Restructuring refers to changes in the composition of a company's set of
businesses and/or financial structure. A restructuring approach to
creating value in an unrelated diversified company involves the buying and
selling of other companies (and their assets) in the external market.
Following a restructuring strategy generally implies buying
a company and selling unnecessary or expensive assets (such as the corporate
headquarters facility) and terminating corporate staff members. Following the
asset sale and layoffs, underperforming divisions (those acquired in the
purchase) are sold to other companies and remaining divisions are placed under
strict budgetary controls accompanied by the reporting of cash inflows and
outflows to the corporate office.
Success in implementing unrelated diversification
strategies usually requires that companies focus on companies in mature, low
technology industries and avoid service businesses because of their client- or
sales-orientation.
Restructuring can take several forms:
- downsizing, primarily to reduce
costs by laying off employees or eliminating operating units
- downscoping to reduce the level of
company unrelatedness
- leveraged buyouts to restructure the
company's assets by taking it private (not practised in India, yet)
In other words, restructuring strategies often were
implemented in response to poor performance and overdiversification. The next
section of the chapter reviews some of the more common restructuring strategies.
- Downsizing has been one of the most
common restructuring strategies adopted internationally. Downsizing represents
a reduction in the number of employees, and sometimes in the number of
operating units, but may or may not represent and a change in the composition
of the businesses in the corporation's portfolio.
- Downscoping refers to the
divestiture, spin-off, or other means of eliminating businesses that are
unrelated to the company's core business.
In other words, downscoping represents establishing a focus on the
company's core businesses. While downscoping often includes downsizing, the
former is targeted so that the company does not lose key employees from core
businesses (because such losses can lead to the loss of core competencies).
As the discussion of overdiversification earlier in this
chapter indicated, reducing the diversity of businesses in the portfolio enables
top-level managers to manage the company more effectively because the company is
less diversified as a result of downscoping and top-level managers can better
understand the core and related businesses
Indian companies use Downscoping as a restructuring strategy
quite often. Both the parent and spin-off company usually shows increases in
shareholder value and accounting performance following the spin off; however,
this is not always the case.
- Leveraged Buyouts (LBO) refers to a restructuring action, whereby the
management of the company and/or an external party buys all of the assets of
the business, largely financed with debt, and thus takes the company private.
Often, LBOs are used as a restructuring strategy to correct for managerial
mistakes or because managers are making decisions that primarily serve their
personal interests rather than those of shareholders. In other words, a few
(new) owners using a significant amount of debt (in a highly leveraged
transaction) purchase a company and the company's stock is no longer traded
publicly.
In general, the new owners restructure the private company by
selling a significant number of assets (businesses) both to downscope the
company and to reduce the level of debt (and significant debt costs) used to
finance the acquisition.
A primary intent of the new owners is to improve the
company's efficiency. This enables
them to sell the company (outright to another owner or by a public stock
underwriting), thus capturing the value created through the restructuring.
However, LBOs are quite low in the U.S itself, the country of
its origin and is not practised in India due to lack of funding and paucity of
professional companies where it can be done.
Research has shown that downsizing does not usually lead to
higher company performance--only 41 percent of downsizing companies have
reported productivity increases, and only 37 percent have realized any long-term
gains in shareholder value, according to a study in U.S. Another study showed that downsizing
contributed to lower returns in both
U.S. and Japanese companies.
In free-market based societies, downsizing has generated a
host of entrepreneurial opportunities for individuals to operate their own
business. In fact, start-up
ventures in the United States are growing at three times the rate of the
national economy.
In general, restructuring will be successful when it enables
top management to regain strategic control of a company's operations.
Downscoping has been successful because it results in refocusing the company on
its core (and related) businesses and, in turn, on its core competencies.