Corporate Restructuring Techniques: Divestment Techniques
Corporate Restructuring is a strategic decision. It is an action taken by a corporate to significantly modify the financial and operational aspects of the company, usually when the business is facing financial stress. Also, Corporate Restructuring can also be considered as the process of changing the business operations and business portfolio in order to assess more profitable business options. In corporate restructuring, there are either operational or functional structure changes or changes in the business model of the company.
Divestment is the process of selling subsidiary assets, investments or divisions in order to maximize the value of the parent company. Some of the divestment techniques for corporate techniques are:
Sell-Off is a type of corporate restructuring techniques and includes an asset restructuring process where a company sells a part of its non-core business to any agreed parties. It is one of the very common divestment strategies where companies are selling off or divesting their less profitable or low performing businesses for avoiding further failure or loss of resources. Hive-Off is not statutorily defined.
Some of the examples of Sell-Offs are :
- British Petroleum sold its Texas City refinery to Marathon Petroleum for $2.5 Billion.
- TATA Motors hived-off the car business including electric vehicles into different separate subsidiaries.
- In 2014, Infosys hive-off its product, platforms and solutions (PPS) business into a separate subsidiary.
Reasons for Sell-Offs:
- To minimize the impact of redundant business units
- To generate funds by selling the non-performing assets
- To ensure stability and business survival
- To ensure profitability by focusing on efficient resources
- To reduce the business risk by selling off the high risk entities.
Demerger (Spin Off)
Demerger or Spin Off is a corporate restructuring business strategy where a company’s division or unit is separated and made into an independent company. In demerger, businesses are broken into components for various reasons; to operate on their own, to be sold or to be liquidated. Demerger generates much interest because it brings about downsizing of parent companies.
Split-up strategy is one of the demerger strategies wherein the company splits-up into one or more independent companies, such that the parent company ceases to exist. When any company with different product lines fails to control any of its business lines can split-up or separate its focus on the profitable business activities.
Some of the examples of demergers are:
- Jindal Stainless Limited demerged its three undertakings into Domestic Steel, Power and International Steel Business to leverage the idle capacity and in streamlining operations.
- British Telecom demerged its mobile phone operations BT Wireless to boost the performance of the stock.
- In 2008, Cadbury Schweppes spin-off Dr. Pepper Snapple from its U.S. Beverages unit.
- In 2019, Raymond demerged Raymond’s Apparel and Raymond’s Garment for increasing shareholder’s value.
- Tata Group announced demerger of the consumer product business from Tata Chemicals and Tata Global Beverages.
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Reasons for Demerger
- To focus on their most profitable units
- Demerger reduces risk and gain tax benefits
- To create value for shareholders
- To prevent performing from hostile takeover
Disadvantages of Demerger
- Loss of economies of scale
- Lower turnover and profitability
- Increase in overhead
- Loss of benefits from synergy
Management Buyout(MBO) is one of the forms of corporate restructuring techniques where a company’s management takes over or acquires a large part or all of the company either from the parent company or private owners. Interested management team pools resources to buy complete or part of the business they work for. MBO is a very convenient exit strategy for sellers.
Generally Management Buyout is favoured by the private equity firms and occurs when owners are retiring or has developed a capable management team to carry the business forward to the next stage. MBO is an attractive option because it is quicker, management knows all the ins and outs of the business, less risky.
Some of the examples of Management Buyout are:
- Sheffield Frgemasters buy-out from British Steel.
- Vickers Laboratories has been acquired as Management Buyout from Majority shareholders Julian Driver.
- Chief Executive David Bondi processed the management buyout of Freshcut Foods in partnership with private equity fund Perwyn.
Reasons for Management Buy Out
- It is quicker, less risky and has less due diligence.
- It has a low transaction cost and easy process..
- The business will grow in progress manner as management is buying out the organization where they are employed.
Leverage refers to a company’s debt level. Leverage Buyout is the condition of corporate restructuring where any firm or individual purchases a company using a significant amount of borrowed debt for the purchase transaction.
Some of the examples of Leverage Buyout are:
- Leveraged Buyout of Hospital Corporation of America (HCA) by Kohlberg Kravis Roberts & CO., Bain & Co. and Merrill Lynch is one of the largest buyouts.
- Leveraged Buyout of Gibson Greeting Cards by Wesray Capital is one of the successful buyouts.
- Blackstone Group bought Hilton Hotel in $26 billion as leveraged buyout.
- Kohlberg Kravis Roberts & CO. acquired First Data in $30 billion as leveraged buyout.
Reasons for Leverage Buyout
- A private investment firm or interested business may effectively run the targeted firm more efficiently.
- Leverage Buyout includes debt investment which helps in reducing the tax bill.
- The seller is able to bargain the price of the buyout and is the ideal exit strategy for the business.
Liquidation is one of the common corporate restructuring techniques where businesses are put to an end and assets are distributed or sold to claimants. This process is carried out when a company declares itself insolvent i.e. company is unable to pay the obligation from its core or regular operations. Here, the asset of the company is sold out and the money collected is used to pay the rightful amount to creditors and shareholders as per the priority. A bankrupt or insolvent firm ceases to exist once the liquidation process is complete. Liquidation value is the worth of a company’s assets if any firm declares insolvent and assets are sold. Liquidation has a legal approach in any business environment.
Some of the examples of Liquidation are:
- Merry-Go-Round filed bankruptcy in 1994 and all the assets were liquidated all its business in 1996.
- Financial Corporation of India liquidated in 1989 and Assets were worth $33.8 billion.
- Bank of New England Corporation was liquidated in 1991 and Assets were valued to $29.7 billion.
- Assurance Bank of Nigeria was liquidated in January 2006
Reasons for Liquidation
- Liquidation as an exit strategy
- It allows outstanding debt write off i.e. no debt obligation.
- Liquidation is a relatively low-cost method.
- Liquidation is a legal and organized end to the business.