesses. So business restructuring helps to identify opportunities. It helps the business to survive and stay fittest from the rest. It plays an important role in the internal and external growth of the organization. Improves share holders confidence in the company. Reduces the cost of operations for the company.

Types of Corporate Restructuring

Mergers / Amalgamation Acquisition and Takeover Divestiture Demerger (spin off / split up / split off) Reduction of Capital Joint Ventures Buy back of Securities

1) MERGERS: The combining of two or more companies,

generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Mergers come into play in the world of business for two very different reasons. -The first is when you've decided it makes sense to join forces with another company to reap the rewards that come from your combined strengths. - The second reason you'd plan for a merger is when you've decided you want to sell your company and another, existing business decides it would be in its best interest to acquire your firm.

Types of mergers:
There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. From the business structure perspective, some of the most common and significant types of mergers and acquisitions are listed below:

1. Horizontal Merger:
This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger. In case of horizontal merger, the top management of the company being meted is generally, replaced by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade. Weinberg and Blank define horizontal merger as follows: A takeover or merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services which compete directly with each other (for example sugar and artificial sweetness). In recent years, the great majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers

Involve a reduction in the number of competing firms in an industry; they tend to create the greatest concern from an anti-

Monopoly point of view, on the other hand horizontal mergers and takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate facilities.
Example: A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.

2. Vertical Merger:
Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors

 Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products).

Weinberg and Blank define Vertical merger as follows:

A takeover of merger is vertical where one of two companies is an actual or potential supplier of goods or services to the other, so that the two companies are both engaged in the manufacture or provision of the same goods or services but at the different stages in the supply route (for example where a motor car manufacturer takes over a manufacturer of sheet metal or a car distributing firm). Here the object is usually to ensure a source of supply or an outlet for products or services, but the effect of the merger may be to improve efficiency through improving the flow of production and reducing stock holding and handling costs, where, however there is a degree of concentration in the markets of either of the companies, anti-monopoly problems may arise.

Example

A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business.

3. CO-generic Merger:
Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements. In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources. Western and Mansinghka classified co generic mergers as: A) Product extension: When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger B) Market extension: Similarly market extension merger help to add a new market either through same line of business or adding an allied field. Both these types bear some common elements of horizontal, vertical and conglomerate merger.

Example: Merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger.

4) Conglomerate Merger Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is just a unification of businesses from different verticals under one flagship enterprise or firm. These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing products), nor vertically( in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of these common factors. There are two types of conglomerate mergers: a) Pure conglomerate mergers They involve firms with nothing in common. b) Mixed conglomerate mergers - They involve firms that are looking for product extensions or market extensions.

Example: A leading manufacturer of athletic shoes merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.

2) ACQUISITION:
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. Acquisition is also called as a TAKEOVER. Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired

Hostile acquisitions don't have the same agreement from the

target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake. In either case, the acquiring company often offers a premium on the market price of the target company's shares in order to entice shareholders to sell. For example, News Corp.'s bid to acquire Dow Jones was equal to a 65% premium over the stock's market price.

Types of acquisitions:
1) Management buyout
A management buyout (MBO) is a form of acquisition where a companys existing managers acquire a large part or all of the company from either the parent company or from the private owners. Management buy outs are conducted by management teams as they want to get the financial reward for the future development of the company more directly than they would do as employees only. A management buyout can also be attractive for the seller as he can be assured that the future stand-alone company will have a dedicated management team thus providing a substantial downside risk against failure and hence negative press.

2) Takeover
Takeovers are normally viewed as unfriendly acquisitions as in this case, one company purchases a majority interest in the target company resulting in the loss of management control of the company. There are 3 types of takeovers: a) Hostile takeover It allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover.

b) Leveraged buyout - The acquisition of another company using a

significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being

acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

c) Asset buyout When key assets of the buying company are purchased rather than its shares.

3) Joint venture :
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants' other business interests. Although JVs represent a great way to pool capital and expertise and reduce the exposure of risk to all involved, they do present some unique challenges as well. For instance, if party A comes up with an idea that allows the JV to flourish, what cut of the profits does party a get? Does the party simply receive a cut based on the original investment pool or is there recognition of the party's contribution above and beyond the initial stake? For this and other reasons, it is estimated that nearly half of all JVs last less than four years and end in animosity.

CHARACTERISTICS OF JV are:
Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking. Joint property interest in the subject matter of the venture. Right of mutual control or management of the enterprise. Right to share in the property.

DIFFICULTIES IN JV:
Inadequate preplanning for the joint venture. The hoped-for technology never developed. Agreements could not be reached on alternative approaches to solving the basic objectives of the joint venture. People with expertise in one company refused to share knowledge with their counterparts in the joint venture. Parent companies are unable to share control or compromise on difficult issues.

4) DE- MERGERS :
A business strategy in which a single business is broken into components, either to operate on their own, to be sold or to be dissolved. A de-merger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations. For example, in 2001, British Telecom conducted a demerger of its mobile phone operations, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture. Another example would be a utility that separates its business into two

components: one to manage the utility's infrastructure assets and another to manage the delivery of energy to consumers

BIBLOGRAPHY
http://www.universalteacherpublications.com/mba/free-project/p3/page6.htm http://www.slideshare.net/vish25/business-restructuring http://www.investopedia.com/terms/a/acquisition.asp http://business.gov.in/growing_business/joint_ventures.php http://hbswk.hbs.edu/item/2476.html