by Prof. Ian H. Giddy, New York University
Corporate restructuring entails any fundamental change in a company's business or financial structure, designed to increase the company's value to shareholders or creditor. Corporate restructuring is often divided into two parts: financial restructuring and operational restructuring. Financial restructuring relates to improvements in the capital structure of the firm. An example of financial restructuring would be to add debt to lower the corporation's overall cost of capital. For otherwise viable firms under stress it may mean debt rescheduling or equity-for-debt swaps based on the strength of the firm. If the firm is in bankruptcy, this financial restructuring is laid out in the plan of reorganization. The second meaning, operational restructuring, is the process of increasing the economic viability of the underlying business model. Examples include mergers, the sale of divisions or abandonment of product lines, or cost-cutting measures such as closing down unprofitable facilities. In most turnarounds and bankruptcy situations, both financial and operational restructuring must occur simultaneously to save the business.
Corporate financial restructuring involves restructuring the assets and liabilities of corporations, including their debt-to-equity structures, in line with their cash-flow needs to promote efficiency, support growth, and maximize the value to shareholders, creditors and other stakeholders. These objectives make it sound like restructuring is done pro-actively, that it is initiated by management or the board of directors. While that is sometimes the case -- examples include share buybacks and leveraged recapitalizations -- more often the existing structure remains in place until a crisis emerges. Then the motives are defensive -- as in defenses against a hostile takeover -- or distress-induced, where creditors threaten to enforce their rights.
Financial restructuring may mean refinancing at every level of capital structure, including:
Assignment: Identify a company in the news that is undergoing
corporate restructuring. Is the restructuring financial or operational? What
methods are being used? Will they produce fundamental improvements? What
risks does the company run in using these techniques?