Corporate restructuring usually involves changes in ownership, business mix, asset mix and alliances with a view to enhance shareholder value. So, such an exercise involves ownership restructuring, business restructuring and asset restructuring.
There may be various motives to be satisfied while undertaking a corporate restructuring exercise. These could be both internal and external to the target company. A target may restructure as a response to external factors such as increasing competition, to overcome slow growth and lower profitability within the industry or even to circumvent a government regulation. Alternatively, it may restructure due to internal reasons such as to utilize its underutilized physical, human and managerial resources, displace existing management, achieve diversification, achieve economies of scale with proportionately less capital investment, or more.
Specifically, dimensions of corporate restructuring could involve the following:
- Financial Restructuring
- Technological Restructuring
- Market Restructuring
- Organizational Restructuring
VALUATION AND WHY YOUR CORPORATE RESTRUCTURING NEEDS TO CHECK CASH FLOWS
Irrespective of the motive or the associated dimension, a key pre-requisite of corporate restructuring is the inculcation of independent professionals such as a legal counsel and independent valuation experts. The legal counsel ensures adherence to all applicable laws, whereas the valuation expert provides an understanding of the fair value of the target, subject to the appropriate context of restructuring and the applicable tax regime. Valuation, which is a vital pre-requisite of any corporate restructuring exercise, is arrived at via methods such as Discounted Cash Flow (DCF), Net Asset Value (NAV), Market Multiple and Profit Earning capacity Value (PECV).
SO WHAT DO YOU DO TO START?
Firstly, companies should involve experts, who have handled restructuring engagements, early on in the process. Secondly, as time is of essence, responsiveness and agility in executing a restructuring exercise is key and ought to be time bound. Thirdly, all information about the target ought to be organized and made readily accessible to the experts, in order to expedite the process. Fourthly, companies need to develop a strategic communications strategy to disclose forward progress to relevant stakeholders i.e. from employees and vendors to financial institutions and the media. Lastly, companies need to be sensitive to stakeholders, as emotions run high during such an exercise. Stakeholders need to be reassured that their interests are of significance to the process and are therefore being addressed appropriately.
WHAT WORKS -AND WHAT DOESN’T
Examples abound where mergers (corporate restructuring at the merged entity) have led to failures. Bank of America’s (BofA) acquisition of Countrywide, in 2008, for US$2.5bn was a result of faulty valuation which led to losses of US$40bn for BofA. Acquisition of retailer Sears by Kmart in 2005, for US$ 11bn, saw Sears revenues fall by 10% post the merger. Within the technology domain, eBay’s acquisition of Skype for US$ 2.6bn in 2005 and its sale for US$ 1.9bn in 2009 depicts erosion of value for the stakeholders involved. Lastly, an example of a strategic ‘mis-match’ was the failed merger of Dalmier Benz buying Chrysler for US$36bn and later involving Cerbus Capital Management for US$650mn for severing the ties with Chrysler. Their respective business models were not compatible, where the target i.e. Chrysler focused on the low income segment and the buyer aimed at the luxury segment. In our opinion, these examples highlight that corporate restructuring is as much an art as it is science.
To conclude, we would like to highlight certain issues that companies face, during the corporate restructuring process. These may be financial, operational, strategic and legal. For example, from a financial perspective, issues such as short term cash flow may emerge as an immediate concern as well as a requirement to restructure their corporate debt. The company may face rapid changes in its relationships with their lenders. From an operational perspective, there may be momentary disruption to the supply chain and the company may want to exit from a business unit, but its management may not know how to handle such a separation. Additionally, the target maybe required taking strategic calls on entering newer markets to increase profitability, but may neither have the market knowledge nor the operational and personnel bandwidth to deliver on the requirement. These are key risks, the manifestation of which can undermine the entire process.
Appearing in Business, InBusiness Online, on July 27, 2017 - click here to read more