Corporate restructuring is a process undertaken by businesses, usually when facing financial distress, to reorganize their finances, structure or operations. The ultimate goal is to improve profitability. Restructure is covered by Chapter 11 of the US Bankruptcy Code.
There are many reasons for corporate restructure, including:
Debt reorganization is common during a recession, as companies experience greater financial hardship and tougher market conditions.
However, corporate restructure can also be a proactive approach to improving overall business performance.
Corporate restructuring can look very different depending on the particular strategy taken by the business. The main corporate restructure types or strategies are:
There are numerous hurdles to overcome with a corporate restructure. Follow these four principles to ensure yours is as smooth as possible.
Don’t leave it too late to pull the trigger. Many companies initiate a restructure on the back foot, when fewer options remain. The later you leave it, the more difficult it can be to save the company and the less value can be realized.
For example, companies are often widely criticized by the media for mass layoffs. Such drastic action is usually only necessary because the company has taken insufficient measures before that to address its financial problems.
Research shows that preemptive restructuring can generate more value than an eleventh hour restructuring in response to an immediate threat of bankruptcy or a hostile takeover.
What type of restructure is required for the specific issue or opportunity the company is facing? Is there a need for bankruptcy debt restructuring? Can the organization attempt an out-of-court restructure? Will divestment of a subsidiary solve the problem? Or does the business need to downsize across all areas?
The goal of execution is to realize as much value as possible. But corporate restructure execution is complicated, and has many pain points and legal entanglements. In a bankruptcy restructuring, where the objective is to reduce the firm's debt pressure, companies must be mindful that cancellation of debt creates taxable income. Other types of restructures will carry their own challenges.
Corporate downsizing also presents significant challenges, such as how many and what type of employees to lay off, as well as the timetable for it to happen. Where this is part of a merger, these decisions can impact the integration process and how the stock market values the merger.
How the restructure is marketed or communicated to investors has a direct impact on the company’s stock price. Internal communications and media relations must also be carefully managed. This process is further complicated if leadership's compensation is linked to the financial success of the restructuring.
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