The following main points highlight the thirteen main techniques used for restructuring the business. The techniques are: 1. Management Buy-Out (MBO) 2. Management Buy-In (MBI) 3. Strategic Alliances 4. Reverse Merger 5. Sell-Off 6. Divestitures 7. Slump Sale 8. Equity Carveout 9. Franchising 10. Intellectual Property Rights 11. Holding Companies 12. Going Private 13. Liquidation.
Technique # 1. Management Buy-Out (MBO):
MBO is the purchase of a business by its management when the existing owners are trying to sell business to third parties due to its slow growth or lack of managerial skills in running the business. The existing managers will come forward to purchase and run the business by taking it over from the owners. In a MBO, the managers purchase all or part of the business from its owners.
The management team will take substantial controlling interest from the existing owners who are having control over the affairs of the company. The management team may consist of one or more directors and employees, either with or without inviting for external associates. It is a method of setting up of business by the management team itself.
The cases of MBO occurs when the existing owners unable to run the company successfully and when the very existence of the company is at stake. It is a divestment technique to sell the business which does not fit in with the new strategic plan of the group. The management will know the strengths and weaknesses of the business they are proposing to purchase from the owners and can make a better bargain.
The insider information available with the managers will lead them to acquire substantial stake. The purchase price is met by a small amount of their own funds and the rest of funds are arranged through venture capital and bank debt. MBOs are also resorted when the succession of family business arises.
Sometimes the conglomerate intend to concentrate on core activities and by disposing the non-core divisions to the managers who are interested in running them and allowing those units to continue as strategic partner in business. The MBOs are used in restructuring the business and to tide over the recessionary tendency in business.
Technique # 2. Management Buy-In (MBI):
The management team who have got special skills will search out and purchase business, to their interested area, which has considerable potential but that has not been run to its full advantage due to lack of managerial and technical skills, fails to establish the market for the company’s products. After the identification of suitable unit for purchase, the management team will make arrangements with the venture capitalist for finance.
The management team will generally have lesser funds for investment and, therefore, debt component will be more in their purchase of the business unit. The MBI is just reverse to MBO. In MBI, the management of other concern, not the management of the same company, acquires the majority shareholding and thus the existing management of the concern has to leave the concern.
Technique # 3. Strategic Alliances:
An ‘alliance’ is defined as associations to further the common interests of the members. Strategic alliance is an arrangement or agreement under which two or more firms cooperate in order to achieve certain commercial objectives. The motive behind strategic alliances is to reduce cost, technology sharing, product development, market access, availability of capital, risk sharing etc.
The concept of ‘alliance’ is gaining importance in infrastructure sectors, more particularly in the areas of power, oil and gas. The basic objective is to facilitate transfer of technology while implementing large objectives. The resultant benefits are shared in proportion to the contribution made by each party in achieving the targets. In strategic alliance, two or more firms that unite to pursue a set of agreed upon goals, remain independent subsequent to the formation of an alliance.
The strategic alliances are generally in the forms like joint venture, franchising, supply agreement, purchase agreement, distribution agreement, marketing agreement, management contract, technical service agreement, licensing of technology/patent/trade mark/design etc.
The strategic alliance agreement contains the terms like capital contribution, infrastructure, decision-making, sharing of risk and return etc. A strategic alliance integrates the synergetic talents of alliance partners. Mutual understanding and trust are the basic tenets of strategic alliances. For smooth functioning of an alliance, partners are required to have preset priorities and expectations from each other.
Technique # 4. Reverse Merger:
In corporate merger, relative size in terms of either capital employed or turnover of the companies in deal determines which will be acquired by whom. In normal practice, it is the larger company which acquire a smaller one. But in case of reverse merger it is a smaller company acquires the larger company.
The reverse merger may be motivated by tax benefits available whenever at least one of the companies in deal has accumulated loss or unabsorbed expenses/allowance that can be carried forward and setoff against future profit of the amalgamated company.
The takeover by the smaller firm would also be more appropriate if it had the better record and more promising future. In some cases the smaller company is listed but the larger company is not and, therefore, in order to keep the listing, without having to pay costs in obtaining a new one, the smaller listed company makes the acquisition.
The restructuring through reverse merger process is carried on following three steps:
1. Capital reduction of the losing company to write-off the share capital not represented by assets.
2. Consolidation of shares after capital reduction to make face value of shares of the acquirer at par with that of the target.
3. Change of name after merger to publicize the name of the target.
Technique # 5. Sell-Off:
In a strategic planning process, a company can take decision to concentrate on core business activities by selling off the non-core business divisions.
A sell-off is a sale of part of the organization to a third party in the following circumstances:
1. To come out of shortage of cash and severe liquidity problems
2. To concentrate on core business activities
3. To protect the firm from takeover activities by selling-off the desirable division to the bidder
4. To improve the profitability of the firm by selling-off loss-making divisions
5. To increase the efficiency of men, machines and money
6. To facilitate the promising activities with enough funds by sell-off non-performing assets
7. To reduce the business risk by selling-off the high risk activities
Technique # 6. Divestitures:
Divestitures are considered as one of the important techniques in corporate restructuring. Divestitures does not deal with acquisition or combination but it frequently examine the various recently acquired assets and divisions to determine whether the assets or divisions are fit into overall corporate strategy in value maximization and its future plans. If it does not serve the purpose, such assets or divisions are hived-off.
Technique # 7. Slump Sale:
When a company sells or disposes the whole or substantially the whole of the undertaking for a predetermined lumpsum amount as sale consideration is called ‘slump sale’. The acquirer may be interested in purchase of an undertaking or part of it as a going concern and the acquirer is not interested in taking the whole company as part of the transaction.
While fixing the selling price, the values of assets are not individually counted and the liabilities are not separately considered while fixing the slump price. A business transfer agreement will be entered into between the acquirer and seller and the hive-off deal passes the title for both movable and immovable properties and the related liabilities as a ‘going concern’.
Technique # 8. Equity Carveout:
It is a situation where a parent company sells portion of its equity in a wholly owned subsidiary to the general public or to a strategic investor. An equity carveout enable the parent to generate cash inflow which can be used for further investments. In a spin-off, the shares received from the acquirer of undertaking are distributed among the existing shareholders of the parent company. But in equity carve out the shares of the parent company in wholly owned subsidiary are sold out to outside investors.
Technique # 9. Franchising:
Franchising provides an immediate access to business operations and technology in profitable fields of operations. It is an important means of doing business in several countries and represents an effective combination of the advantages of large business with the motivation and adaptation capabilities of small or medium scale enterprises.
It also enables linkages of large and small businesses within a framework of vertical division of labour. The concept of franchising is quite comprehensive and covers an extensive range of marketing and distribution arrangements for goods and services. Franchises are becoming a key mechanism for technological, marketing and service linkages between enterprises within a country as well as globally.
Technique # 10. Intellectual Property Rights:
The worth of a company lies more in its intangible assets (patents, trademarks, brands, copyrights etc.) than tangible assets (land, building, plant & machinery). The intellectual property rights give real value to a company. Patents, trademarks and strong brands lead to higher sales, economies of scale and profits.
Some business gains, however, instead of investing efforts, time and money in research and development for new patents, trademarks and brands, prefer to buy these from companies or go to the extent of acquiring the companies themselves.
Technique # 11. Holding Companies:
A holding company enjoys controlling interest in the subsidiary by acquiring substantial voting power in the form of acquisition of equity shares. When the holding company acquires 100% voting power in subsidiary, it is called ‘wholly owned subsidiary’. Acquisition of controlling interest in subsidiary by holding company is a form of combination and can also be used as a technique of restructuring. The holding company is also called as ‘parent’ enterprise.
A parent can exercise control over subsidiary in the following manner:
1. More than 50 per cent of voting power of subsidiary is held by parent either directly or along with other subsidiaries, or
2. The composition of the board of directors or the governing body of subsidiary is controlled by parent with a view to obtain economic benefits from its activities.
A group enterprise consists of parent and all its subsidiaries. The consolidated financial statements are prepared and presented treating the group as a single enterprise.
Technique # 12. Going Private:
In a restructure program, the management of the widely held company may decide to go private by purchase of stocks from the outside public and delisting the shares in the stock exchanges where the shares are traded. By going private, a company can avoid the predators from bidding the company.
It can avoid the listing fees of the stock exchanges and when the company is in financial difficulties this will avoid the fall in share prices. It facilitates to avoid the declaration of periodical results for general public. By keeping-off from the public, trade secrecy can be maintained.
Technique # 13. Liquidation:
A business may go into decline when losses are made over several years. The losses are setoff against past profits retained in the business (reserves), but clearly the situation cannot continue for very long. In such case liquidation of company may be imminent.
In case of technological obsolescence, lack of market for the company’s products, financial losses, cash shortages, lack of managerial skills, the owners may decide to liquidate the business to stop further aggravation of losses. With a strategic motive also, a business unit may be liquidated.