Factors And Types Of Corporate Restructuring
“Corporate restructuring is about changes in and around an organization, which involves, strategic choices, regarding which business to enter, acquire, expand or divest. ” Porter (1980). Schmitt (2009) suggests that, corporate restructuring can be considered as a variety of crafty strategies, formulated to adjust and adapt, to the decline experienced in organizations; The propositions to which the organisation adapts and to minimize the effects on its operation’s and resources. “Corporate restructuring is based on publicly known facts and data. ” Gilson (2010). This suggests that organisations undertaking restructuring, are experiencing difficulties in their current operations and are seeking to alleviate and remedy these issues. Gilson (2010), further states that restructuring is more effective when implemented to address individual, isolated issues. Therefore, restructuring efforts has to be tailored to the needs of the specific organization, there is no one remedy that will fit all.
Corporate restructuring is a declaration of a company to move towards consolidation of its operations and to strengthen its position in its designated industry. Industry refers to ‘a group of firms producing the same principal product or service’ (Johnson, Scholes and Whittington 2009).
Frenkel (2003), proposes that restructuring is a defensive tool, organizations use against, the effects of external pressures. He goes on to suggest, that restructuring in the form of downsizing, impresses upon the organizations’ employees at every level, this may also increase the approval amongst staff. This decrease in numbers employed is an opportunity for the remaining workforce to exhibit more responsibility Comfiled (2001). There are a number of factors which can lead a firm to take on various restructuring processes. These can include changes in the environment in which the organization operates.
Factors Influencing Organizational Restructuring
All organizations go through periods of turmoil throughout its lifecycle, from its introduction to maturity. As a result, it is imminent for such organizations to undergo some form of restructuring, to quickly diagnose and formulate processes to combat these issues. (Gleeson 2014). Schmitt (2009), proposes that restructuring can be influenced by either internal or external changes to the organisation’s environment. These external changes can be as a result of, climate changes, natural disasters, changes in governing policies and advancement in technology, amongst others. Internal changes can include changes in management, policies and product diversification. (Gleeson 2014), suggests that organizations may decide to undergo restructuring when profit and growth becomes an issue. After periods of consistent growth, the business most likely enters into the decline phase and this is when they will need to be proactive with their strategy to take on some type of restructuring.
A study carried out by (Schendel, Patton and Riggs 1976), of similarities in actions within 54 successfully restructured companies highlighted the importance of strategy as compared to operational restructuring. This indicates that strategy should include how the organization would treat with changes in their internal and external environment.
By planning for these changes the organization will be quick in their response to restructuring, thus reducing losses and down time. Gleeson 2014, as well as (Schendel, Patton and Riggs 1976), highlights the importance of corporate restructuring being incorporated within the strategy of the organization. Johnson, Scholes and Whittington, (2009, p. 3) define strategy as ‘the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations’. Corporate restructuring as we have established needs to be carried out in an organized manner and with great planning for the execution to be successful. Here the organization will re-evaluate its position and objectives at the corporate level (Ghosn 2002), highlights two critical conditions under which restructuring is vital for the continued success of an organization:
- Enhancing management’s commitment, to identify problems and working on finding pertinent solutions, and
- To formulate a sense of awareness in treating with culture; encouraging the business to develop a culture that is accepting to changes.
Therefore, organizations should adopt a culture that is conducive to changes, this will place them at an advantage over their competitors, within this transformation to adapt to the changes in operations when restructuring is being undertaken.
Types of Restructuring
Bowman and Singh (1993) as well as Gibbs (1993) “differentiates three types of corporate restructuring:
- financial restructuring (including recapitalization, stock repurchases, and changes in the capital structure),
- portfolio restructuring (divestment, acquisitions, refocusing on core businesses)
- organisational, (operational) restructuring.
”Financial restructuring is the reorganization of the financial assets and liabilities of a corporation, in order to create the most beneficial financial environment for the company Kumar and Venai. (2012). Firms experiencing financial distress will have to re-evaluate their strategy, to devise new plans of action, to address these issues. Updated strategies are necessary when an organization is considering financial restructuring.
Financial restructuring is designed towards changes to the capital structure of a firm. This can result in the organization taking downsizing action, by way of mass layoffs. This pushes the remaining employees to become more engaged and foster greater input, as it allows them to express initiative towards improvements to the organization with their contributions. Another strategy larger firms may adopt in order to reduce cost is, reducing the number of outlets they operate, this will decrease overheads and present the organization to new opportunities.
Capital Structure refers to the level of capital employed by a firm to facilitate its operations. Capital can be classified as equity capital or, debt capital in regard to risk and rewards. Equity capital refers to the capital raised by the company’s shareholders (owners), this can be incorporated into two categories, the first being, and contributed capital. This is the funds which were initially injected into the business by shareholders in exchange for shares and ownership. The second category of equity capital is retained earnings, this the remaining balance of profits after all payments at the end of the financial period. Equity capital is commonly considered to be the most expensive type of capital utilized by companies, this is because the cost of equity is the "cost" of return the firm needs to earn to engage investments, as different businesses require different proportions of capital.
The other form of capital is debt capital, this refers to borrowed capital which is employed by the organization. This debt can be in the form of bank loans, both long and short and long-term. These loans can be used to purchase fixed assets and help expand the operations. Another type of restructuring identified is, portfolio restructuring this involves reorganising the company’s asset mix, by trading or selling off, undesired or underutilized assets and replacing them with the appropriate ones, needed for the organisation to accomplish maximum output. (GAUGHAN, 2015) The term corporate restructuring usually refers to asset sell-offs, such as divestitures.
Portfolio restructuring is mainly undertaken by companies who were involved in divestitures, acquisitions and or spin-offs, to aid the organization with re-identifying its core operations. This restructuring will be more beneficial if the organization utilizes the subsidiary companies, which will encourage other mergers, as an alternative to selling off its assets. Operational restructuring addresses standardization of wages, aggressive disposition of non-core assets and reduction in labour output.
Operational restructuring forms part of the financial restructuring, as it supports the efforts of financial restructuring with the improvements to the business’s performance. This restructuring will be specific to the business and their current position. This will target the unique issues affecting the organization, which in turn will accelerate the recovery of the organization. These issues can include high overheads and changes in the environment, brought on by advancements in technology such as the use of mobile and internet devices, for online shopping and e-commerce (Schmitt, 2009). Mergers and acquisitions are another way in which an organization may decide to undergo restructuring. Acquisitions is where one organization takes the complete ownership of another organization; Mergers on the other hand is a joint agreement of ownership between firms (Johnson, Scholes, and Whittington, 2009).
Organizations may have different influences for choosing to engage in mergers and acquisitions as a means of restructuring. Exploitation of strategic capabilities, is another motivator for choosing an acquisition, costs of research and development efforts are usually very high, so organizations may, buy companies overseas to utilize and capitalize on their skills. Competitive situation (Johnson, Scholes, and Whittington, 2009). the influence of the merger company may be stronger than that of the restructuring organization, thus the union will be beneficial to the restructuring company. Changes in the industry may push an organization to seek mergers to adapt to rapid changes in technology and also aid in keeping costs lower while remaining relevant during periods of intense changes. For consolidation opportunities, where supply outweighs demands, companies can obtain businesses which will help level out and decentralize the lower level industries and shut down surplus volumes, balancing off the supply and demand (Johnson, Scholes, and Whittington, 2009).
