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Different Forms of Corporate Restructuring

Different Forms of Corporate Restructuring

Corporate restructuring or business restructuring has gained popularity with big and small business houses across the globe. It has become an ideal strategy to meet the expansion or contraction needs of an organization.

Organizations planning to expand their base resort to amalgamations, acquisitions, mergers, asset purchases, joint ventures, and takeovers. They are all different forms of corporate restructuring that bring together the resources of two businesses under a single umbrella. They are considered synergistic in nature because they lead to greater benefits of economics of scale, utilization of tax shelters, creation of a vast pool of assets, and the setting up of a more efficient management.

Alternatively, contracting the business through divestitures, spinoffs and a splitups are other forms of corporate restructuring. Here the focus is to remove a loss-making strategic business unit in order to curtail business losses. Such ways are also preferred when organizations strive for greater operational efficiency and want to concentrate more on areas that have immense profit-generating potential.

A divestiture involves the sale of a division of an organization to another firm. It is a contraction move from the seller’s point of view. In a spinoff, a business unit is spun off into a separate company having its own legal identity and a common seal. In a spiltup, a single organization, which is a parent company, is broken into two or more independent organizations.

A popular form of corporate restructuring is to raise funds from the general public via the equity or debt route. This helps the company collate large amounts of funds that otherwise is impossible via the private route. In this, the company brings out an initial public offer inviting people to apply to its prescribed minimum number of shares carrying a fixed face value. Moreover, the status of the company changes from private limited to public limited after fulfilling a long list of legal formalities.

Alternatively, a public enterprise going private is also a form of corporate restructuring. It is commonly known as privatization. In many developing countries, public sector was established to take care of industries of strategic importance like steel, petroleum, and defense. Over the passage of time, inefficiencies like bureaucracy and red tapism crept into the system leading to continuous financial losses. Therefore, the government in these countries started transferring ownership of their businesses into private hands.

The current business scenario has given birth to various types of business combination’s and corporate restructuring that is done with the key objective of achieving a competitive edge in the market.