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Forms of Restructuring

Describe about the Strategic Management for Journal of Finance.

Strategic Management refers to the strategy that the business or the corporate adopts in the organizations or business firms. Strategic management is often concerned to the senior management who are responsible for the success as well failure of the organization (Gaughan 2013). Moreover, different firms have different choices to restructure the strategic choices in the organization. Although, strategic management is grounded is grounded in practice and provides strategic direction to the organizations. However, strategic management is only achieved in well organized organizations (Hill, Jones and Schilling 2014). An organization which has diversified itself globally acquires the need to get restructured in various dimensions. However, restructuring itself can be based on corporate actions like refocusing, repurchasing, alliances, consolidations as well as leveraged capitalizations (Eckbo and Thornburn 2013).

On the other hand, restructuring provides opportunities that can help an organization to restore its value through diffusing “excess diversification.” Restructuring even possess some issues that needs to be well accepted in propositions while adopting any control and effect measure. In other words, according to Soni (2016), restructuring is the process of redesigning aspects in the organization that are implemented due to number of factors like adverse economic climate, competitive nature and new direction for the corporation. It is basically done to attain new markets as well as greater efficiency. However, the three broad types of restructuring are organization and management restructuring, financial restructuring and portfolio and asset restructuring.

Broad Types of Restructuring

Figure: Broad Types of Restructuring

Source: (Hallinger, Murphy and Hausman 2013)

Conversely, the three broad types of restructuring are provided based on the expansion, contraction, corporate control and change in ownership.

1. Merger or Amalgamation

The merger or amalgamation is the restructuring two organizations/ business in the form acquiring a new company such that asset6s and liabilities of the merging companies becomes one (Bena ad Li 2014). Moreover, mergers can be further divided in the two forms of mergers that can be done either done by absorption or consolidation to enhance the long term profitability by expanding the operations.

  • By Absorption – Absorption can be explained when two or more companies merges with one “existing” company. This can be explained by Billabong International Limited, one of the Australian Listed Company that acquired other small firms like “Von Zipper” and “Element” (Mules 2014).

  • By Consolidation – On the other hand, consolidation is the form of merger that combine on or two companies to become one new company. Here, the assets and liabilities of two companies are exchanges in the forms of cash or shares. One example that can define such companies is from India that is merger of Hindustan Computers Limited, Hindustan Instruments Limited, Reprographics Limited and Indian Software Company Limited into a new company named by HCL Limited (Hellström, Liu and Sjögren, 2016).

Furthermore, mergers can be of three types namely that is vertical merger, horizontal merger, concentric merger and conglomerate merger.

Types of Mergers

Figure: Types of Mergers

Source: (Brueller, Carmeli and Drori 2014)

On the other hand, acquisition is buying controlling such that 100% interest is developed in another firm with the intention of acquiring the other firm within its desired portfolio whereas takeover is a particular type of strategy that does not ask for the buying firm’s proposal. However, Takeovers hold half of the nominal value of the equity such that they are only able to retain their legal entities and maintain separate books of accounts (Gaughan 2013).

1. Merger or Amalgamation

Conversely, takeovers are considered hostile even when it is undesired and unexpected by the target firm. All the more, “tender offers” are the formal offers that are used in takeovers for direct approach with and without negotiations. Moreover, with negotiations is done when the acquiring company directly approaches the target company through means of shareholders by means of tender offer whereas tender offer without negotiations is used for hostile takeovers (Carline, Linn and Yadav 2014). This can be further elaborated by the merger of TATA Tea of CLL (Consolidated Coffee Limited) where 50% of shareholders sold the shareholding to TATA Tea at the offered price is the example of tender offer.

The basic reasons for acquisitions are to overcome the entry barriers to speed up the cost of new product. The other reasons could be increased diversification, reshaping of competitive advantage as well as developing new capabilities. The following figure explains the reason as well as the problems in achieving success : (Vazirani 2015).

Figure: Acquisitions

Source: (Vazirani 2015)

The asset acquisition or divestiture is the form of selling of the assets or acquiring effective control over assets, cash for securities by another company without any piecemeal manner. However, it is done to mobilize resources, unlocking value, selling cash cows and for a strategic change without any combination of businesses or companies. Moreover, both kinds of assets can be acquired tangible assets like manufacturing units as well as intangible assets like brands, etc (Jung, Aguilera and Goyer, 2015). Example can be of HLL that buys the brands of Lakme in India.

The strategic alliance of the corporations can be acquired through Joint ventures and Demergers

Joint Ventures are the agreement between the two companies to develop new assets that can contribute to equity followed by enterprise and consequent assets and revenues for a finite time. The famous joint venture example in Australia is combination of Yahoo Channel with Channel 7 (Attruia, 2015). On the other hand, demergers are further divided into three types namely Spin Offs, Sell Offs and Split Offs

Sell off is the usual practice of selling out a part of the business that is unprofitable part that could drain resources to a third party. Secondly, Spin Offs are new companies created that are created from single entities. Moreover, spin offs leads to no change in ownership and shareholders holds shares in two different companies. Thirdly, split offs involves the divisions in the parent company itself such that two companies are formed that exists even after the company goes for mergers and acquisitions (Bergh and Sharp 2015).

2. Acquisition and Takeover

The restructuring strategies are applied when the organization even changes its business or finance structure which can be broadly divided into three types namely downsizing, downscoping and leveraged buyouts (LBO). Restructuring efforts is either by reducing diversification (downscoping) or reducing the size of the workforce (downsizing) which is performed in the acquisition of new businesses (Hitt et al. 2012).

 As per the research in Fortune, it is said that downsizing strategy has been applied by 85% of the firms from 1000 firms in 2002-2003. Downsizing is the paramount activity downsizes itself to remain in business during the session of loss of revenue. Hence, most companies will either close product lines and close departments or sell activities and lay off managers to still be in business.  That may or may not change the company’s portfolio

Changing Incentives is possibly done to create longer managerial time horizons for division managers. This risk is adopted to diminish the managerial risk aversion by reducing business portfolio in a set of stable as well as mature business in which financial controls are appropriate and involve less innovation. However, this business scenario does not solve the competitiveness problem but it diminishes information processing of executives by focusing in set of unrelated rather mature activities. However, to reduce this problem, incentives should be derived in a way that motivates the executives in taking risks by operating on their own interest as incentive system is linked to performance evaluation of strategic actions (Milidonis and Stathopoulos 2014).

On the other hand, with help of downscoping businesses can make narrow span of control to reassert the strategic control and emphasize resources as well as strengths. However, downscoping allows more of incentives as well as governance. He financial risk in such strategic strategies reduces the financial risk and leads to debt deduction with the willingness to accept the risk of innovation strategies. Downscoping can be used as a strict sense of term where reduced bureaucratic control may result in market retreat and may involve the rehain its strategic control. Nevertheless, it leads to loss of critical employees because now the retention has been through voluntary programs (Hitt, Ireland and Hoskisson 2012).

On the contrary, downscoping is considered to be more beneficial than downsizing as its emphasis on restructuring. Moreover, Marriott’s disinvestments of restaurants, exit from foods from American Brands, General Mills withdrawal from retailing as well as Allegis sale of car rental and hotel business are the examples that had lead to downscoping strategy being more successful (Hitt, Ireland and Hoskisson 2012).

3. Divestiture (Asset Acquisition)

It is a form of acquisition in the company that is majorly financed through debt such that when the managers of the companies buys the company from the owners that is shareholders of the company then it known as management buy-out. It is then evaluated by the discounted cash flow method and the firms who target LBO’s are high market share and growth firms. High debt capacity and liquidity firm, low operating risk firms and high profit potential firms (Hitt et al. 2012).

The following errors need to be avoided while restructuring strategies or organization structure. Firstly the company should avoid integration difficulties, larger or extraordinary debts should be avoided. The problems even lead to problems of synergies that exceeds the value of units working independently. The private synergy of combining and integrating the assets with the other company may cause the acquisition to downsize. Too much diversification will lower the incentive level. Although, acquisition leads to change of attitude towards the firms that increases their expectations by leading to following:

Additional costs increases the benefits of economies of scale that leads to additional market power but may eventually lead to drop in profits later, once the costs are only increasing.

The innovation and diversification may be hampered

The large market power firms will lead to bureaucratic controls.

However, the formalized controls adopted may lead to rigid and standardized managerial attitude and behaviour (Hitt, Ireland and Hoskisson 2012).

Conclusion

Corporate restructuring based on ownership and strategy can lead to elements that not only lead to positive but as well as negative changes that can hamper effectiveness and performance of the organization. The basic aim lies in the amalgamation of strategy as well as structure that introduces changes in the performance as well as structural parameters of the company so the entity can drive to be enlisted in the profit making companies.

References

Attruia, R.M., 2015. The creation of shareholder value through spin-offs: the xase of Yahoo.

Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), pp.1923-1960.

Bergh, D.D. and Sharp, B.M., 2015. How far do owners reach into the divestiture process? Blockholders and the choice between spin-off and sell-off. Journal of Management, 41(4), pp.1155-1183.

Brueller, N.N., Carmeli, A. and Drori, I., 2014. How do different types of mergers and acquisitions facilitate strategic agility?. California Management Review, 56(3), pp.39-57.

Carline, N.F., Linn, S.C. and Yadav, P.K., 2014, March. Corporate governance and the nature of takeover resistance. In American Finance Association Meetings Working Paper.

Eckbo, B.E. and Thorburn, K.S., 2013. Corporate restructuring. Foundations and Trends in Finance, Forthcoming.

Gaughan, P.A., 2013. Maximizing Corporate Value Through Mergers and Acquisitions: A Strategic Growth Guide. John Wiley & Sons.

Hallinger, P., Murphy, J. and Hausman, C., 2013. Conceptualizing school restructuring. School-based management and school effectiveness, p.22.

Hellström, J., Liu, Y. and Sjögren, T., 2016. Stock exchange mergers and weak-form information efficiency: Evidence from the OMX Nordic and Baltic consolidation.

Hill, C., Jones, G. and Schilling, M., 2014. Strategic management: theory: an integrated approach. Cengage Learning.

Hitt, M., Ireland, R.D. and Hoskisson, R., 2012. Strategic management cases: competitiveness and globalization. Cengage Learning.

Hitt, M.A., King, D., Krishnan, H., Makri, M., SCHIIVEN, M., Shimizu, K. and Zhu, H., 2012. Creating value through mergers and acquisitions. The Handbook of Mergers and Acquisitions, p.71.

Jung, D.K., Aguilera, R. and Goyer, M., 2015. Institutions and preferences in settings of causal complexity: foreign institutional investors and corporate restructuring practices in France. The International Journal of Human Resource Management, 26(16), pp.2062-2086.

Milidonis, A. and Stathopoulos, K., 2014. Managerial Incentives, Risk Aversion, and Debt. Journal of Financial and Quantitative Analysis, 49(02), pp.453-481.

Mules, R., 2014. Exporting for success: How small and large businesses negotiate the task.

Soni, Y.P., 2016. Organizational Restructuring. Xlibris Corporation.

Vazirani, N., 2015. A Literature Review on Mergers and Acquisitions Waves and Theories. SIES Journal of Management, 11(1).

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