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, or a response to a crisis or major change in the business such as
bankruptcy,
repositioning, or
buyout. Restructuring may also be described as corporate restructuring,
debt restructuring and financial restructuring.
In education,
restructuring refers a requirement in the
No Child Left Behind act of 2001, which requires schools identified as chronically failing for 5 years or more to undertake rapid changes that affect how the school is led and instruction delivered.
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 and
equity 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,
valuations 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.
Restructuring in Europe
The “London Approach” Historically,
European
banks handled non-investment grade
lending and
capital structures that were fairly straightforward. Nicknamed the “London Approach” in the UK, restructurings focused on avoiding
debt write-offs rather than providing distressed companies with an appropriately sized
balance sheet. This approach became impractical in the 1990s with
private equity 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 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 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
- 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).
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.
