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The Role of Mergers in Corporate Restructuring

Home » Insights » The Role of Mergers in Corporate Restructuring

The Role of Mergers in Corporate Restructuring

by Khadija Tahir

Mergers and acquisitions (M&A) in corporate restructuring increase the value of a firm through the creation of synergies.  These synergies can take many forms such as higher prices due to reduced competition, and increased sales from improved distribution. Lower operating costs because of economies of scale, tax savings from loss carryforwards, or improved strategic and financial management.

M&A can be either friendly or extremely hostile.  In most cases, the management of two companies mutually agrees to merge their operations or have one company acquire the other firm.  If the parties do not agree, one may attempt a take-over by appealing directly to the other company’s shareholders.  The bidding process that follows is quite formal and carefully monitored. By securities regulators to ensure all investors are treated fairly.  Takeovers are expensive transactions.

So the offeror recruits a large group of outside advisors consisting of investment bankers, lawyers, and accountants to help determine a fair value for the firm, guide them through the bidding process, and counter any defensive measures the target company might take to stop or delay the acquisition.  Target companies also use outside advisors to ensure that the offering price is fair and negotiate aggressively with the offeror.  These advisors are quite successful as the target company’s shareholders usually receive. A sizeable price premium that includes nearly all the potential synergies.

Besides M&A, companies can restructure their operations using divestitures. Spin-offs, split outs, and split-ups to re-focus on their core business, redeploy capital, pay down debt, or outsource production.  Corporate restructuring is generally done badly by the public because of the plant closures and layoffs that can sometimes result.  Although these actions are difficult for employees. They are essential if the economy is to remain efficient and managers are to maximize their firm’s share price.

Types of Corporate Restructuring

Financial Restructuring: This type of restructuring may take place due to a severe fall in overall sales because of adverse economic conditions. Here, the corporate entity may alter its equity pattern, debt-servicing schedule, equity holdings, and cross-holding pattern. All this is to sustain the market and the profitability of the company.

Organizational Restructuring: Organisational Restructuring implies a change in the organizational structure of a company. Such as reducing its level of hierarchy, redesigning the job positions, downsizing the employees, and changing the reporting relationships. This type of restructuring is to cut down the cost and pay off. The outstanding debt to continue with the business operations in some manner.

Reasons for Corporate Restructuring

Corporate restructuring is in the following situations:

Change in the Strategy: The management of the distressed entity attempts to improve its performance. By eliminating certain divisions and subsidiaries which do not align with the core strategy of the company. The division or subsidiaries may not appear to fit strategically with the company’s long-term vision. Thus, the corporate entity decides to focus on its core strategy and dispose of such assets to the potential buyers.

Lack of Profits: The undertaking may not be enough profit-making to cover the cost of capital of the company and may cause economic losses. The poor performance of the undertaking is the result of a wrong decision by the management to start the division or the decline in the profitability of the undertaking due to the change in customer needs or increasing costs.

Reverse Synergy: This concept contrasts with the principles of synergy. Where the value of a merged unit is more than the value of individual units collectively. According to reverse synergy, the value of an individual unit may be more than the merged unit. This is one of the common reasons for divesting the assets of the company. The concerned entity may decide that divesting a division to a third party can fetch more value rather than owning it.

Cash Flow Requirement: Disposing of an unproductive undertaking can provide a considerable cash inflow to the company. If the concerned corporate entity is facing some complexity in obtaining finance. Disposing of an asset is an approach in order to raise money and reducing debt.

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