Definition
Restructuring and reorganisation in finance refer to the act of rearranging the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable or better organized for its present needs. This process often involves modifying debt terms, selling portions of the company, or merging with other businesses. This usually occurs during times of financial distress or bankruptcy, but can also be a chosen strategy for business expansion or change in direction.
Key Takeaways
- Restructuring and Reorganisation often refer to the act of making significant changes within a company. These changes can include alterations in ownership, operational adjustments, implementing new business strategies, or adapting to a new regulatory environment in order to improve the company’s financial health.
- Restructuring and reorganisation can be a means to respond to significant financial distress, including bankruptcy. In such cases, the company may decide on debt restructuring – this is where the terms of outstanding credits are renegotiated in an attempt to extend the payback period, lower interest rates, and/or exchange the debt for equity.
- While these processes can result in a more competitive and financially stable company, they can also lead to job losses as departments may be downsized, merged, or eliminated. However, successful restructuring or reorganisation can allow a company to emerge stronger and more focused, ultimately supporting long-term growth and sustainability.
Importance
Restructuring and reorganisation are crucial terms in finance due to their significant impact on a company’s operational, financial, and managerial structure.
This process allows firms that are facing financial difficulties or looking to improve their performance and productivity to adjust their debts, change their business model, or modify their operational strategies for enhanced efficiency and profitability.
Restructuring and reorganisation can often lead to job cuts, asset sales, or spin-offs but these measures can ultimately result in a leaner, more efficient, and profitable organisation in the long run.
Consequently, successful restructuring and reorganisation can not only allow a company to survive a period of weak financial performance or severe crisis, but also position it for substantial future growth.
Explanation
The primary purpose of restructuring and reorganisation in finance is to enhance efficiency, productivity, and overall business performance. It is a strategic move companies undertake to manage their debt, change the organizational structure, or respond to significant shifts in the market like changes in technology or consumer behaviors.
Typically, the restructuring process involves revising various aspects of business activity – layoffs or reduction in workforce, consolidation of departments, alteration in operational strategies, or modification of financial structures. The process of restructuring and reorganisation is generally used to salvage a company that is under-performing, indebted, or is in need of a makeover to adjust to new market trends and business realities.
It can help in reducing financial losses by cutting down excess costs or streamlining operations. It is also common in mergers and acquisitions (M&A), where the management of the acquiring company restructures the acquired entity to align with its corporate strategy and objectives.
Ultimately, the goal of any restructuring or reorganisation is to revitalise the company to better withstand hardships, survive in competitive environments, and achieve its long-term business objectives.
Examples of Restructuring and Reorganisation
General Motors 2009 Restructuring: Amidst the 2008 financial crisis, General Motors faced severe financial distress and declared bankruptcy in
The company underwent major restructuring and reorganisation efforts that were facilitated by the U.S. government’s bailout. This involved job cuts, closures of manufacturing plants, withdrawal from unprofitable markets, and focusing on core brands. The company emerged from bankruptcy quickly, and by 2010, started making profits again.
Kodak’s 2012 Restructuring: Eastman Kodak, once the leader in the photo film market, filed for bankruptcy in 2012 as it struggled to compete in the digital photography market. The company went through restructuring and shifted its focus to digital imaging and printing services for businesses. This transformative step helped the company adapt to the digital age and emerge from bankruptcy in
Lehman Brothers’ 2008 Reorganisation: Lehman Brothers was a global financial services firm that filed for bankruptcy during the 2008 financial crisis. It was one of the largest bankruptcy filings in the history of the United States and it triggered a restructuring and reorganisation process. The company ended up selling its North American investment banking and trading businesses to Barclays and its investment management division was sold to Neuberger Berman.
FAQs about Restructuring and Reorganisation
1. What is Restructuring and Reorganisation?
Restructuring and reorganisation refer to the act of reordering business operations, structure, and debt with an aim to increase profits, improve the firm’s alignment to business strategy, or respond to a crisis. This normally happens in response to significant adjustments within an industry or business.
2. What are the types of Restructuring and Reorganisation?
There are two main types of restructuring: financial and operational. Financial restructuring involves changes to a firm’s capital structure, while operational restructuring focuses on improving the organization’s performance and efficiency at the operational level.
3. What is the impact of Restructuring and Reorganisation on employees?
Restructuring and reorganisation may involve job layoffs, shifts in job responsibilities, and changes in managerial hierarchies. Such changes can have both positive and negative impacts. On the positive side, it can result in a more efficient and prosperous organization. However, it may also lead to job insecurity and stress among employees.
4. When is Restructuring and Reorganisation necessary?
Restructuring and reorganisation become necessary when a company is facing financial difficulties, has acquired a new business, is undertaking a merger or acquisition and needs to align operations, wants to fix performance problems or seeks to pivot its business model in light of changing market dynamics.
5. How long does Restructuring and Reorganisation take?
The time taken for Restructuring and Reorganisation varies greatly and depends on the size of the organization, the complexity of operations, and the extent of the changes being made. This can range from a few months to a few years.
Related Entrepreneurship Terms
- Debt Restructuring
- Corporate Restructuring
- Operational Reorganisation
- Bankruptcy Reorganization
- Mergers and Acquisitions (M&A)
Sources for More Information
- Investopedia: This website offers a comprehensive selection of articles, definitions, and expert insights into the world of finance, including topics on restructuring and reorganisation.
- Financial Times: A leading news organisation with a strong focus on business and economic news. They often offer deep dives into complex topics such as corporate restructuring and reorganisation.
- Bloomberg: A globally-recognised platform for financial, data, and media, Bloomberg frequently analyses economic trends and themes like restructuring and reorganisation.
- The Economist: Known for its authoritative perspective on international news, politics, business, and finance, this platform can provide a well-rounded understanding of restructuring and reorganisation.
