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Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Corporate Restructuring Concepts for Financial Management and Policy MCOM Sem 2 Delhi University : Corporate restructuring involves restructuring the assets and liabilities of corporations, including their debt-to-equity structures, in line with their cash flow needs in order to.

· Promote efficiency,

· Restore growth,

· And minimize the cost to tax payers.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Corporate governance refers to the framework of rules and regulations that enable the stakeholders to exercise appropriate oversight of a company to maximize its value and to obtain a return on their holdings. Fundamental cultural and institutional changes are required if a new corporate governance structure is to be established with arm’s-length, transparent relations between corporations, government, and banks. Changing corporate governance, however, is a long-term process. Global enterprises may be motivated to reorganize their worldwide tax and legal structure for a variety of reasons.

For example.

· To fully realize the value anticipated from a strategic merger or acquisition, a global enterprise must quickly reorganize and integrate its combined business operations from a tax and legal perspective.

· On the other hand, a fully integrated global enterprise may be forced to quickly realign its worldwide structure in order to effect a strategic spin-off or disposition of business operations that the management no longer deems desirable or essential.

· Finally, a global enterprise may wish to reorganize its worldwide structure to accommodate a down-sizing or transformation of its existing business operations or simply to generate tax and legal efficiencies that will contribute to its overall earnings per share. Whatever the objective, to be truly successful, a global reorganization must be structured in a manner that not only,

· Optimizes the ultimate tax position of the enterprise, · But also addresses a multitude of legal issues that arise as a result of the restructuring.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

There are many reasons why a company may aim to achieve growth rather than remain at the same size. Firms which grow benefit from the economies of scale which eventually lead to a LESSON 1: UNIT 1 INTRODUCTION TO CORPORATE RESTRUCTURING greater profit. Firms aim to maximize their profit as this is the ultimate goal for all firms. Economies of scale give greater technical efficiency, spreading fixed costs, bulk buying, agglomeration and so on. That is, technical efficiency generally increases as the size of the firm increases, MR = MC and profit is maximised.

Pathways for Takeovers and Mergers

A takeover occurs when one company secures over 50% of another company. This can be for several reasons such as the benefits of economies of scale (especially with the sharing of management), greater marketing power and complimentary Objective The objective of this lesson is to give you insight in to : · The concept of corporate restructure · Why should Corporates restructure themselves · How to structure a restructuring 2 CORPORATE RESTRUCTURING products.

Forms of Business Growth (increased market share; product development; growth of market from external sources; profit growth)

Steady growth in profits, assets and income can be used as one form of measurement of business growth.

Sources of Finance for Business Growth

There are several ways of raising finance for a company. Determining which method is used to get it, depends on how much finance is needed in the first place and the current net assets of the company, how urgently the finance is needed, whether or not and how long before the money will be payed backed and other factors. Some companies will choose to float some shares in their company as a source of finance.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Business Failures

Before we understand the physiology of restructuring let us understand the causes for corporate failures. “God, but its hard making predictions!…….. Especially about the future” – Alphonse Allais. “The future, sadly, is not any more what it used to be” – Paul Valery. The result is increased number of corporate failures.

Business Failure and Reorganization

Business failure occurs due to different reasons. While few firms fail within first year or two of life, few others grow, mature and fail much later. The failure can occur in a number of ways and also from different reasons. Business failure can be considered from, · Economic and, · Financial view point.

Symptoms of Bankruptcy or Failure

Having understood the causes for a firm’s sickness, the next important question is – is it possible to with reasonable accuracy predict a firm’s failure using some modeling technique. Research shows that as a company enters the final stage prior to failure – a pattern may develop in terms of – changing financial ratios which prove to be useful indicators of an impending disaster.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Types of Business Failure

Insolvency

A firm may fail if its returns are negative or even low. A firm that consistently reports losses at operational level would experience decline in market share and eventual closure.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Technical Insolvency

A firm is said to be facing technical insolvency when it is unable to pay its liabilities as they become due. Thus when a firm faces technical insolvency its assets are still greater than the liabilities but the firm is confronted with liquidity crisis.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Bankruptcy

When a firm has technical insolvency some of its assets could be converted to cash to escape complete failure. If this is not done at right time, the firm may have to face a more serious type of failure – Bankruptcy. It occurs when firm’s assets are less than the liabilities. A bankrupt firm has a negative shareholder’s equity. Although bankruptcy is a more obvious form of business failure courts treat technical insolvency and bankruptcy in the same way.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

The Challenge

When a firm faces severe problems, either the problems must be resolved or the firm must be liquidated. At such point an important question has to be answered – “is the firm worth more dead or alive” The decision to continue operating has to be based upon – The feasibility and fairness of reorganizing the firms as opposed to the benefits of liquidating the business. When technical insolvency occurs management must either modify the operating financial conditions or terminate the firm’s life If a decision is made to alter the company in the hopes of revitalizing its operations, · Either voluntary agreements with the investors, or · A formal court arranged reorganization must be used. If on the other hand the difficulties are believed to be insurmountable, then liquidation will take place either by assignments of assets to an independent party for liquidation or by formal bankruptcy proceedings.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Voluntary Remedies to Insolvency

Once a firm begins to encounter these difficulties the firm’s owners and management have to consider the alternatives available to failing business. Such a firm has two remedies, · Attempt to resolve its difficulties with its creditors on voluntary or informal process. · Petition the courts for assistance and formally declare bankruptcy. The company creditors also may petition to courts and get the company involuntarily declared bankrupt.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

To Reorganize or Liquidate

Regardless of whether a business chooses informal or formal methods to deal with its difficulties eventually the decision has to be made whether to reorganize or liquidate the business. Before this decision can be made both the business liquidation value and its going concern value has to determine. Liquidation value: equals the proceeds that would be received from the sale of the business less its liabilities. Going concern value: equals the capitalized value of the company’s operating earnings less its liabilities. Normally, If the going-concern value exceeds the liquidation value the company needs to be reorganized otherwise it should be liquidated.

However in practice the determination of the going concern and liquidation values is not easy due to following reasons,

· Uncertainty as to estimating the price the company’s assts will bring at auction.

· The company’s future operating earnings

· Appropriate discount rate at which to capitalize the earning may be difficult to determine.

· Management understandably is not in a position to be completely –objective, about the above values.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Informal Alternatives for Failing Business

Regardless of exact reasons why a business begins to experience difficulties Regardless of the exact reasons why a business begins to experience difficulties the result is often same – Cash flow problems Frequently, · The first step taken by troubled company involves stretching its payable. In some occasions this can keep the company busy for several weeks of needed time before creditors take action. If the difficulties are more than just minor and temporary the company may turn to its bankers with request for additional working capital loans.

· Another possible action is the company bankers and creditors take up to restructure the company’s debt. Restructuring of debt by bankers can be quite complex. However debt restructuring basically involves either · Extension, · Composition, or

· A combination of both above.

In Extension: The failing company tries to reach an agreement with its creditors that will permit it to lengthen the time for meeting its obligations. In composition: The firm’s creditors accept some percentage amount lees than their original claim and the company is permitted to discharge its debt obligations by paying less than the full amounts and are protected from any further actions on part of creditors while it attempts to work out a plan of reorganization.

Another important aspect of the bankruptcy procedures involves what to do with the failing firm. Just as in case of informal alternatives a decision has to be made about whether a firm’s value as a going concern is greater than its liquidation value. Generally if this is so a suitable plan of reorganization can be formulated and the firm is reorganized otherwise it is liquidated.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

Reorganization

If a voluntary remedy such as an extension or composition is not workable a company can declare or be forced by its creditors into bankruptcy. As a part of this process a firm is either reorganized or dissolved. Reorganization is similar to an extension or composition, the objective being to revitalize the firm by changing its capital structure like, · Reduction of fixed charges by substituting equity and limited income securities in place of fixed income securities, etc. Corporate restructuring can occur in myriad ways. Mergers, takeovers, divestitures, spin-offs, and so on referred to collectively as corporate restructuring have become a major force in the financial and economic environment all over the world.

Corporate Restructuring Concepts for Financial Management and Policy Mcom Sem 2 Delhi University

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