Restructuring

Restructuring is the corporate management term for the act of partially dismantling or otherwise reorganizing a company for the purpose of making it more profitable. Also known as corporate restructuring and financial restructuring.

Restructuring is often done as part of a bankruptcy or of a strategic takeover by another firm, such as a leveraged buyout by a private equity firm.

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 reducing or reorganizing 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 the 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^[1]

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.^[1]

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

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
A major public relations campaign to reposition the company with consumers
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.

References

^ ^a ^b Joseph Swanson and Peter Marshall, Houlihan Lokey and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide to Corporate Restructuring, Preface. City & Financial Publishing, 1st edition ISBN: 9781905121311

Valuations in restructuring

Restructuring in Europe

Characteristics

Results

References

See also