What is Corporate Restructuring?
Corporate restructuring refers to the process of making significant changes to a company’s structure, operations, or ownership to enhance business performance, increase profitability, or better align with current business needs.
In some cases, internal issues, such as underperformance or strategic realignment, and external factors, like market conditions and regulatory requirements, may prompt it.
Corporate Restructuring Example
1. General Motors during the Financial Crisis
In 2009, General Motors (GM) experienced a major restructuring in response to the financial crisis. As part of the restructuring, GM’s assets were sold to a new company, NGMCO Inc. (often referred to as New GM), enabling it to maintain its operations seamlessly.
GM further divested non-essential assets, renegotiated labour contracts, and shifted its focus towards manufacturing more fuel-efficient vehicles. This restructuring stands as one of the largest corporate Chapter 11 bankruptcies in the history of the United States.
2. IBM’s Shift from Hardware to Software Services
IBM’s evolution from a hardware-focused organisation to a leader in software and services began in the early 2010s. The company strategically decided to focus on cloud computing, artificial intelligence (AI), and other advanced technologies.
IBM grew its offerings by buying several cloud companies and building a solid cloud computing system, marking the start of the “IBM as a service” era. This transition required substantial changes to IBM’s business model, shifting focus from hardware sales to software and service offerings. Key milestones in this transformation included the launch of IBM Cloud and Watson AI.
3. Nokia’s Acquisition by Microsoft
In 2013, Microsoft announced it bought Nokia’s handset business for $7.2 billion. This move aimed to boost Microsoft’s presence in the smartphone market. The deal included Nokia’s devices, services, and important mobile licenses. It was completed in April 2014, leading to the creation of Microsoft Mobile Oy. The goal was to strengthen Microsoft’s mobile capabilities and expand its range of devices and services. However, despite initial hopes, the acquisition faced difficulties, and Microsoft ultimately wrote off the Nokia deal in 2015.
Types of Corporate Restructuring
1. Financial Restructuring
Financial restructuring involves changing a company’s finances to improve its health and performance, often during financial struggles or to enhance its capital structure.
Financial Restructuring Example
- Debt consolidation, where several debts are combined into one loan with better terms
- Equity recapitalisation, which adjusts the company’s debt-to-equity ratio by issuing new shares or repurchasing existing ones
- Renegotiating loans to get lower interest rates or longer repayment periods
These steps help companies ease financial pressure, improve cash flow, and meet their financial commitments better.
2. Organisational Restructuring
- Organisational restructuring involves changing a company’s structure to boost its effectiveness and adapt to shifting business conditions.
- This may include altering reporting lines, creating new departments or roles, or completely redesigning the organisation.
- A standard part of this process is management reshuffling, where key leaders are reassigned or replaced.
- Other changes can involve merging or splitting departments and downsizing the workforce to reduce costs.
3. Mergers & Acquisitions (M&A)
- M&A are types of corporate restructuring that involve combining companies or their key assets.
- A merger happens when two companies join to form a new organisation, while an acquisition occurs when one company takes over another.
- M&A activities aim to expand a company’s reach, increase market share, and enhance shareholder value.
- Mergers are usually voluntary and involve companies of similar sizes, whereas acquisitions can be friendly or hostile. Both companies agree to the deal in a friendly acquisition, while a hostile takeover occurs when the target company opposes it.
4. Divestiture
- Divestiture is a company selling or closing a business unit, division, or assets, either fully or partially.
- This can involve selling to other companies, creating separate entities, or shutting down operations.
- Companies pursue divestitures to concentrate on their main businesses, reduce costs, pay off debts, or increase shareholder value.
- For instance, a company might sell an underperforming division to streamline operations and boost profitability.
5 Legal Restructuring
- Legal restructuring involves changing a company’s legal framework to enhance efficiency, comply with regulations, or meet strategic goals.
- This can include changing the company’s name, altering its legal status (such as shifting from a private to a public company), or adjusting ownership structures.
- It may also involve reviewing and updating legal agreements with clients, shareholders, and other stakeholders.
