Reorganization refers to the legal process of modifying, merging, or acquiring a company and its assets. Typically undertaken to solve low profit margins, reasons for revamping vary as per the needs of a firm. For instance, in 2017, Wall Street Journal had announced a major editorial reorganization to help the 128-year-old newspaper adopt to the requirements of digital news reporting.
- Reorganization is the legal process of revamping the existing structure of a company or a part of it with a sense of urgency to enhance its efficiency. It could involve modifying, merging, or acquiring a company and its assets to save it from bankruptcy or low-profit marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. .
- The legal methodology for undertaking such changes is clearly defined and outlined in the IRS tax code. Of most importance, is the handling and transferring of asset shares from one company to another during a merger and acquisition.
- Restructuring can mean reorganization as well but is usually reserved for describing hierarchal changes within the company only.
How Does Reorganization Work?
A company undertakes various measures to ensure that it stays in business. It focuses on maximizing profits, gaining an edge over its competitors and attaining a profound market standing. Reorganization is one such measure that companies deploy to ensure they stay in business. It could also come as a saving grace when a company has to go for liquidation due to bankruptcy.
For instance, if a firm is under heavy debt and cannot make payments for interest, salary, expenses or principal amount, it may revamp its structure to increase the amount of capital. Lay-offs, mergers, corporate buyouts, recapitalizationRecapitalizationA recapitalization is a method of restructuring the ratios of various capital-generating modes, such as debt, equity, and preference shares, based on WACC and other company requirements, such as desired control level. or changing the existing business structure are ways to attain reorganization. It can be challenging for both employees and employers regardless of whether the restructuring is happening under good or bad conditions.
The reorganization is a legal process. Courts and lawyers often emerge especially in the case of bankruptcy and mergers. According to the Harvard Business Review, at least two-thirds of such changes are motivated to deliver at least some performance improvement. Reorg and reorganization are used interchangeably.
Why Do Companies Go For Reorganization?
There is a multitude of reasons why a company enters the reorganization process. The most common reason is profit. Expanding business operations, customer bases, and operative reach are all benefits of reorgs.
Other reasons can be more clearly seen in the different types of reorgs as the process is subjective in nature, and each company can essentially create its own. The United States IRS (Section 368) recognizes seven types of reorganization. Some of them are mergers, subsidiary acquisition of stock, transfer spin-offs or split-offsSpin-offs Or Split-offsBoth spin-off and split-off are the two different forms of divestitures. In a spin-off, the subsidiary company's shares are distributed among all of the shareholders. In contrast, in a split-off, the stakeholders have to surrender their parent company's shareholding for receiving the subsidiary company's shares., etc.
Listed below are some reasons for reorgs.
- Share control and majority stake is an important reason why many reorgs take place.
- Another reason is mergersMergersA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share.. Two separate legal entities decide to move forward as one during a merger. Consolidation of assets is common with a merger, but each company has its own process. This is mainly dependent on what terms the two parties agree to.
- When one company acquires another company entirely or the majority of its shares to create a majority stake, reorg occurs. In an acquisition, a company can still retain its own name and legal existence. Important to note with acquisition is the treatment of the acquired company’s asset shares. The purchasing company is within legal rights to make decisions without the votes of the acquired company’s shareholders.
- Reorgs also occur for liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order., or bankruptcy of a firm drowning in debt. Bankruptcy is a legal process. As such, liquidation of a company’s assets especially in relation to the hierarchy of shareholders must be done a certain way.
- Similarly, recapitalization itself is another important reason. If a company is too largely weighted in bonds and deems it is overleveraged, a solution is recapitalizing and reissuing new equity shares to re-balance.
- Perhaps one of the better-known reorganization examples is the merger of J.P. Morgan with Chase Manhattan Bank. J.P. Morgan was primarily an investment bank, while Chase Manhattan was a traditional retail bank.
- In 2000, the two merged to become J.P. Morgan Chase & Co., with Chase acquiring J.P. Morgan. It had been reported that the merger brought together $660 billion in assets, and the merged bank ranked third as the largest bank holding in the nation.
- J.P. Morgan Chase & Co. never looked back ever since flowing from market capitalization when retail deposits were clubbed with institutional investing.
Reorganization vs Restructuring
- It is essential to note that both of these terms essentially mean the same thing, and are often used interchangeably – particularly online. A clear distinction is that reorganization is a legal process that requires legal filings with the IRS, whereas restructuring is not.
- Reorganization can include the dissolution, bankruptcy, acquisition, and merging of companies. Restructuring focuses on making an existing company more efficient. This is done in a myriad of ways, and companies each have their own process.
- That being said, reorganization is a form of restructuring – one is re-forming their company’s basic workings. Restructuring can often describe organizational changes at the management level (whereas reorgs pertain to legal changes at the corporate level.) Examples of such include changes in management personnel and C-Suite executives.
- Changes in business and sales teams or marketing teams are also common in restructures. Production efficiency is at the core of restructuring, and depending on what is lacking, a company changes.
- Most employees will go through several reorgs/restructure throughout their careers. They are a controversial time for any employee, as can include layoffs.
This has been a guide to What is Reorganization & its Meaning. Here we discuss types of reorganization and how it works along with some examples. You may also have a look at the following articles to learn more –