Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.
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 reorganizing or reducing 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 a distressed situation.
Corporate debt restructuring is the reorganization of companies’ outstanding liabilities. It is generally a mechanism used by companies which are facing difficulties in repaying their debts. In the process of restructuring, the credit obligations are spread out over longer duration with smaller payments. This allows company’s ability to meet debt obligations. Also, as part of process, some creditors may agree to exchange debt for some portion of equity. It is based on the principle that restructuring facilities available to companies in a timely and transparent matter goes a long way in ensuring their viability which is sometimes threatened by internal and external factors. This process tries to resolve the difficulties faced by the corporate sector and enables them to become viable again.
- 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
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.
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.
- Cash management and cash generation during crisis
- Impaired Loan Advisory Services (ILAS)
- Retention of corporate management in the form of "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)
- Improving the efficiency and productivity through new investments, R&D and business engineering.
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.
An Example Of Restructured Company RESTRUCTURING OF LITHAN ACADEMY Overview of Lithan Academy Lithan Company redefines adult education via learning innovation (Loh, 2016). The company serves as a lifelong career progression for individuals as well as learning partner for individuals. Lithan seeks to also provide solutions to enterprises pertaining training and talent nurturing.
The education services provided by Lithan Academy are highly customized. Lithan provides programs that are blended to ensure relevancy, affordability, flexibility and personalization in learning (Lithan, 2016). Learning can be done without geographical boundaries through the virtual blended and good delivery of content in whatever place one may be at a given point.
Learning in Lithan academy relies on technology and modern education analytics to promote collaborative education learning that ensures best education outcomes (Chowdhury, 2014). The use of innovative technology by Lithan has greatly improved learning delivery as it can be done from anywhere and anytime thus giving an individual the experience of close mentorship and support. Lithan ensures delivery of tangible skills that can be applied to businesses using the work based learning pedagogy.
Lithan, therefore, serves as the training and recruitment partner to most enterprises and companies. The place and train program that enhances talent recruitment make it possible and easy for companies to acquire unique talents cost effectively. The Competency Learning as a Service makes the workplace learning very nice with the help of on-demand curriculum, learning facilitation as well as learning technology among others.
Lithan has become a company to be celebrated over the years due to the provision of relevant learning journeys which enhance students’ job performance. The employers of the students at Lithan also enjoy tangible outcomes. The latter are combined to form the measure of success that is often used by the Lithan.
Business Case for Restructuring There are several things that make it necessary to reassess the situation in Lithan Academy. The opportunities, as well as challenges at hand, make it imperative to relook at the present design and structure of the institution for better services and increased returns. First, the level of employee redundancy in Lithan Academy has been high for a long time. The duties and responsibilities to be done exceed the number of employees in place. This implies undeserving of the Lithan employed workers. Additionally, the salary payment to these many employees is very high in comparison with the services they deliver in the institution.
Lithan is faced with the opportunity of making use of technology to increase its returns (Chowdhury, 2014). A higher investment in technology will help reduce the number of employees in the institution. Some of the duties that require many employees can collectively be done using technological advancements. Technological use in the institution will offer a solution to the problem of employee redundancy.
Additionally, developing go-to-market structure will help expand the customer base for Lithan Academy. The structure of promoting the institution far beyond Singapore has not been adopted and hence serves as an opportunity that is essential to be exploited. Better utilization of technological advancement can aid the turning of this opportunity to the benefit of the Lithan organization.
The management team has had a thorough review and is determined to have new ways of working with enhanced technology in Lithan introduced. There is a need to have the present structure relooked at to allow achievement of the desired goals of Lithan Academy.
The current technology team comprises of thirty members; a number that surpasses the required one and all this calls for reconsideration. All these job positions are of the highest payment grade in the payroll and they risk redundancy. Adequate actions have been taken to ensure that the feared redundancies are well taken care of. The measures taken have seen ten posts deleted and declared vacant.
The chain of command used in Lithan Academy features many autocratic tendencies. There is rising need to have a flat structure of organization where the employees can are able to have a voice within the organization. Presently, many unsound decisions are made concerning the affairs of Lithan Academy. The cause of such decisions is too much centralization of authority that limits the views and ideas from employees.
Presently, vertical coordination of activities is greatly upheld in Lithan Academy. The employees are subjected to many unethical practices but cannot express themselves as the communication is one way. The tasks the top leaders must perform within a day are above the allowed extent due to much focus on authority rather than employee expertise. The redundancy levels among the employees are at highest level. The single task single employee framework makes it possible to have the number of employees exceeding the number of tasks to be accomplished. Lithan Academy spends a lot of money in terms of salaries and wages of the employees whose services are redundant.
These many challenges and pressing issues increase the cries for the restructuring of the Lithan Academy. The present structure proves to be having so many loopholes that affect not only the organization but also those who work in the organization. The management team has a mandate of reviewing and reshaping the manner in which Lithan performs its activities. Incorporation of elements that will help eliminate the challenges experienced in the current structure is the main focus of the restructure.
The organic structure serves a good proposal of the type of organizational structure that Lithan Academy has to implement. The structure can be anticipated to bring the expected change in terms of employee handling, decision making, and effective communication within the institution. In this structure, a flat model of doing things can be more suitable. The organic structure will allow horizontal coordination of all activities of the organization. The communication in this structure will be lateral and suggestions, as well as opinions, will acceptable. Decentralization of authority, as well as the use of teamwork, takes much action rather than autocracy in the management of the institution.
- Infoworld - "HP to slash 14,500 jobs in major restructuring move"
- CBC News - "Stelco unveils restructuring plan"
- Web site of the TRACE Project, a large scale European trade union project that has created a mass of resources, training materials, etc about restructuring
- Web site of the MIRE Project (Monitoring Innovative Restructuring in Europe) including thematic analysis and 30 case studies
- European Restructuring Toolbox on Anticipedia web site of the European Commission
- Health in Restructuring: Innovative Approaches and Policy Recommendations (HIRES)
- European Restructuring Monitor (Eurofound)- Tracks large-scale restructuring events in Europe and covers the 28 EU Member States plus Norway