Here is an essay on the ‘Forms of Corporate Restructuring’ for class 11 and 12. Find paragraphs, long and short essays on the ‘Forms of Corporate Restructuring’ especially written for college and management students.

Essay on Corporate Restructuring

Essay Contents:

  1. Essay on Streamlining of Internal Operations in an Organisation
  2. Essay on Mergers and Acquisitions (M&A) of an Organisation
  3. Essay on Divestitures of an Organisation 
  4. Essay on Strategic Alliances (SA) of an Organisation 
  5. Essay on Financial Restructuring of an Organisation

Essay # 1. Streamlining of Internal Operations in an Organisation:

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Most organisations tend to develop inefficiencies over a period of time which make them uncompetitive. A general tendency is to explain away underperformance rather than initiate correc­tive actions. This can result in a number of consequences, such as: decline in competitive position dissatisfaction among customers deterioration in profitability and market share possibility of a takeover

Periodic streamlining of internal operations is needed, by undertaking belt-tightening measures, to bring the operations back to the desired efficiency, productivity and effectiveness in all the key result areas. The principal objective of such streamlining is to improve the fundamentals with a view to enhancing a firm’s competitiveness.

Some of the key actions that normally come under such programmes are:

(a) Cost reduction,

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(b) Improvement of productivity and operating efficiency,

(c) Downsizing of excess manning reduction in overheads,

(d) Rationalisation of product-mix,

(e) Closure of uneconomic units better working capital management,

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(f) Strengthening of distribution network, logistics and after-sales service quality improvement across the entire value chain,

(g) Disposal of idle assets (plants and machinery, land, utilities, etc.) building-in a strong customer orientation,

(h) Making the organisation lean and mean, and

(i) Installing appropriate systems and procedures for better planning, decision-making and con­trol.

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When a firm undertakes internal streamlining, there may be a need to make a balancing invest­ment in select areas to increase efficiency and productivity in underperforming areas. In general, the process is complex to manage since it involves questioning past practices and methods and changing attitudes and behaviour of people. A record of the past success of erstwhile organisational processes and systems and the underlying paradigm become major bottlenecks against rapid changes.

Ensuring the following can help achieve success in internal streamlining:

(a) Right benchmarking in all the areas where improvements are being sought;

(b) Introduction of systems for measurement, evaluation and feedback;

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(c) Identification of a champion or ‘First Person Responsible’ for each specific efficiency im­provement programme;

(d) Continuous communication to create a sense of urgency and need for change;

(e) Constant reminders and follow-up to retain the gains already made; visible involvement of the top management and CEO in the programme;

(f) Single-mindedness and the guts to achieve the targets within the time scale agreed, no matter what the obstacles are.

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The principal thrust in streamlining internal operations should be to improve performance dramatically in four key critical areas, viz:

(i) Cost.

(ii) Quality.

(iii) Service.

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(iv) Speed.

Unfortunately, since modern organisations are characterised by division of work on functional, product or area basis, they are unable to achieve superior performance in the above four areas due to the following shortcomings:

a. The processes within the organisation are inflexible and unresponsive lack of customer focus

b. Bureaucratic procedures paralysing the process of taking action on time absence of innovation

c. Extensive companmentalisation of activities with no emphasis on results

If an organisation wishes to come out of such shortcomings, there is a need to reunify miscel­laneous tasks into coherent business processes. The technique used for this purpose is called ‘Business Process Repositioning’ (BPR).

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BPR starts from scratch. It requires fundamental rethinking and a radical redesign of various business processes to achieve dramatic improvement in the four areas of cost, quality, service and speed. Here business process is defined as a collection of activities, which when performed in a predefined manner, produces value for customers (an example of a business process is ‘order to delivery’). The critical factors in redesigning business process, comprise knowledge of information technology, and the ability to think differently about how each specific task can be performed. As alternative process designs are being considered, the emphasis has to be on elimination of as many hands as possible.

In BPR, the process teams responsible for all the activities that come under the process take decisions concerning the outcome. After reengineering, the work becomes satisfying, since people can see the whole job and thus feel empowered. Managers become coaches and not bosses. The structure becomes flat and the total number of employees comes down.

The key success factors for making the BPR effective are:

a. It is not advisable to start reengineering of all the processes simultaneously. Only those proc­esses which are in the deepest trouble, have the greatest impact on customers and are suscepti­ble to redesign, should be chosen first;

b. Persuading people to embrace (or at least not resist) changes;

c. The CEO’s visible involvement in the reengineering programme; aggressive reengineering performance targets; and

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d. Monitor progress and initiate corrective actions.

Essay # 2. Mergers and Acquisitions (M&A) of an Organisation:

M&A has become a popular approach during the past 15-20 years as a means for increasing competitive power, entering into a new field, undertaking geographical expansion, acquiring new competencies, etc. A key advantage of the M&A route over internal development is the speed of implementation of strategic decisions. Also, if planned well it may be possible to acquire a new firm at a lower cost than what may be incurred in the case of internal development or a joint venture.

M&A can take different forms, such as:

(a) Takeover of the controlling interests of one company by another, but both the companies continue to exist;

(b) Merger of one firm with another, leading to liquidation of one of the firms; and

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(c) Purchase of assets and/or liabilities of one firm by another firm as a going concern.

There are three kinds of mergers, viz:

(i) Horizontal Mergers:

A larger firm is formed to get the benefit of the economies of scale and an increased competitive power. However, beyond a certain size regulatory control can be im­posed because of the potential negative impact of such mergers on competition.

(ii) Vertical Mergers:

Such mergers aim to ensure either reliability of inputs-both in terms of quality and availability-or facilitate disposal of outputs. After a vertical merger, control on produc­tion and inventory management is likely to be better. Common ownership of various parts of the value chain ensures reconciliation of divergent interests. It has the potential to create entry barriers (in terms of knowledge and capital), and hence, may be perceived as anti-competitive. However, such mergers often suffer from a number of weaknesses as has been discussed on vertical integration strategy.

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(iii) Conglomerate Mergers:

This kind of mergers are normally employed for diversifying into unrelated activities. The combined company requires special competencies and skills to manage different functions pertaining to each diversified business. The emphasis is on gaining competitive and cost advantages through synergistic effects (depending on the extent of relatedness and complementarity’s), even though the businesses may be in different areas. The role of the corporate office lies in providing individual operating units with expertise and counsel on general management functions across diverse businesses.

Of the above three kinds of mergers, horizontal mergers are the most popular. Large firms operating in mature industries resort to this route to augment market power, reduce costs and in­crease prices. Small firms operating in their growth stage but unable to grow for want of funds and management expertise-are targeted by large firms for a takeover. Sometimes, a number of small firms in the same industry may decide to merge horizontally to pool their management and capital re­sources.

When an industry enters the decline stage, horizontal mergers can still be attractive to gain market power and increase the chances of survival. Vertical mergers are also undertaken during this stage to increase efficiency and reduce cost. In case the future of an industry really turns out to be uncertain and the existing business becomes incapable of providing the desired return, a firm may like to pursue a diversification strategy (related or unrelated) in order to move into new areas quickly through horizontal or conglomerate mergers.

Any M&A activity requires careful planning-as otherwise the anticipated synergies are unlikely to be realised.

The key steps in the process are:

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i. Determination of the purpose of M&A (in terms of enhancing competitive power, increasing the size, achieving economies of scale, ensuring a steady supply of inputs, acquiring new competencies, expanding market reach etc.);

ii. Development of an appropriate strategy for the combined enterprise and supportive func­tional policies that will help in realising the synergy and ensure that the combined firm will be able to augment shareholder value significantly (if the management of the acquiring company is not able to enhance the value of the acquired company by injecting expertise, technical competence and funds to a higher level than what existed prior to the merger, then the merger will be a failure);

iii. Financial analysis of the target; valuation of the target;

iv. Fixing the target price and determining the basis of exchange;

v. Identifying the legal and regulatory formalities to be completed; identifying critical issues in post-merger integration and formulating action plan as needed;

vi. Preparation of a detached checklist of the tasks to be taken up during implementation.

Many an M&A activity fails to deliver results as expected not because the basic idea is faulty, but because of poor planning beforehand and bad management afterwards, i.e., during implementation. Ability to foresee the hindrances resulting from legal requirements and organisational issues, and to develop responses in advance are key to success. 

It is, however, worth mentioning that the valuation of the target has to be done carefully, duly incorporating the acquiring firm’s strategy-so far as the target is concerned-while improving the overall effectiveness of the latter. Specific programmes should be identified for each functional area, and the cost and revenue projections over the next five to ten years should be made duly taking into account the impact of such programmes.

The projected profit performance estimated on this basis will indicate the quantum of value that will be added by the acquiring firm once the merger has been effected. The valuation, thus made, will give an indication of the maximum price the acquiring firm can pay to the target company’s shareholders.

As mentioned, even though mergers undertaken for strategic repositioning of firms are on the rise, there are many underachievers-mergers which have simply not worked well in terms of recover­ing initial costs, improving productivity and efficiency, expanding market reach and margin, etc. The main causes of failure are poor pre-merger planning, and also, inappropriate management of the changes caused by the merger.

Some of the key areas where attention should be paid in order to achieve greater effectiveness in M&A activities are:

a. Spell out, to the minutest details, all the tasks that have to be completed, and identify the officials responsible for each such task; responding to the legal requirements and improving the quality of communications are key priorities;

b. Take steps to maintain the momentum in the operations of the acquired firm, immediately after the merger;

c. Work out programmes for bringing the new organisation into the existing corporate structure of the acquiring firm;

d. Initiate programmes for realising the short-term profit potential assumed at the time of valu­ation;

e. Develop programmes for realising long-term profit potential.

The majority ‘of the risks in M&A lie in the inability of the acquiring firm to integrate the merger. There are certain key success factors and adherence to them ensures that the post-merger activities, as listed above, will be executed successfully. These factors can be classified under two broad categories, viz., organisation and leadership.

Noting the difficulties in making an M&A activity successful, Bitt et al. have spelt out the following attributes of successful acquisitions:

1. Careful and deliberate selection of the target firm and conduct of negotiation

2. Target pre-selection and establishment of a working relationship before acquisition;

3. Financial slack in both the acquiring and the target firms;

4. Low to medium debt position of the merged firm;

5. Acquiring firm and acquired firm having complementary assets/ resources;

6. Continuing investment in R&D and emphasis on innovation; flexibility and ability to adapt changes;

7. Friendly acquisition.

Essay # 3. Divestitures of an Organisation:

Like M&A, divestitures or down scoping represents efforts made by a business to adjust to a changing economic environment. This strategy has often met with more success vis-a-vis a merger. Divestiture involves selling assets, product lines, divisions and subsidiaries to a third party for cash, stock, or a combination of the two.

Divestiture takes place for various reasons, as stated below:

1. Focusing in core areas;

2. Reversal of acquisitions made wrongly;

3. To correct previous investment decisions in diversified activities; increase value of the com­pany by disposing of the underperforming assets/segments;

4. Raise the working capital and pay-off debts;

5. The assets are worth more as part of the buyer’s organisation; the assets are interfering with other profitable operations of the seller;

6. Greater acceptance by the capital market because of specific industry focus;

7. Businesses which were acquired at a low value in the past with a view to enhancing their value by better management are sold off after this has been achieved, leading to profit making;

8. Disposal of businesses where no further improvements are feasible; financing of other attrac­tive opportunities by selling-off some of the existing assets when the going is good.

It must be understood that divestiture does not imply acceptance of failure resulting from wrong or inappropriate decisions taken in the past by the management. A company needs well thought-out plans to decide which businesses are to be retained, which to be disposed of in order to release the resources and also, which are the areas where the resources should be invested.

All such planning needs to be done carefully (including the areas to be divested) to enhance competitive position and maximise the shareholder value. If properly managed, a divestiture can perform a vital economic function resulting in a movement of resources from low value added uses to higher value- added uses.

Selling a division or a company calls for as much planning, thought and expertise as is needed while buying. If the process is not well thought out and managed properly, the selling company may sell the business for the wrong reason to the wrong buyer.

The key steps in selling are:

1. Assess the salability of the business (in terms of relative attractiveness to the prospective buyers);

2. Identify prospective buyers (who are clear about what they want out of the purchase and also how the potential synergy will be realised);

3. Prepare a shortlist of the potential buyers, taking into account the scope for the smooth integration of the division being sold with the buyer’s organisation, the buyer’s ability to pay, credibility in the eyes of the financial community, etc.;

4. Negotiate (secrecy is vital for both the buyer and the seller);

5. Communicate to the employees of the division the rationale behind the divestment and the possibility of a better future for them under the management of the acquiring company;

6. Take action swiftly to execute the deal.

In addition to an outright sale of assets or controlling shares in one or more divisions, there are other forms of divestitures, such as:

(a) Spin-Offs (involving divestment of the shareholding of a parent company in its subsidiary through distribution of shares to its own shareholders, or formation of a separate company- with or without a joint venture partner-which will ultimately takeover the specific business identified for divestment by the selling firm);

(b) Split-Offs (through which the majority holding in a subsidiary is divested by a parent company in favour of a group of shareholders, in lieu of the latter’s relinquishing their shares in the said parent company);

(c) Split-Ups (by which a holding company, which has a number of subsidiaries with 100% hold­ing or less holding, decides to spin off all its subsidiaries, leading to liquidation of the holding company);

(d) Equity carve outs (by which part of a subsidiary’s equity owned by the parent company is offered to the public, bringing in an infusion of cash to the parent, without loss of control);

(e) Leveraged buyouts (in which the manager( s) of one of the divisions (or the firm itself) and/ or an external group buys all the assets of the business by forming a new company-financed largely with debt; the new owner makes the new firm private with the ultimate aim of selling part of the assets taken over, immediately after the deal has been completed; the new owner may even make the company public again, after adding the necessary value, thereby enabling them to not only recoup the original investment but also to make a substantial gain at the time of public issue); and

(f) Employee stock option plan (which is another method of divestment; to operate such a plan, the employers make a superannuation contribution to a trust meant for their employees and the trust in turn buys their own company’s stock, with or without debts from banks financial institutions).

All the methods of divestiture referred to above are already in use in advanced countries. But for a developing economy like India, not all of these will be immediately applicable, mainly due to statutory restrictions to undertake such methods of divestment.

Essay # 4. Strategic Alliances (SA) of an Organisation:

Strategic alliances are often employed by firms to meet specific requirements of their businesses since it is not always possible to possess all the knowledge and expertise that are needed to compete successfully.

There are various forms of strategic alliances, viz:

1. Licensing joint ventures

2. Joint R&D

3. Supply arrangement co-production, etc.

Strategic alliances and collaborative arrangements are being preferred increasingly by firms to face the onslaught of globalisation. Asymmetry in skills can be overcome through SA. In general, if managed properly, SAs can help in combining resources, capabilities and core competencies to pur­sue common interests and goals.

There can be a number of objectives behind entering into an SA.

These are:

1. Access new markets.

2. Acquire know-how and establish contacts.

3. Reduce risks.

4. Strengthen/build competencies in the areas needed reduce lead time to build competencies.

5. Share fixed cost and resources.

6. Develop marketing and distribution resources.

There can be three types of SA, viz:

(a) Combining the manufacturing and R&D strengths of one partner with the market knowledge and distribution network of the other partner; such SAs enable the pooling of diverse compe­tencies, risk sharing and resource conservation;

(b) Combining the downstream activities (such as assembly, sales and services) of the two firms: this will help in having broader product lines, pooling together the marketing know-how of both firms, as well as other competencies, in the downstream; and

(c) Combining upstream activities, such as R&D and manufacturing, through which important complementary technologies can be made available.

A firm needs to take great care while forming an SA.

The key steps are:

a. Get the support of the key stakeholders (including senior managers).

b. Identify the areas of cooperation and articulate the benefits.

Note:

The above two steps must bring out the following clearly:

1. An agreement on how the partners can complement each other;

2. Clarity on how the SA can support the business strategies of both the cooperating firms;

3. Negotiate (the formation of a task force consisting of officials of both sides who will be involved in running the SA later will be necessary); and

4. Formalise the miscellaneous details of the SA (ownership structure, legal liabilities of the partners, staffing of the SA, physical location of SA, financial objectives, etc.).

Some of the key problems with SA are:

1. The chance of one partner getting ‘deskilled’ or ‘hollowed-out‘ if proper care is not taken (for example, many US firms, which entered into a large number of SAs with Japanese firms in the mid-70s and 80s, have had this unfortunate experience).

2. In the SAs that involve the outsourcing of production, it is quite possible that the partner outsourcing the production may eventually get ‘locked-out’ implying that the partner will lose opportunities to learn new skills and technologies progressively; as a matter of fact outsourcing can be a potential source of future competition.

3. The divergent objectives of partners can lead to conflicts in day-today matters;

4. A day-to-day contact between the managers and engineers of the two partner companies may lead to an exchange and sharing of information beyond the scope of the agreement; even though the information may be divulged incrementally, cumulatively it can represent a rich body of knowledge and insights.

The above-mentioned negative outcomes may be experienced when short term financial consid­erations dominate the broader vision, such as the importance of long-term competitiveness. Also, not all partners are good at learning. Another problem may be the SBU structure of modern corporations, in which the SBU managers are concerned only with their respective competencies and not the core competencies that underlie all the SBUs of the company.

As a result, when a particular SBU enters into an SA, there can be a possibility that the SBU may be exposing the underlying competencies of the entire corporation to the SA partner, who just by making the finance available or providing market access, will have the opportunity to learn new technologies that had not been available to it hitherto.

For the success of an SA, the key requirements shall be as follows:

(a) Ensuring a healthy balance between contribution and dependency and not allowing this to shift;

(b) Total commitment of all the partners in giving competent managerial and technical re­sources to set up and manage the venture: governance is the key;

(c) The ability to sense the willingness and determination of the partner( s) to learn competencies, if this is too high in case of one partner, the other partner will get into trouble, unless proper protection is built-in;

(d) Successful integration of day-to-day processes as well as a mutual understanding and apprecia­tion of corporate values and culture;

(e) Both partners should see the SA as profitable and must not have any plan to exit

(f) Asking the right questions at the beginning itself to thrash out any possible difficulties later;

(g) Built-in flexibility to adjust to the changes in market and technology;

(h) Knowing the key members of the partner companies at all levels socially; and

(i) Celebrating achievements together.

Essay # 5. Financial Restructuring of an Organisation:

Invariably, as a firm restructures itself through M&A, internal streamlining, divestitures or SA, there will be a need for significant financial restructuring. In the post-restructuring phase, there can be a number of firms.-in place of the one or two firms that existed at the beginning-which may have come into being as a result of M&A, spin-offs, or entering into SA. This will require either a flagship company or an apex body to coordinate the activities of all the firms belonging to the group.

Financial restructuring of the parent company may involve one or more of the following:

a. A change in the ownership structure in line with the objectives of repositioning; this may include changes in:

(i) The majority holding,

(ii) Holding by financial institutions, and

(iii) Foreign holdings;

b. A change in the ratio of preference and equity holding; a change in the debt-equity ratio;

c. A change in the mix of secured and unsecured loans (including the use of different kinds of instruments);

d. Accessing the international money and capital market; and

e. An innovative use of tax havens across the world to exploit the benefits arising out of various international tax treaties.

The above list is not exhaustive. No details on each of these areas are being provided here since the same are available in any standard corporate finance textbook. It must be stressed that a financial restructuring decision is of strategic importance to the firm and should be taken after duly balancing both long and short-term imperatives facing the firm.

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