Investment Banking – Restructuring and Reorganization

Updated on May 2, 2024
Article byDheeraj Vaidya, CFA, FRM

Investment Banking Restructuring and Reorganization

Restructuring is when one reorganizes the ownership, operational, or legal structure. Reorganization is when one designs a plan to revive a company that became bankrupt or is in financial trouble.

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This article is the 8th tutorial out of the 9th post tutorial on Investment Banking Basics.

Here, we discuss investment banking – restructuring and reorganization.

In this article, we discuss investment banking restructuring and reorganization.

Key Takeaways

  • Restructuring involves reorganizing a company’s ownership, operational, or legal structure. Reorganization, conversely, refers to developing a plan to revive a financially troubled or bankrupt company. 
  • The restructuring may involve selling off assets to generate cash or converting debt into securities, such as offering stocks to bondholders. Investment bankers can assist in restructuring deals by facilitating asset sales or helping to sell the entire company. 
  • Reorganization focuses on reshaping the company’s strategy. Investment bankers take on a consultant role, analyzing the market, supporting management in identifying new focus areas, and helping strengthen the company’s financials. 

Investment Banking Restructuring and Reorganization Video

And we have also looked at Investment Banking Pitch Books, bringing us to the last part of the investment banking restructuring and reorganization. If you look at investment banking restructuring and reorganization, this becomes very important in the context of those companies which are about to go bankrupt. They face margin pressure cash issues and may want to reorganize very quickly. Hence, they take help from top investment banks, or they may be investment banks that can help them strategically restructure the financial aspects of their equity and debt. So, investment banks have a larger role to play. Hence, there are two categories: reorganizing and restructuring.

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Restructuring and Reorganization – Explained in Video

 

Investment Banking – Restructuring

Investment Banking Restructuring

Let us now consider why investment banks are important for reorganizing or restructuring companies. So, why are these required? When is it applicable for different companies? Companies often may not pay to do good in their business and face cost pressure as they cannot pay their set-off cash obligations, which may be related to debt etc. So, they are a set of companies, let us assume, on the verge of bankruptcy. What can these companies do? they can opt for either of the two or mix for both, one known as restructuring and the other known as reorganization. For these two activities, investor bankers come in handy.

So, how restructuring and investment bankers can help? Let us say there is a huge debt piled up in ABC Co., so restructuring would mean selling off part of the assets to meet the cash obligation or paying off the debt that normally happens second. It could be converting a portion of debt into securities. So, those who are bondholders would get stocks in return for debt. It may also mean that one can sell the company entirely so investment bankers can help restructure the original deal with the financiers and find a way out between this. Primarily to rescue the firm from bankruptcy which will ultimately lead to nothing but sell company where you know only the debt holder may be able to recover the partial amount. So, this is where investment bankers can be handy.

Investment Banking – Reorganization

Investment Banking Reorganization

The second part involves reorganization. Reorganization means that you are reorganizing the company’s strategy altogether. Maybe earlier, the company was into emerging markets. Still, you probably may not have the appetite to pay for products we are into, so just realigning the strategy from emerging to developed markets can help. So, the investment bankers take the consultant role, analyze completion, support the management in the new focus areas and help them revive their financials. It may also lead to a change in administration. So, an investment bank, for a fee, performs reorganization and restructuring. So, it can be a standard fee or a fee based on performance, so this is where investor bankers play a good role to look at. So, with this, we hope that you now fully understand restructuring. So, we hope you know this provided a good glimpse of the different kinds of functions of investment banking.

Frequently Asked Questions (FAQs)

1. What are the advantages associated with investment banking restructuring and reorganization? 

Investment banking restructuring and reorganization offer several advantages. First, they can help troubled companies regain financial stability and improve operational efficiency. This may involve restructuring debt, renegotiating contracts, or implementing cost-cutting measures. Furthermore, these processes can attract new investors and restore market confidence, potentially leading to increased share prices and access to capital. 

2.   What are the disadvantages associated with investment banking restructuring and reorganization? 

Investment banking restructuring and reorganization also have certain disadvantages. Firstly, these processes can be complex and time-consuming, requiring extensive planning, negotiations, and coordination among various stakeholders. Secondly, there may be costs associated with professional fees, legal expenses, and potential workforce reductions. Additionally, the restructuring and reorganization efforts may not guarantee success, and companies may still face challenges in a highly competitive market. 

3. What is recapitalization vs. investment banking restructuring and reorganization? 

Recapitalization and investment banking restructuring and reorganization are related but distinct concepts. Recapitalization refers to changing a company’s capital structure by altering the proportion of debt and equity. On the other hand, investment banking restructuring and reorganization encompass a broader range of activities, including strategic, operational, and financial changes to address underperformance, financial distress, or changing market conditions. 

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