A Comprehensive Guide to Corporate Restructuring in 2023: Meaning, Types, and Strategies

There are times when businesses need to reassess their operating model or financial standing. If you’re wondering what that is in corporate speak, it means corporate restructuring. This term refers to structural or operational changes in the company for reducing costs and improving efficiency, and profitability. Generally, corporate restructuring happens when a company is experiencing significant financial loss or facing problems continuing operations. Let’s take a closer look at what this means, its types, and if it benefits companies.

What is Corporate Restructuring?

Corporate restructuring refers to making significant changes in a company’s organizational or financial structure. This could mean a change in business strategy, closing subsidiaries,  acquiring new business, etc, to increase long-term profitability. Sometimes businesses also undergo restructuring to improve their overall performance and efficiency.

Why Companies Undertake Corporate Restructuring

1. Financial Difficulties: Companies may do corporate restructuring to tackle financial difficulties. For instance, if a company is facing difficulties in meeting its debt obligations, it may restructure its finances to avoid bankruptcy.
2. A Dynamic Business Environment: Companies need to be flexible to survive in today’s competitive environment. They need to adapt to changing market conditions, competition, and evolving customer needs. Corporate restructuring, therefore, helps companies in reorganizing their operations or changing their business strategy.
3. Mergers and Acquisitions: Corporate restructuring during a merger or acquisition is a way to integrate operations, streamline processes, and make the transition smooth.
4. Improve Efficiency and Profitability: Another reason for corporate restructuring is to increase the productivity of the workforce.

Also Read: What Is Corporate Sustainability? Learn About its 3 Pillars that Drive Long-Term Growth

Benefits of Corporate Restructuring

1. Improves Internal Communication: With restructuring, companies can improve their internal communication by reassessing and fixing any gaps.
2. Improves a Company’s Financial Situation: Many companies undertake corporate restructuring to improve their financial situation. A big reason is that restructuring allows companies to reevaluate their revenue stream and identify innovative ways to increase them.
3. Gives You an Edge Over Competitors: Corporate restructuring provides companies with an opportunity to improve their finance and organizational structure and other business processes. This helps companies to level up to their competitors.
4. Initiates Growth: Businesses can grow and expand their operations to different markets. They can also adopt the latest technological invention to gain agility and an upper hand over competitors.

Top Three Types of Corporate Restructuring

Portfolio Restructuring

This is the process of making changes to the company’s investment portfolio. Organizations use strategies like rebalancing, diversifying, and adjusting to restructure the assets owned by the company. There can be many reasons for restructuring a company’s portfolio. Some of them include market conditions, insolvency, or changes in financial goals.

Financial Restructuring

In this type of restructuring, businesses make changes in their financial assets to increase profits and reduce risks.  The main aim of financial restructuring is to ensure that the company and its subsidiaries generate a marginal increase in profit over time. It also prepares the company to face financial challenges by conducting debt refinancing and equity restructuring.

Organizational Restructuring

This is the process of changing the business model of an organization. Such changes can be legal, structural, or operational. The main reason for undertaking organizational restructuring is to prepare the company to adapt to the changes in the market and level up to the competition.

Also Read: What is Executive Presence? The Leadership Quality No One Told You About

Corporate Restructuring Strategies

While there are many corporate restructuring strategies that a company can undertake, we look at five of the most popular ones.

1# Mergers and Acquisitions (M&A)

Mergers and acquisitions are the processes of consolidating two or more companies into a single corporate entity. In a merger, two organizations of the same size consolidate to form a single new entity. Meanwhile, in an acquisition, one company acquires another business entity.  The main aim of merger and acquisition is to leverage business synergies achieved by combining two businesses. It’s important to remember that M&A can be beneficial for both companies involved, but it can also be risky and costly if not executed properly.

2# Divestiture

Divestiture involves the sale or liquidation of a non-performing or underperforming subsidiary, division, or product line of a company. It is also known as divestment. The purpose of divestitures is to focus on the core business and improve financial performance by selling off underperforming assets. Companies sometimes use divestiture to raise capital or pay the debt.

3# Joint Ventures

A joint venture is an agreement between two or more partners to combine their resources to achieve a common goal. It is a popular corporate restructuring strategy that companies undertake for a limited duration. Generally, companies participate in joint ventures to access new markets, unique technologies, or business activities that have more risk. Joint ventures help in sharing risk between partners.

 4# Spin-Offs

A spin-off occurs when a company creates a new and independent corporate entity. The new company is then presented to shareholders as a separate entity. The main aim of spin-offs is to allow parent companies to focus on their core business and improve their financial performance.

5# Leveraged Buyouts (LBO)

In a Leveraged Buyout (LBO), a parent company acquires a significant amount from its subsidiary entity through debt financing. They then restructure it and resell it by publicly listing it or selling it directly to an investor.  A leveraged buyout is beneficial for both the acquirer and the acquired company. However, it can be risky if the debt burden becomes too high.

Corporate restructuring is an essential tool that companies use to adapt to changing business environments, improve their financial performance, and gain a competitive advantage. If you are planning to make a career in finance, it’s important to be well-versed in the topic.  Moreover, enrolling in Emeritus’ leadership courses will help you learn about restructuring and what it takes to lead by example. These courses are designed to equip you with the skills and knowledge needed to enhance your career prospects.