Dynamics of Restructuring

Corporate restructuring occurs periodically, Certain conditions or circumstances induce corporate restructuring and how should corporate governance be reformed to make to more responsive to the needs of restructuring.

Even through the environmental change, which warrants corporate restructuring, is a gradual process, corporate restructuring is often an episode and convulsive exercise. Why? Typically, an organization can tolerate only one vision of the future, articulated by its chief executive, and it takes time to communicate that vision and mobile collective commitment. Once the strategy and structure that reflect that vision are in place, they acquire a life of their own. A constituency develops, with a vested interest in that strategy and structure which resists change unless it becomes inescapable. Hence resistance to change often preserves the status quo well beyond its period of relevance so that when change comes, the pent up forces, like an earthquake, capture in one violent moment a decade of gradual change.

The conditions or circumstances which seem to enhance the probability of voluntary corporate restructuring, but not necessarily guarantee the same are: (1) Persuasive evidence that the strategy and structure in place have substantially eroded the benefits accruing to one or more principle corporate constituencies. (2) A shift in the balance of power in favor of the disadvantaged constituency, (3) Availability of options to improve performance, (4) Presence of leadership which is capable of and willing to act.

Corporate restructuring occurs periodically due to an ongoing tension between the organizational need for stability and continuity on one hand and the economic compulsion to adapt to changes on the other. The wrongs that develop during one period of stable strategy and structure are never permanently righted because each new restructuring becomes the platform on which the next era of stability and continuity is constructed.

Portfolio restructuring essentially involves modifying the business portfolio through divestiture and de-merger. A divestiture involves the sale of a division or plant or unit of one firm to another. A de-merger results in the transfer of one or more undertakings of a company to another company. The company whose undertaking is transferred is called the de-merged company and the company to which the undertaking is transferred is referred to as the resulting company. Divestitures and de-mergers are motivated by reverse synergy or ‘energy’. This means that the value of the parts is greater than the whole. In simple arithmetic, it implies that 5 – 3 = 3!

Financial restructuring involves a significant change in the financial structure of the firm and/or the pattern of ownership and control. Financial restructuring is done in a variety of ways. The more common ones are: going public, debt equity swap and leveraged buyout. Most of the partnership firms and private limited companies that have attained some size and stature have a compulsion to go public. When a firm finds it difficult to service its existing debt, it may explore the possibility of converting debt into equity. Such a conversion is referred to as a debt-equity swap. A leveraged buyout a transfer of ownership consummated mainly with debt. Generally, a leveraged buyout involves an acquisition of a division or unit of a company; occasionally, it entails the purchase of an entire company.

Many firms have begun organizational restructuring exercises in recent years to cope with heightened competition. The common elements in most organizational restructuring and performance enhancement programs are: regrouping of business, decentralization, downsizing, outsourcing, business process re-engineering, enterprise resources planning and total quality management.

Corporate restructuring occurs periodically due to an ongoing tension between the organizational need for stability and continuity on the hand and the economic compulsion to adapt to changes on the other.

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