CORPORATE RESTRUCTURING CORPORATE RESTRUCTURING
What is restructuring? What is restructuring?
It is a complex and multi-dimensional task. It can be re-assignment of It is a complex and multi-dimensional task. It can be re-assignment of human resources, downsizing, redrawing of systems & rules, selling off human resources, downsizing, redrawing of systems & rules, selling off assets / businesses or changing the finance portfolio or a combination of assets / businesses or changing the finance portfolio or a combination of all. The objective is to reorient or tune the organisation to make it more all. The objective is to reorient or tune the organisation to make it more efficient and
efficient and effective.effective.
Examples: Examples:
AT&T had its share prices shoot up with an announcement of 40,000 cutAT&T had its share prices shoot up with an announcement of 40,000 cut in its workforce when faced with pressure on
in its workforce when faced with pressure on profits.profits.
Daewoo during early 90s Daewoo during early 90s experienced difficultiexperienced difficulties with es with its large diversifiedits large diversified empire. By amputating unprofitable parts, restructuring and downsizing, it empire. By amputating unprofitable parts, restructuring and downsizing, it rewrote its success story. Subsequently it again got into
rewrote its success story. Subsequently it again got into trouble.trouble.
Some Indian cases: Some Indian cases:
Tata Steel had taken the services of 3 international consultants namelyTata Steel had taken the services of 3 international consultants namely McKinsey & Co, Arthur D Little and Booz Allen & Hamilton to enable it McKinsey & Co, Arthur D Little and Booz Allen & Hamilton to enable it to become it
to become it globally competitive.globally competitive.
It sold of its cements division, had VRS & modernised its plants and It sold of its cements division, had VRS & modernised its plants and thereafter becam
Asian Paints has restructured its manufacturing operations into 3 SBU’s:Asian Paints has restructured its manufacturing operations into 3 SBU’s: De
Decocoraratitive ve InIndidia, a, DeDecocoraratitive ve InInteternrnatatioionanal l anand d ananototheher r mamade de up up of of che
chemimical cal busbusineinessesses s alalong ong witwith h indindustustririal al paipaints nts to to ensensure ure focfocus us andand greater accountability
greater accountability. Driving force being . Driving force being global operations.global operations.
Dabur with P/E ratio of 20 and operating profit margin of 12% was notDabur with P/E ratio of 20 and operating profit margin of 12% was not satisfied. With assistance from McKinsey it initiated steps to lower its satisfied. With assistance from McKinsey it initiated steps to lower its inventory costs, shorten delivery schedules and sharpen response time to inventory costs, shorten delivery schedules and sharpen response time to market needs.
market needs.
TH
THERERE E IIS S NO NO SSET ET FFORORMMULULA A OR OR SSTTAANNDADARD RD MMOODDEEL L FOFOR R RE
RESTSTRURUCTCTURURINING. G. HOHOWEWEVEVER R IT IT SHSHOUOULD LD BE BE A A COCONSNSTATANTNT P
PRROOCCEESSS S WWIITTH H PPEERRIIOODDIIC C DDOOSSEES S TTO O FFIINNEE--TTUUNNE E TTHHEE ORGANISATION.
Why restructure? Why restructure?
Restructuring has caught up with Indian companies. In the US companies Restructuring has caught up with Indian companies. In the US companies ha
have ve unundedertrtakaken en a a wiwide de rarangnge e of of rereststruructctururining g trtranansasactctioions ns ininclclududiningg acquisition, divestiture, spin-off, split-off, leveraged buyout,
acquisition, divestiture, spin-off, split-off, leveraged buyout, etc.etc.
•
• The major objective of restructuring is to enhance shareholder value.The major objective of restructuring is to enhance shareholder value.
Besides other reasons as: Besides other reasons as:
1.
1. Changes Changes in coin competitive mpetitive situation situation ::
Because of foreign competition, accelerated rate of technological change Because of foreign competition, accelerated rate of technological change & competitive pressures faced
& competitive pressures faced globally.globally.
To focus on core competencies by divesting non-core businesses; these To focus on core competencies by divesting non-core businesses; these disinvestments can have attractive valuations.
disinvestments can have attractive valuations.
2.
2. Changes in Changes in capital markets capital markets : [has triggered : [has triggered financial resfinancial restructuringtructuring]]
Abolition of Controller of Capital Issues, empowering SEBI, freedom to Abolition of Controller of Capital Issues, empowering SEBI, freedom to FIIs to invest in new issues and existing stocks, access to capital globally FIIs to invest in new issues and existing stocks, access to capital globally at
at chcheaeap p raratetes, s, scscopope e fofor r prprivivatate e plplacacememenent, t, scscopope e fofor r dedeliliststining, g, ththee emergence of angel investors as well as venture funds, etc, are forcing emergence of angel investors as well as venture funds, etc, are forcing companies to rethink their
companies to rethink their capital structure.capital structure.
3.
3. ChaChanges inges in Govn Govt. pot. policilicies es ::
Major changes in MRTP Act, FEMA, Industrial licensing, setting up of Major changes in MRTP Act, FEMA, Industrial licensing, setting up of Competition Commission of India, etc;
Competition Commission of India, etc;
Size no longer is a constraint; growth strategy is based on competencies Size no longer is a constraint; growth strategy is based on competencies and not govt.
MNCs can gain control of operations in
MNCs can gain control of operations in India. A classic example isIndia. A classic example is HULHUL.. From associate companies to subsidiaries to 100% ownership
From associate companies to subsidiaries to 100% ownership
4.
4. To avoTo avoid unid unsolicited solicited take-overs take-overs ::
As bidders believe that the stock prices of some companies do not reflect As bidders believe that the stock prices of some companies do not reflect true values achievable via restructuring of businesses (after acquisition). true values achievable via restructuring of businesses (after acquisition). Go
Goiing ng ccononccerern n vvalalue ue mmaay y be be llowoweer r tthahan n brbreaeak-k-up up mmaarrkeket t vavaluluee.. Therefore, some firms increase debt
Therefore, some firms increase debt considerably to become considerably to become unattractiunattractive.ve.
5. To gain long
5. To gain long term competitive advantageterm competitive advantage:: Honda Motors
Honda Motors India broke up with Kinetic Engineering to set up HMSIIndia broke up with Kinetic Engineering to set up HMSI Private Limited.
Private Limited. HUL
HUL restructured itself via project millennium in 2000. Now after loosingrestructured itself via project millennium in 2000. Now after loosing market share to competitors in 2008-09 it is
market share to competitors in 2008-09 it is trying to reinvent itself.trying to reinvent itself.
6.
6. To enter interTo enter international marnational markets kets ::
This is especially in the face of quota & other restrictions besides the This is especially in the face of quota & other restrictions besides the effects of globalisation.
effects of globalisation. Ranbaxi
Ranbaxi acquired firms’ abroad to penetrate foreign markets.acquired firms’ abroad to penetrate foreign markets. Infosys
Infosys reorganised itself as per demands of international stock exchangesreorganised itself as per demands of international stock exchanges and investors.
and investors. Tata’s
Tata’s acquired Tetley, Chorus and Jaguar Land rover to enter globalacquired Tetley, Chorus and Jaguar Land rover to enter global business in tea, steel and
7.
7. To achieTo achieve operave operationational & market rel & market relatelated benefitd benefitss::
Restructuring of the appropriate kind can lead to improved competitive Restructuring of the appropriate kind can lead to improved competitive p
pososititioion n (s(say ay vivia a vevertrticical al inintetegrgratatioion)n), , gagainins s in in mamarkrket et shsharare e (b(byy business combinations) and increased productivity (via modernisation business combinations) and increased productivity (via modernisation
and retraining) and retraining)
8.
8. To To reduce reduce cost:cost:
Reducing the cost structure via a host of organisational, portfolio and Reducing the cost structure via a host of organisational, portfolio and fi
finannancicial al rerestrstructucturiuring ng is is essessententiaial l to to mamake ke fifirmrms s coscost t comcompetpetitiitive/ve/ profitable.
profitable.
9.
9. To incrTo increase mease management anagement control:control:
By merger of investment companies, increasing share holding
By merger of investment companies, increasing share holding pattern,pattern, etc.
Types of
Types of RestructuriRestructuringng
1
1.. OOrrggaanniissaattiioonnaal Rel Ressttrruuccttuurriinngg:: Here, changes are aimed largely at
Here, changes are aimed largely at corporate culture, processes & systems,corporate culture, processes & systems, number of employees, levels of managers (especially middle managers & number of employees, levels of managers (especially middle managers & professionals) or a combination of
professionals) or a combination of the aforesaid.the aforesaid.
2
2.. PPoorrttffoolliio o RReessttrruuccttuurriinngg::
It refers to changes in the sets of businesses comprising the corporation to It refers to changes in the sets of businesses comprising the corporation to cre
create ate a a momore re efeffecfectivtive e conconfifigurguratiation on of of busbusineinessesses. s. EffEffecectivtiveneeness ss isis enhanced by combining lines of businesses in areas where the firm has enhanced by combining lines of businesses in areas where the firm has competitive advantage, and by shedding lines of business where it cannot competitive advantage, and by shedding lines of business where it cannot obtain higher returns than its competitors.
obtain higher returns than its competitors.
3
3.. FFiinnaanncciiaal l RReessttrruuccttuurriinngg::
•
• It mainly involves changes in the capital It mainly involves changes in the capital structure of the firm.structure of the firm.
•
• It has meant different things at different times. Increase in debtIt has meant different things at different times. Increase in debt
when it is
when it is attractive (trading on equity), greater reliance on equity whenattractive (trading on equity), greater reliance on equity when it proves to be cheap, going in for GDR issues, etc.
it proves to be cheap, going in for GDR issues, etc.
•
• It It alalso so ininvovolvlves es chchanange ge in in ththe e ststruructcturure e of of dedebt bt & & eqequiuity ty – –
convertible bonds – as well as improved treasury management, convertible bonds – as well as improved treasury management, inter-corporate deposits and commercial paper/ inter-corporate bond.
corporate deposits and commercial paper/ corporate bond.
•
• All of these intended to reduce cost of financing, passing on theseAll of these intended to reduce cost of financing, passing on these
benefits to shareholders &
FORMS OF BUSINESS RESTRUCTURING IN INDIA FORMS OF BUSINESS RESTRUCTURING IN INDIA
(Based on article by
(Based on article by Prof. N Venkiteswaran 1997, Vikalpa)Prof. N Venkiteswaran 1997, Vikalpa)
Portfolio RestructuringPortfolio Restructuring
1
1.. AAccqquuiissiittiioonnss::
Various considerations (few are given below) have driven firms to Various considerations (few are given below) have driven firms to acquire companies in India. Generally, instead of 100% acquisitions acquire companies in India. Generally, instead of 100% acquisitions only controlling blocks of shares have been
only controlling blocks of shares have been acquired.acquired.
Acqu
Acquisitisition foion for Market er Market entry ntry ::
# Vodafone’s acquisition of 67% stake in
# Vodafone’s acquisition of 67% stake in Hutchison Essar from Li KaHutchison Essar from Li Ka Shing in February 2007.
Shing in February 2007.
# NTT DoCoMo’s 26% acquisition of Tata Tele Services in
# NTT DoCoMo’s 26% acquisition of Tata Tele Services in Nov 08Nov 08
# Daiichi Sankyo’s acquisition of >50% stake in
# Daiichi Sankyo’s acquisition of >50% stake in Ranbaxy Ltd in 2008Ranbaxy Ltd in 2008
Acquisitio
Acquisition for n for DiversificatDiversification ion : (By acq: (By acquiring)uiring)
# Torrents group’s acquisition of the controlling interest in Ahmedabad # Torrents group’s acquisition of the controlling interest in Ahmedabad Electric Co. Ltd. and Surat Electricity Co. Ltd
Electric Co. Ltd. and Surat Electricity Co. Ltd
# Acquisition of the erstwhile Union Carbide India Ltd. by Khaitans/ # Acquisition of the erstwhile Union Carbide India Ltd. by Khaitans/ Mcleod Russell group in a
Acquisitio
Acquisition for markn for market share & inet share & industry cdustry consolidaonsolidation tion ::
# Hindalco’s acquisition of Novelis a Canadian company in
# Hindalco’s acquisition of Novelis a Canadian company in Feb 2007Feb 2007 for $ 6 billion
for $ 6 billion
# Merger of Centurian Bank of Punjab with HDFC Bank in Feb 2008 at # Merger of Centurian Bank of Punjab with HDFC Bank in Feb 2008 at $ 2.4 billion
$ 2.4 billion
2.
2. MergeMergers anrs and Amalgd Amalgamatiamations ons ::
Consoli
Consolidation dation at the buat the business / siness / group legroup level vel ::
Th
This is is is dodone ne to to gagain in crcrititicical al mamassss, , rereduduce ce cocoststs, s, gagain in fofocucus s anandd eliminate intra-group competition.
eliminate intra-group competition.
# RPL merger with RIL in March 2008 at $ 1.68 billion; the swap ratio # RPL merger with RIL in March 2008 at $ 1.68 billion; the swap ratio was 16:1.
was 16:1.
# Series of mergers involving Unilever group of
# Series of mergers involving Unilever group of companies in India.companies in India.
Financial
Financial and taand tax consx considerations iderations ::
# Merger with sick firms (for tax benefit), asset stripping, etc # Merger with sick firms (for tax benefit), asset stripping, etc E.g. Mcleod Russel (India) merging with
3.
3. DiDiveveststititurureses: (: (FoFor r liliququididitity, y, fofocucus, s, etetc.c.))
Tata Steel’s divestment of Cement division to Lafarge of France Tata Steel’s divestment of Cement division to Lafarge of France
4.
4. Joint Joint Ventures Ventures & & Strategic Strategic AlliancesAlliances
Hero Groups joint venture with Honda Motors to
Hero Groups joint venture with Honda Motors to enter enter motorcycles market
motorcycles market
IC
ICICICI I coconvnverertiting ng itits s ininveveststmement nt babanknkining g bubusisineness ss ininto to a a JVJV company ICICI Securiti
company ICICI Securities with JP es with JP Morgan as the JV partner Morgan as the JV partner
5.
5. Demerger Demerger or or spin-off: spin-off: (increase (increase business business unit unit value)value)
Demerger of Aptech from Apple Industries Ltd. Demerger of Aptech from Apple Industries Ltd.
Financial Financial restructurrestructuringing
Debt Res
Debt Restructuring tructuring : (when : (when debt levdebt level is hel is high)igh)
Can be done through fresh issue of equity and / or divestment and Can be done through fresh issue of equity and / or divestment and asset sale to retire debt
asset sale to retire debt
Converting debt to equity; FI
Converting debt to equity; FI loans are converted to equity to free theloans are converted to equity to free the firm from interest and repaym
firm from interest and repayment burden when it is ent burden when it is passing through apassing through a very difficult financial situation.
Ca
Capipitatal l ReReduductctioion n : : CaCan n be be dodone ne by by rereduducicing ng eqequiuity ty by by papartrt conversion into preference capital/ debentures. (EPS increases and conversion into preference capital/ debentures. (EPS increases and stock prices too)
stock prices too)
Now share buy back has made
Now share buy back has made the process less cumbersome.the process less cumbersome.
Ownership Restructuring:Ownership Restructuring:
A situation wherein, the shareholding
A situation wherein, the shareholding structure undergoes changes evenstructure undergoes changes even as the management remains the same.
as the management remains the same.
Ta
Tarrgegeteted d shshaarre e isissusues es : : CoCommpapaniniees s iissssuiuing ng shshaarres es tto o tthehe manageme
management or nt or the promoter groups essentially to beef up the promoter groups essentially to beef up the latter’sthe latter’s holdings (e.g. private placement, etc).
holdings (e.g. private placement, etc).
Indi
Indian an affaffiliatiliates es of MNC’s were of MNC’s were the first to the first to do do so so when governwhen governmentment relaxed ceiling on foreign holding of 40%
relaxed ceiling on foreign holding of 40%
The pricing of shares for increasing stake by MNC’s were in many The pricing of shares for increasing stake by MNC’s were in many cases low / unfair. Now it
cases low / unfair. Now it can be issued only at can be issued only at market prices.market prices.
Sha
Sharehreholdolding ing by by FIIFII’s ’s : : The The ententry ry of of FIIFII’s ’s as as shasharehreholdolderers s of of Indian firms is affecting the
Indian firms is affecting the quality of governance (positively)quality of governance (positively)
Th
This is is is rereflflececteted d in in cocompmpanany y fofocucus, s, ininfoformrmatatioion n didissssememininatatioionn practices, etc.
Restructuring Conglomerates in Emerging Markets
Restructuring Conglomerates in Emerging Markets
TarTarun un KhKhannanna a and and KrKrishishna na PalPalepu epu havhave e raraiseised d a a relrelevaevant nt quequestistionon
whether it is desirable to dismantle the diversified business groups that whether it is desirable to dismantle the diversified business groups that dominate emerging markets?
dominate emerging markets?
These conglomerates in developing countries provide the services thatThese conglomerates in developing countries provide the services that
are necessary for proper functioning of an efficient market (e.g. capital are necessary for proper functioning of an efficient market (e.g. capital market, market for labour,
market, market for labour, managemenmanagement, technology, t, technology, etc.)etc.)
In western countries independent institutions exist to provide theseIn western countries independent institutions exist to provide these
services like investment banks, venture capital firms, well developed services like investment banks, venture capital firms, well developed capital markets, stock exchanges, B-schools, technical institutes, R&D capital markets, stock exchanges, B-schools, technical institutes, R&D labs, etc.
labs, etc.
What the Business Groups provide? [Add value] What the Business Groups provide? [Add value]
They substitute for intermediaries by providing funds needed for They substitute for intermediaries by providing funds needed for diversificati
diversification / on / growth for group businesses.growth for group businesses.
Substitute for labour market institutions.Substitute for labour market institutions.
Develop a common brand name, which group companies canDevelop a common brand name, which group companies can leverage nationally or
Therefore, if dismantling the business groups is not the best option,Therefore, if dismantling the business groups is not the best option, what needs to be done?
what needs to be done?
The BG’s should be encouraged in the short term to make proper The BG’s should be encouraged in the short term to make proper reforms to substitute for
reforms to substitute for market institutions.market institutions.
Governments in these countries should focus on building these Governments in these countries should focus on building these institutions in the long run.
institutions in the long run.
Dismantling of BG’s will happen naturally once these institutions Dismantling of BG’s will happen naturally once these institutions are in place.
are in place.
In
Incrcreaeasising ng cocompmpetetititioion n wiwill ll foforcrce e ththesese e BGBG’s ’s to to rereststruructctururee themselves.
themselves.
How should the BG’s improve their functioning? How should the BG’s improve their functioning?
1.
1. RefoReform busrm businesiness pracs practicetices s ::
They have to
They have to shift from ‘growth now, shift from ‘growth now, profitabilitprofitability later’ to y later’ to ‘profitabl‘profitablee growth now’ by:
growth now’ by:
i)
i) ininveveststining in ig in intnterernanal inl infoformrmatatioion ann and ind incecentntivive sye syststememss ii
ii)) shshouould ld leleararn hn how ow to to exexit it a a bubusisinenessss; ; anandd iii
2.
2. Investing Investing in instin institutionaitutional value l value added added ::
ii)) iimmpprroovviinng fg fiinnaanncciiaal ml maannaaggeemmeennt bt byy::
•
• distinguishing between financing new ventures anddistinguishing between financing new ventures and
financing ongoing operations financing ongoing operations
•
• behaving like a Venture capital firm behaving like a Venture capital firm
Providing only risk capital Providing only risk capital
Never transfer funds from one venture to another Never transfer funds from one venture to another
Rarely interfere in day-to-day operations Rarely interfere in day-to-day operations
iiii)) ssuuppeerriioor rr roolle ie in Mn MDDPP; a; anndd
iii
iii)) ProPromomote ste stantandardards in ds in quaqualitlity, cy, custustomomer ser servervice ice and and ethethicsics..
•
• AsAssusume me leleadaderershship ip rorole le in in coco-o-ordrdininatatining g ththe e dedesisign gn anandd
dissemination of best business
dissemination of best business practices.practices.
•
• LaLay y ththe e fofounundadatition on fofor r lolong ng teterm rm chchanange ge by by prpromomototiningg
transparenc
