Sfm ch 16 r kjp

Ch. 16

Presented to:Ms. Suchi Patel(Asst. professor)

Anand Institute of Management

Business Restructuring &

Industrial SicknessPresented by:

Krunal shah 10

Kinjal Joshi 36

Ruchi Shah 20

Kinjal Patel 03

Meaning of Corporate Restructuring• It is a process by which a firm does an analysis of itself as

a point of time and alters what it owes and owns, refocus itself to specific tasks of performance improvements by radically altering the firm’s capital structure, asset mix and organization so as to enhance the value of the firm.

• The corporate restructuring is designed to accomplish specific goals and strategies such as:

a) Profitability & ROI improvementb) Higher economies of scalec) Optimum BEPd) Reducing financial & operational riske) Continuous improvement in shareholder value.

Broad areas of Corporate Restructuring

• FINANCIAL

• TECHNICAL

• MARKETING

• MANPOWER

Basic reasons for Corporate Restructuring

• The globalization of business• Change in fiscal and government policies• Revolution in information technology• Competitive Biz. Necessitated to have sharp focus on core

business activities, to gain synergy benefit in operation.• Economies of scale can be achieved by consolidating the

capacities and by expansion of activities.• Diversification of business activities• For converting sick Biz. Into profitable one.• For obtaining desired balance of debt and equity for

optimizing financial risk and reduce over all cost of capital.

Implication of Corporate Restructuring

• Reduced number of player in a market

• Emerging of new look companies

• Healthy economic state of the nation.

• Social discontent

Financial Restructuring & Financial Reconstruction• Financial Restructuring

It refers to financial reorganization of a company by affecting change in the capital structure for achieving balanced operational results by bringing balance in debt and equity funds, short & long term financing, reduction in finance charge, measure to improve EPS etc.

# Steps in Financial Restructuring@ Valuation of business@ Formulation of New capital structure@ Exchange of Old Securities for New one.

Financial Restructuring & Financial Reconstruction

• Financial ReconstructionIn financial reconstruction scheme, the capital amounts and asset values are reduced to write-off past losses and to rearrange the capital structure of the business to make turnaround of business.

# Two types of Financial Reconstruction@ External Reconstruction@ Internal Reconstruction

Corporate Restructuring Process• Hardware Restructuring:- it involves redefining, dismantling, or modification of

the existing structure of the organisation. The major areas are* Identification of core competency* Flattering of organizational level* Downsizing* Creation of self-directed teams* Benchmarking

• Software Restructuring:- it involves cultural and process charges required to create the more collaborative environment needed for the renewal and growth of the company.* Communication* Organizational Support* Trust* Stretch* Empowering People* Industry Foresight* Training

Techniques of Corporate Restructuring• Mergers• Takeovers • Joint Ventures• Divestitures• Slump Sale• Strategic Alliances• Equity Carve out• Franchising• Intellectual property rights• Holding companies

• Sell-off• Going Private• Liquidation• Takeover by reverse Bid• Reverse Merger• Demerger• Management buy-IN(MBI)• Management Buy-

Out(MBO)• Leveraged Buy-Out(LBO)

MergerIt is a situation where two or more companies, keeping in view of their long-term business interest, combine into one economic entity to share risk and financial rewards.

TakeoverIt is a business strategy whereby a person acquires control over the other company - either directly by acquiring assets or indirectly by controlling management.

Joint VentureIt is a form of business in which two different unaffiliated companies contribute finance, technology, manpower, patents, trademark, copyright, etc. For a new company formed to engage some business activity for mutual benefit.

DivestituresIn divestitures, the company who has acquired assets & divisions, will make an examination to determine whether the assets or divisions fit into overall corporate strategy in value maximization. If it does not serve the purpose, such assets or division are hived-off.

Slump SaleIn slump sale, a company sells or disposes the whole or substantially the whole of the undertaking for a predetermined lump sum amount as sale consideration without fixing the value of individual assets and liabilities.

Strategic AllianceIn strategic alliance, two or more firms that unite to pursue a set of agreed upon goals, remain independent subsequent to the formation an alliance. The common objectives would be reduction of cost, technology sharing, product development, market access etc.

Equity Carve outIn Equity carve out, a parent company sells a portion of its equity in a wholly owned subsidiary to the general public or to a strategic investor to generate cash flow.

FranchisingIn franchising, a large firm establishes linkage with small firms and allows them to use technology or sell products/services by using the BRAND of a large firm for a predetermined share of fees/commission/profit payable by the small firms.

Intellectual Property RightThe worth of the company lies more in its intangible assets. The intellectual property rights give real value to a company. Sometimes instead of investing efforts company prefer to buy these from companies or go to the extent of acquiring the companies themselves.

Holding CompaniesWhen a company acquires more than 50% voting power or controls composition of Board of directors, it becomes holding company. When 100% of voting power is controlled in a subsidiary, it becomes ‘wholly owned subsidiary’

Sell – Off A company will resort to sell a part of the organization to a third party, with a view to concentrate on core business activities, by selling – off non – core activities. It is also called as ‘ hive – off’.

Going privateSometimes, a listed company may decide to go private by purchase of stocks from outside public and delisting the shares in the stock exchanges where shares are traded to avoid the fall in share prices, to avoid declaration of periodical results to the public.

LiquidationA company which is continuously making cash losses, faces technological obsolescence, and lack of market cannot continue for long and the business unit may be liquidated.

Takeover by Reverse BidNormally, a large company takeover a small company. But when a small company acquires a big company, in takeover mode, such situation is called ‘takeover by reverse bid’.

Reverse MergerThe reverse merger take place when a profit making company merge into a loss making company. Reverse merger may be motivated for exploiting tax benefit of carry forward of accumulated losses and unabsorbed depreciation of loss making company by a profit making company.

Demerger In demerger, for strategic reasons, a conglomerate splits into two or more independent separate bodies and assets are transferred to such bodies.

Management Buy – Out In MBO, the management purchases all or part of business, when the owners trying to sell business to third parties, due to its slow growth or lack of managerial skill in running the business.

Leveraged Buy – OutIn LBO, a small group of investors acquire company with funds derived primarily from debt financing, the consideration for LBO is a mix of debt and equity components with high gearing.

Management Buy – In The management team who have got special skills will search out and purchase business, to their interested area, which has considerable potential but that has not been run to its full advantage due to lack of managerial and technical skills, fails to establish the market for the company’s products.

After the identification of suitable unit for purchase, the management team will make arrangements with the venture capitalist finance. The management team will generally have lesser funds for investment and, therefore debt component will be more in their purchase of the business unit. The MBI is just reverse to MBO. In MBI, the management of other concern, not the management of the same company, acquires the majority shareholding and thus the existing management of the concern has to leave the concern.

Definition of sick industrial company• According to Companies Act, 1956 Section 2(46AA) ‘Sick Industrial Company’ means an industrial company which has: (a) the accumulated losses in any financial year equal to fifty

percentage or more of its average net worth during 4 years immediately preceding such financial year, or

(b) failed to repay its debts within any three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company.

Section 2(29A) ‘Net Worth’ means the sum total of the paid up capital and free

reserve after deducting the provisions or expenses as may be prescribed.

Cont’d…• According to RBI Sick Industrial Company – It is an industrial company which

has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.

Potentially sick industrial company – If the accumulated losses of an industrial company as at the end of any financial year have resulted in the erosion of fifty percentage or more of its peak net worth during the immediately preceding four financial years.

Weak unit – If the accumulated losses as at the end of any financial year have resulted in the erosion of 50% or more of its peak net worth during the immediately preceding four financial years.

Causes of Industrial Sickness

-:Internal causes:-o Planning and implementation

stage - Technical feasibility - Economic viabilityo Commercial production stage - Production Management - Financial Management - Labour Management - Marketing Management - Administrative Management

-:External Causes:-o Infrastructure

Bottleneckso Financial Bottleneckso Government Controlso Market Constraintso Extraneous factors

There are mainly two type of causes: # Internal causes # External causes

Reasons for Business FailureThere are mainly two level of causes for business failure:

- The accounting Manifestation - The root problem

Diagnostics study in Revival of Sick Unit

Diagnostics study involves identifying four ‘Rs’ : - Reasons for sickness - Rationale for revival - Risks - Requirements

Turnaround Management

• It has been identified elements as the basic components of successful turnaround strategy as:

Change in top mgt. Initial credibility building pressures.Initial control.Identifying quick pay offs.Quick cost reduction.Revenue generation.Asset liquidation for generating cash.Mobilization of the Org.Better internal co-ordination.

Securitization and Re-construction of Financial Assets.

Securitization of financial assets. Enforcement of Security interest. Special features of securities receipts.

Working capital Mgt. in sick Industries.

A. Poor financial planning.B. Poor resources mgt.C. Faulty costing.D. Use of working capital funds for purpose of capital

expanses.E. Inadequate working capital.F. Prolonged operating cycle.G. Inefficiency in collection of receivables.H. Lack of effective collection machinery.I. Excessive holding of stocks.