Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
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- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
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Asset Restructuring is the process of buying or selling of a company’s assets that comprise of far greater than half of the target company’s consolidated assets. It’s usually a one-time expense that needs to be funded by any company when the restructuring takes place. Asset restructuring is a cost that may occur during the entire process of strategically writing off its assets or sometimes shifting the entire production facility to any new location, shutting down the manufacturing facilities and uniquely laying off all the non-strategic employees.
Very recently, Toshiba announced its plan to split its four in-house companies into wholly owned subsidiaries signaling that it may completely get out of the business of making nuclear plants.
Several companies have successfully developed the restructuring wings and authorities in many countries. A number of MNCs in various nations are keenly involved in this herculean task and are strategically devising the process of asset restructuring.
- Why need asset restructuring?
- Types of Restructuring
- Outcomes of Asset Restructuring
- Key Benefits of Asset Restructuring
- Costs of Asset Restructuring
- Asset Restructuring Charge
- How does Asset Restructuring work?
- Asset Restructuring Example 1
- Asset Restructuring Example 2
- Why is Asset Restructuring Important?
Why need asset restructuring?
Normally, people take a loan from banks while purchasing any immobile property. Several banks lend money to them without making proper background verification of the customers whether they would be able to repay the loan amount with interest within the stipulated time period or their creditworthiness. Hence, the chances of the loan going bad increases significantly and thus might harm these financial institutions by increasing their fiscal debts.
Therefore, the concept of asset restructuring developed for checking such frauds and provide appropriate repair if sudden fiscal loss appears. By such actions, several frauds were successfully prevented and uniquely addressed with a significant fall in fraudulent and criminal activities was noticed. In addition, multiple lending frauds could even be prevented by a robust asset restructuring mechanism. A number of companies are operational on the key project and the same concept has successfully been implemented across several countries.
Asset restructuring could be implemented due to a variety of reasons including, targeting the organization to become more competitive, successfully survive and emerge strongly from the existing hostile economic environment, or position the company to move towards a completely new direction.
Types of Restructuring
There’s a wide range of restructuring available as shown in the diagram below:
Asset restructuring also involves a well-planned sale of intangible or tangible assets of the target company for generating cash.
Restructuring of assets could also take the form of divestiture or a well-planned divestment that comprises of the assets sales of the company, or brand, or divisions or product lines to the third party.
It can also be termed as an acquisition in reverse.
Need for Divestment
- Strategic change
- Strategically selling of cash cows
- Unique disposal of non-profitable businesses
- Unlocking attractive value
Sell-off could also be a part of asset restructuring process with the company selling a portion of its non-core business to any agreed upon third-party. This could be considered a normal practice by several huge companies for selling off or divesting their less profitable or non-profitable businesses for avoiding any further pressure on its key resources.
Many times the company might trade-off their lucrative but non-essential businesses to generate enough liquidity for continuing with its daily operations profitably.
Outcomes of Asset Restructuring
Apart from the positive and favorable results of this asset restructuring program, there are also certain byproducts of the operation such as, a one-time item which is generally an accounting term in any organization’s income statement which is believed to be non-recurring by nature. Further, for getting the right evaluation on any company’s financial performance, one-time elements are normally excluded by investors and analysts while accurately examining any company. One-time elements usually impact any company’s earnings from operations, however, may sometimes have a healthy impact too.
Key Benefits of Asset Restructuring
- Post restructuring of the company’s major non-core and non-profitable assets, its business become attractively integrated and highly profitable. The company mostly hires legal and financial advisors for strategically negotiating and crafting the restructuring plans.
- Asset restructuring must lead to much smoother and highly economic business operations as the selling of non-strategic assets and in turn purchase of several other major assets that are crucial for expanding the business operations is believed to continue to deliver sustainable long-term company growth while offering attractive shareholder returns.
Costs of Asset Restructuring
The process of asset restructuring definitely incurs some costs to the company including, the costs related to the writing off of the assets, minimizing or removing service or product lines, discarding agreements, removing divisions and shutting down the facilities. Further, purchasing some key property adds to the overall asset restructuring costs.
Asset Restructuring Charge
A one-time expense that needs to be funded by any organization when it goes through the process of asset reorganization or restructuring. The restructuring charge might be incurred while writing off non-core assets or shifting the entire production facility to another location, shutting down the manufacturing facility and while laying off its employees to reduce costs.
Ericsson in Q1 2016 reported SEK 13.4 billion of restructuring costs, asset write-downs due to which its reported a Net loss of SEK 2.1 billion in Q1 2016.
Asset restructuring is a type of operational restructuring where a company’s assets might be strategically bought or sold off and that completely depends on the entire process of expanding the economic feasibility of the core business model. Some examples include abandonment of non-core product lines or sale of non-strategic and non-profitable divisions, well-planned mergers, or cost optimization efforts such as shutting down of non-profitable facilities. Asset restructuring is mostly being performed by the companies under major bankruptcy and turnaround situations for saving the business.
How does Asset Restructuring work?
During a key transition, a bankruptcy or a buyout, for instance, the management might consider strategic asset restructuring of the company. Asset restructuring might include several measures for eliminating diseconomies of scale, like streamlining and reorganizing the core operations and the management, consolidating new owners or buyers management teams.
Asset Restructuring might involve new capital, new management, and any new prospect for rethinking the business plan and organization. A fruitful asset restructuring would usually lead to a higher company’s valuation.
Let’s take some examples for getting some clarity on Asset Restructuring:
Asset Restructuring Example 1
Example 1: Assume a bank having some old furniture and a traditional locker with it which is of no use to the bank because it could be treated as non-performing assets or NPAs. Now, the top management of the bank decides to sell it off at some predetermined price. This would allow the bank to get rid of such NPAs while making some money from it which was already of no use to the bank.
However, one must keep in mind a few points about accounting entries to be made while selling any fixed assets including,
- The recording of depreciation expense of the asset till its sales date.
- Removing the accumulated depreciation and cost of the asset.
- Recording the total amount received.
- Any difference must be recorded as a loss or gain.
Asset Restructuring Example 2
Example 2: Consider a calculator being originally bought for $100 while simultaneously depreciated for straight 5 years in a row by applying the straight-line depreciation method and having a salvage value of $0. The ledger entries after 2 years would appear like this:
Product – Calculator Accumulated Depreciation
$100 $20 (yr 1)
$20 (yr 2)
Currently, the decision is to sell the calculator for $80. Further, the entries must be made in the manner that nullifies the accumulated and equipment depreciation accounts as they would cease to exist after the transaction. In addition, one must also consider accounts receivable or cash that is currently available owing to the sale. The journal entries for same appears as follows:
Dr. Cash $80
Dr. Accumulated Depreciation $40
Cr. Product – Calculator $100
But, these credits and debits doesn’t match. This can be corrected by introducing another account referred as Gain (Loss) on the Disposition of Assets or like. A credit entry is treated as a Gain (such as Revenue) and a debit entry treated as a Loss (such as Expense). For this case, a credit entry of $20 is illustrated below:
Dr. Cash $80
Dr. Accumulated Depreciation $40
Cr. Product – Calculator $100
Cr. Gain or Loss on Disposition $20
Hence, credits and debits match!
Now, let’s see the impact on Cash Flow Statement. We observe that the net value of entire fixed assets would get reduced across the company’s balance sheet (being a cash source) and we have grown the overall cash account. This illustrates the transaction’s cash flows.
Another effect includes the net Gain (Loss) on asset’s disposition which is again a non-cash activity that surfaces on the company’s combined income statement whereas reduces or surges taxable income. Likewise, Depreciation Expenditure is a non-cash activity which lowers or expands Net Income Before Taxes (NBIT) beyond limits. Finally, the consolidated income statement appears as follows:
Minus Expense $20
Net Profit from Operations $80
Gain or Loss on disposing off the product $20
Net Income prior to Taxes $82
Net Income $77
In the example above, the company has overstated the net income by a non-cash activity of $20 (whereas, depreciation expenditure is believed to lower the net income as it’s a non-cash expenditure). Hence, one must deduct this non-cash activity as depicted on the cash flow statements for compensating for net income’s over-statement. This comes under operating cash flows as associated with depreciation expenditure.
Why is Asset Restructuring Important?
A strategically restructured company particularly, through asset restructuring is at least tentatively, more profitable, more efficient and more focused on its operations. But, asset restructuring could impact and might even weaken the existing stockholder’s stock values.
The primary objective of asset restructuring is to improve shareholder value.
Besides this several other reasons include,
- Alterations in competitive environment
There could be an accelerated change in technology and globally expanding competitive pressures due to huge foreign competition.
The management might decide to go for asset restructuring of the company for keenly focusing on major competencies through strategic divestment of non-core businesses while these attractive disinvestments could deliver impressive valuations.
A Few More Examples…
- AT&T reported significant expansion in its share price after the company’s strategic declaration of firing approximately 40,000 workers post its core profits came under pressure.
- In early 90s, Daewoo witnessed problems controlling its hugely well-diversified empire. However, by shutting down its non-profitable operations, downsizing and restructuring, it rephrased its achievement story.
- Operating Cash Flow Formula | Calculation | Example
- Causes and Impact of Net Losses
- What is Divesting/Divestiture?
- What are Tangible Assets?
- What is Restructuring Cost
- Impairment of Assets
- Asset Turnover Ratio | Formula | Example | Calculation
- ROIC – Return on Invested Capital
- Return on Equity
Every company does perform certain asset restructuring operations to get rid of its non-performing assets (NPAs) and to improve their financial position while making their balance sheets attractive for the investors. Therefore, through the process of “Asset Restructuring” companies often avoid making huge piles non-performing assets while enhancing cash on their balance sheets.