Corporate Restructuring: A Boon for Competitive Advantage

By Nag, G. C. Pathak, R. D. | Advances in Competitiveness Research, Annual 2009 | Go to article overview

Corporate Restructuring: A Boon for Competitive Advantage


Nag, G. C. Pathak, R. D., Advances in Competitiveness Research


"Whenever you see a successful business, someone once made a courageous decision"--Peter F. Drucker

INTRODUCTION

Restructuring refers to multidimensional process. However, the term corporate restructuring is used here for operational restructuring as long term strategy of business. Operational restructuring is an ongoing process, which includes improvement in efficiency and management, reduction in staff and wages, sales of assets (for example, reduction in subsidiaries), enhanced marketing efforts, and so on with the expectation of higher profitability and cash flow (1). Rising competition, breakthrough technological and other changes, rising stock market volatility, major corporate accounting scandals have increased the responsibility to managers to deliver superior performance and enhance market value to shareholders. The companies which fail to deal with the above successfully may lose their independence, if not face extinction.

According to a study by the Harvard Business School (2), corporate restructuring has enabled thousands of organizations around the world to respond more quickly and effectively to new opportunities and unexpected pressures, thereby re-establishing their competitive advantage.

In India, corporate houses have recently witnessed an increase of restructuring in different organizations. The main reasons for the sudden impetus to restructure in India are as follows: a) deshackling of strict MRTP (3) provisions and new government policy of relicensing b) increased competition is another key element for giving rise to corporate restructuring. c) mounting pressure on margins have necessitated higher volume of business, resulting in mergers and acquisitions or the grand concentration of strategy has led to demergers of non profitable businesses, and d) all round resource optimization in existing businesses to streamline operational profit and to stay fit in competition. However, some organizations have done their restructuring through acquisition and mergers and some through demergers. There is also corporate restructuring done through changes in corporate structure and optimization of resources including financial structuring. When the market price of shares are rising, the companies like to use their shares to acquire other companies. Acquisition is a process of taking over companies and merging with the entity in order to improve the margin. Here the advisors of the company may suggest and encourage mergers after taking over the other company. Demerger is a process of corporate restructuring in which single or multiple business units are spun off as a new entity. Demerger is just the opposite of merger. In a market of falling prices, mergers and initial public offers are less popular and the merchant banks, who normally earn their fees from corporate activity, start to look at demerger possibilities of their clients (4). A framework of corporate restructuring shown in Figure 1 below explains all about corporate restructuring

[FIGURE 1 OMITTED]

OVERVIEWS

There were various corporate restructurings in India during the last few years. However, this paper deals with successful corporate restructuring of three Indian companies which immensely enhanced the shareholders' market value and strengthened their competitive edge in recent times. These are Reliance Industries Ltd., Larsen and Toubro Ltd., and Siemens Ltd.

For example, the acquisition, merger, and demerger of Reliance Industries Ltd. like their acquisition of IPCL (5) mergers of Reliance Petrochemicals Ltd., and the recent demergers of four entities like Reliance Communication Ventures Ltd., Reliance Energy Ventures Ltd., Reliance Natural Resources Ventures Ltd., and Reliance Capital Ventures Ltd. which spun off from Reliance Industries Ltd. (RIL), and were perhaps the most prominent restructurings in recent times.

Even the recent demerger of the cement division of Larsen and Toubro Ltd. …

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