1. Business Restructuring
Ch. 16 &
Industrial Sickness
Presented by:
Krunal shah 10
Presented to:
Ms. Suchi Patel
Kinjal Joshi 36 (Asst. professor)
Anand Institute of Management
Ruchi Shah 20
Kinjal Patel 03
2. 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 improvement
b) Higher economies of scale
c) Optimum BEP
d) Reducing financial & operational risk
e) Continuous improvement in shareholder value.
3. Broad areas of Corporate Restructuring
• FINANCIAL
• TECHNICAL
• MARKETING
• MANPOWER
4. 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.
5. Implication of Corporate Restructuring
• Reduced number of player in a market
• Emerging of new look companies
• Healthy economic state of the nation.
• Social discontent
6. 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.
7. Financial Restructuring & Financial Reconstruction
• Financial Reconstruction
In 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
8. 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
10. Merger
It 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.
Takeover
It is a business strategy whereby a
person acquires control over the
other company - either directly by
acquiring assets or indirectly by
controlling management.
11. Joint Venture
It 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.
Divestitures
In 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.
12. Slump Sale
In 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 Alliance
In 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.
13. Equity Carve out
In 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.
Franchising
In 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.
14. Intellectual Property Right
The 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 Companies
When 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’
15. 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 private
Sometimes, 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.
16. Liquidation
A 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 Bid
Normally, 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’.
17. Reverse Merger
The 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.
18. 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 – Out
In 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.
19. 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.
20. 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.
21. 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.
22. Causes of Industrial Sickness
There are mainly two type of causes:
# Internal causes
# External causes
-:Internal causes:- -:External Causes:-
o Planning and implementation o Infrastructure
stage Bottlenecks
- Technical feasibility
o Financial Bottlenecks
- Economic viability
o Commercial production stage
o Government Controls
- Production Management o Market Constraints
- Financial Management o Extraneous factors
- Labour Management
- Marketing Management
- Administrative Management
23. Reasons for Business Failure
There 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
24. 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.
25. Securitization and Re-construction of
Financial Assets.
Securitization of financial assets.
Enforcement of Security interest.
Special features of securities receipts.
26. 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.
