Definition
Restructuring in finance refers to the corporate action taken by a company to significantly modify its financial or operational structure, typically when it is under financial duress. This can involve modifying payment terms on loans, issuing equity to reduce debt or merging with another company. The goal of restructuring is to make the company more profitable, able to cope with its liabilities, or viably survive when it’s in situations of financial hardship.
Key Takeaways
- Restructuring is a significant modification made to the debt, operations, or structure of a company in order to eliminate financial harm and improve the business. This move is often associated with corporate financial distress or upcoming bankruptcy.
- An essential component of restructuring is debt restructuring. It is basically the process of replacing old debt with new debt. The primary objective is to reduce the interest burden, extend the repayment period, or negotiate for a lower amount to settle the debt.
- Restucturing may involve multiple changes like cost-cutting, selling off portions of the company, implementing new management structures, or a combination of these. Mission is aimed to increase profitability, to focus more on core operations, or to increase market share. Such changes can have wide-ranging effects on the company’s operations, brand image, and future growth potential.
Importance
Restructuring is a crucial term in finance as it refers to the act of reorganizing the financial, operational, legal, or other structures of a company with the purpose of making it more profitable, organized, or better equipped for its present needs.
This process typically occurs in response to significant financial distress, changes in the business environment, or as a strategy for growth.
It can involve changes to the company’s assets, liabilities, or equity structure, impacting its business operations, strategy, management, or competitive position.
Therefore, restructuring is recognized as an essential tool for corporate management to improve inefficiency, reduce costs, or navigate a crisis, thereby impacting the company’s future performance and survival.
Explanation
Restructuring in finance is a significant procedure aimed at adjusting the financial & operational aspects of a company, primarily to alleviate financial distress and to enhance the business’ overall profitability and efficiency. This process is designed as a way for struggling companies to manage debt, reduce operating expenses, or adjust their business model to improve their performance and maximize shareholder value.
It’s a means for underperforming companies to re-establish themselves and become competitive again. In restructuring, debt can be reorganized to facilitate a lower overall debt load and more manageable monthly payments.
A company might also opt for asset sale, closure of certain operations, or overall downsizing to free up resources and reduce operational costs. Organizational restructuring can involve modifying the management structure, departmental roles, and communication processes to foster better cohesiveness and collaboration.
It’s used as a strategic move to overcome financial challenges, breathe new life into the business, and set it on a path towards financial success in the long term.
Examples of Restructuring
General Motors Restructuring (2009): Due to the financial crisis in 2008, General Motors (GM) faced bankruptcy in
To save the company, the American and Canadian governments intervened and restructured GM by providing financial aid. Thousands of jobs were cut, and multiple brands under GM, such as Pontiac, were discontinued as part of the restructuring. The move allowed GM to cut off unprofitable segments and focus more on its core businesses.
Kodak’s Restructuring (2012): Kodak, the iconic photography company, filed for bankruptcy in
The restructuring plan included selling some of its patent portfolio, focusing on more profitable divisions, and transforming from a traditional photography company to a technology company focusing on digital imaging and printing.
Lehman Brothers Bankruptcy (2008): Considered the largest bankruptcy filing in U.S. history, Lehman Brothers collapsed due to the subprime mortgage crisis. It failed to restructure in time to save the company, which led to its downfall. However, after filing for bankruptcy, Lehman Brothers was forced to liquidate its assets, and in the process underwent a type of restructuring. Its North American division was bought by Barclays, and its Asia-Pacific businesses were acquired by Nomura Holdings. The restructuring allowed portions of Lehman Brothers to continue operating under new management.
Restructuring FAQ
What does restructuring mean in finance?
Restructuring in finance refers to the process of changing the organizational structure, business operations, or other aspects of a company. This usually involves financial restructuring which could entail altering the capital structure by means of debt and equity. The main goal behind restructuring is to make the company more profitable or better equipped for growth.
Why do companies undergo restructuring?
Companies usually undergo restructuring to revitalize their business operations, often in times of financial duress. Businesses that are unable to repay their debts may adopt a restructuring strategy to avoid bankruptcy and thus, protect the interests of their shareholders.
What are the types of restructuring?
There are generally two types of restructuring: financial and operational. Financial restructuring involves changes to the capital structure of the company, such as reducing debt or increasing equity. On the other hand, operational restructuring entails changes to the business process, such as downsizing or adopting new technologies to improve efficiency.
How does restructuring impact employees?
Restructuring can lead to workforce reductions as a company downsizes or reorganizes departments. However, it can also open opportunities as new roles can be created to align with the company’s new strategic direction. Employee impact widely depends on the specifics of the restructuring plan.
What is a restructuring plan?
A restructuring plan details the steps a company will take to reorganize. It might involve financial restructuring, such as reducing debt, renegotiating loan agreements, or operational restructuring, like cost-cutting measures or implementing new business strategies. The plan outlines the expected outcomes and timelines.
Related Entrepreneurship Terms
- Debt Restructuring
- Corporate Restructuring
- Bankruptcy
- Merger & Acquisition
- Capital Structure
Sources for More Information
- Investopedia: A comprehensive source for financial information and terms, including ‘restructuring’.
- Finance Town: Provides information about an array of financial terms and concepts, including restructuring.
- CFA Institute: This reputed institute offers detailed information on many finance and investment related topics.
- Corporate Finance Institute: It provides online courses on finance topics and has a large database of financial terms and concepts.
