Restructuring

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Restructuring Meaning

Restructuring is the corporate activity to reform the firm’s operational strategy for successful goal accomplishment. It helps soar the efficacy in commercial activities, facilitating the economic status of the corporation. Moreover, there are two critical types of corporate restructuring in a company, namely, organizational and financial.

Please note that it can incorporate reconfigurations or other ground-level makeovers like dividing, attaching, disintegrating, or shifting business units not impacting the surface structure. Also, its benefits comprise increased communication, improvement in organizational finances, matching with competitors, and enhanced employee productivity.

Key Takeaways

  • Restructuring is a method to execute the organizational redesigning program for its financial condition advancement. Additionally, it assists in boosting the operational efficacy resulting in successful outputs.
  • This entails surface-level adjustments like splitting, adding, dissolving, or transferring non-productive business sectors or deeper financial refurbishments.
  • It is categorized into two major types, namely, organizational and financial restructuring. While the former aims at functional alterations, the latter is focused on economic changes.
  • Its benefits are enhanced interaction, refined company funds, equalizing the competition with rivals, and better employee productiveness.

Restructuring Explained

Restructuring can happen following insolvency, continue changing markets, or upon approving further structural improvements such as merging with another enterprise. Additionally, the business possibly comprises arrears management in the reorganization scheme accompanying functional and structural changes.

Determined by the severity of the institution’s situation, it may transpire formally (lawful corporate restructuring actions) or informally (behind the scenes). Please note that undertaking this action can be complicated and hard. Therefore, the Board of Directors (BOD)Board Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more typically takes this decision which may include hiring underwritersUnderwritersAn underwriter is an individual or an institution who is involved in the act of underwriting the issue of securities of a company for a fee.read more.

To clarify, the establishment must contemplate reorganizing itself if it,

  1. Is documenting a logically substandard business outcome
  2. Couldn’t reimburse short-term or long-term debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more repayment
  3. Fails to make a profit that fulfills the stockholders’ expectations
  4. Has experienced an incomparable severe case like a slump in major clients leading to financial hardship
  5. Is thriving in some divisions and is lagging in others

Most importantly, company reorganizationReorganizationReorganization 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 firm's needs. For instance, in 2017, Wall Street Journal had announced a major editorial reorganization to help the 128-year-old newspaper adapt to the requirements of digital news reporting.read more is advantageous only if problem-solving can assist it in dealing productively in the foreseeable future. It can also encompass refinancing bank services, staffing cutbacks or readjustments, rationalizing goods or utilities, or initiating new venture capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more.

The firm restructures itself (through mergersMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more and acquisitions, divestment, or cost modifications) to attain synergySynergySynergy in M&A is the approach of business units that if they combine their businesses by forming one single unit and then working together to achieve a common goal, the total earnings of the business can be greater than the sum of the earnings of both businesses earned separately, and the cost of the merger can be reduced.read more advantages via a beneficial strategy.

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Types Of Restructuring

In other words, the following are two pivotal kinds of company restructuring:

1. Financial Restructuring

This can occur owing to a steep decline in the total sales caused by drastic financial situations. Moreover, the business entity can modify its equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.read more holdings and pattern, cross-holding pattern, and debt-servicing arrangement. It assists in maintaining the market and profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more of the business.

2. Organizational Restructuring

It implicates modifications in the firm’s organizational structure like its hierarchy level reduction, downsizing the workers, redeveloping job profiles, and altering the reporting relations. Hence, organizational restructuring helps cut back the expenses and settle the outstanding dues for continuance with commercial activities.

Examples

Here are a few examples of the same.

Example#1

  1. Say the BOD discovers the acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more of irrelevant businesses in ABC Co. aimed at increasing the salary of its Chief Executive Officer (CEO). Therefore, it might choose capital restructuring to sell off the unrelated acquisition, diminishing the CEO’s salary while making the firm cash-rich.
  2. Suppose a corporation, XYZ Co., may restructure itself after successfully launching the latest service or product in case of insufficient debt payment and payroll coverage revenues. Therefore, it may sell the assets, issue equity to reduce debt, reorganize the fiscal arrangements, or file for foreclosureForeclosureForeclosure refers to the legal action taken by the lender when the borrower fails to repay the amount due against the mortgage loan. The lender can take the possession of mortgaged asset or property or resale it to a third party for recovering the default loan amount.read more as the company sustains operations.

Example#2

Atos SE is planning the spinoffSpinoffA spinoff, also known as starburst or spinout, refers to an operational strategy where a company separates its subsidiary to form a new independent entity.read more of the Big Data and cybersecurity business into an individual entity leading to the resignation of its CEO Rodolphe Belmer. The resignation comes after he disagrees with the firm about the restructuring proposal.

Moreover, this plan will list the current data unit before 2023’s second half with Evidian as the afflicted legacy IT solutions will go ahead as Atos. Both firms will possess different management.

As per the estimates by Atos, 1.6 billion euros of total finances is required for 2022-2023, with gains anticipated from selling 700 million euros of non-essential assets. As a result, Atos stakeholders will completely possess the restructured firm with 70% ownership in Evidian. To clarify, Atos will hold the remaining 30% share.

Benefits Of Restructuring

Above all, here are the benefits of company restructuring:

1. Boosts Communication

While reorganizing business activitiesBusiness ActivitiesBusiness activities refer to the activities performed by businesses to make a profit and ensure business continuity. read more or organizational elements, corporate leaders may probably boost interaction between corporate branch locations or divisions. Also, it affects the working process of departments toward organizational goals and their collaboration with each other.

2. Sustains Or Refines Company Funds

This helps enterprises maximize revenue streamsRevenue StreamsRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients.read more, debt reduction, or sustenance of operations throughout financial downturns.

3. Equalizes Firms with Rivals

It permits the organizations to facilitate their functional structure and funds or adjust to industry changes. Therefore, corporations can match market rivals and maintain a robust business image.

4. Enhances Employee Productiveness

The reorganization of divisions or a complete firm lets the organizational leaders redesign commercial affairs and roles in a manner that benefits employees. To clarify, this comprises the workers’ movement into distinctive teams or parts and executing systems to boost functionalities.

Frequently Asked Questions (FAQs)

What Is Corporate Restructuring?

Corporate restructuring is a business activity involving relevant modification of the firm’s debt, functions, or arrangement. Furthermore, it aids in restricting fiscal harms and business improvements. Please note that it has two types, financial and organizational restructuring.

What Is Financial Restructuring?


Financial restructuring is a corporate reconstitution technique conveying issues and disorganizations due to the firm’s unsuitable economic structure. Moreover, it can entail matters like transforming preference shares to ordinary shares or current dues to equity, and debt comprises debt subordination.

To clarify, this may also involve the transferral or sale of current equity or liabilities to more encouraging new owners.

What Are the Problems with Restructuring?


Here are the problems with restructuring,
1. Probable negative public image
2. Employee anxiety
3. Unpredictable investor reactions
4. Losing assets
5. Reduction in employee morale
6. Re-training efforts and expenses
7. Possibly adverse effect on Return on Investment (ROI)

This article has been a guide to Restructuring & its Meaning. Here we explain corporate or company restructuring, its types (financial & organizational), & benefits. You can learn more about accounting from the following articles: –