is the corporate management
term for the act of partially dismantling or otherwise reorganizing a company
for the purpose of making it more profitable. Also known as corporate restructuring, debt restructuring
and financial restructuring.
Restructuring is often done as part of a bankruptcy or of a strategic takeover by another firm, such as a leveraged buyout by a private equity firm.
Executives involved in restructuring often hire financial and legal advisors to assist in the transaction details and negotiation. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company. It generally involves financing debt, selling portions of the company to investors, and reducing or reorganizing operations.
The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of the distressed situation.
- ensure the company has enough liquidity to operate during implementation of a complete restructuring
- produce accurate working capital forecasts
- provide open and clear lines of communication with creditors who mostly control the company's ability to raise financing
- update detailed business plan and considerations
Valuations in restructuring
In corporate restructuring, valuations
are used as negotiating
tools and more than third-party reviews designed for litigation avoidance. This distinction between negotiation and process is a difference between financial restructuring and corporate finance
Restructuring in Europe
The “London Approach”
Historically, European banks handled non-investment grade lending
structures that were fairly straightforward. Nicknamed the “London Approach” in the UK, restructurings focused on avoiding debt
write-offs rather than providing distressed companies with an appropriately sized balance sheet
. This approach became impractical in the 1990s with private equity
increasing demand for highly leveraged capital structures that created the market in high-yield and mezzanine debt
. Increased volume of distressed debt drew in hedge funds
and credit derivatives
deepened the market—trends outside the control of both the regulator and the leading commercial banks.
- Retention of corporate management sometimes "stay bonus" payments or equity grants
- Sale of underutilized assets, such as patents or brands
- Outsourcing of operations such as payroll and technical support to a more efficient third party
- Moving of operations such as manufacturing to lower-cost locations
- Reorganization of functions such as sales, marketing, and distribution
- Renegotiation of labor contracts to reduce overhead
- Refinancing of corporate debt to reduce interest payments
- A major public relations campaign to reposition the company with consumers
- Forfeiture of all or part of the ownership share by pre restructuring stock holders (if the remainder represents only a fraction of the original firm, it is termed a stub).
A company that has been restructured effectively will theoretically be leaner, more efficient, better organized, and better focused on its core business with a revised strategic and financial plan. If the restructured company was a leverage acquisition, the parent company will likely resell it at a profit if the restructuring has proven successful.