What is Restructuring?
Restructuring is an action implemented by a company to bring about substantial modifications in its financial and operational aspects, usually in response to financial challenges. It is a form of corporate action aimed at making significant alterations to a company’s debt, operations, or structure to mitigate financial harm and enhance overall business performance.
When a company faces difficulties meeting its debt obligations, it frequently engages in debt restructuring, consolidating and adjusting the terms of the debt to establish a feasible plan for repaying bondholders. Also, a company can undertake operational or structural restructuring by implementing cost-cutting measures, such as reducing payroll or divesting assets, to streamline its operations.
Key points:
- Restructuring involves significant changes to a company’s financial or operational structure, often during financial difficulties.
- Companies may opt for restructuring in preparation for a sale, buyout, merger, shift in overall objectives, or a change in ownership.
- Post-restructuring, the company should emerge with more streamlined and financially robust business operations.
There are many reasons prompting companies to undergo restructuring, encompassing various factors such as declining financial health, underperforming earnings, sluggish sales revenue, burdensome debt, loss of competitiveness, or intense industry competition.
A company might opt for restructuring as a strategic move to prepare for sale, acquisition, merger, realignment of objectives, or transfer of ownership. For instance, restructuring could follow a failed product or service launch, leaving the company unable to generate sufficient revenue to meet payroll and debt obligations.
Subject to agreement among shareholders and creditors, the company may pursue actions such as asset sales, financial restructuring, equity issuance for debt reduction, or bankruptcy filing while continuing operations.
Restructuring Process
When a company undergoes internal restructuring, it may experience changes in its operations, processes, departments, or ownership, with the aim of enhancing integration and profitability. Often, financial and legal advisors are enlisted to facilitate negotiations on restructuring plans. This could involve selling parts of the company to investors and appointing a new chief executive officer (CEO) to oversee the implementation of changes.
The outcomes of such restructuring efforts may include modifications in procedures, computer systems, networks, locations, and legal matters. Due to potential position overlaps, there may be job redundancies leading to layoffs.
The expenses associated with restructuring can accumulate rapidly, whether it involves streamlining product or service lines, terminating contracts, dissolving divisions, depreciating assets, shuttering facilities, or relocating staff.
Similarly, venturing into new markets, expanding product lines or services, onboarding new staff, and acquiring property entail additional expenditures. Alterations in business operations, whether expansion or contraction, often lead to changes in debt levels and financial obligations.
Following a period of adjustment for employees to the new organisational landscape, the company may find itself better positioned to achieve its objectives through increased production efficiency. However, not all corporate restructurings yield positive outcomes, and in some cases, companies may need to acknowledge failure and consider selling or liquidating assets to settle debts before ceasing operations permanently.
Examples of Restructuring
Let’s take a look at some Australian businesses that have successfully restructured or are proceeding with their restructuring.
Westpac
The Westpac Group has been working on a tech-based restructure plan since early 2022. The work involves splitting up its joint IT and operations division and putting up the ops functions to the Corporate Services arm. New chief executives for the consumer and business banking departments and the Westpac Institutional Bank were appointed.
Australian MPA Fish Farms and MPA Marketing, Barramundi Group
In 2022, the Singapore-based Barramundi Group originally planned to sell its aquaculture company, Marine Produce Australia (MPA), to Wild Ocean Australia, for $1.6m, plus $3.4m based on securing four site leases in Kimberley, WA. The plan called for Barramundi to increase its 34 per cent stake in Wild Ocean to 50.5 per cent had the sale gone ahead.
However, the deal fell through in early 2023 after Wild Ocean failed to secure funding. Instead of finding new buyers, Barramundi tapped two administrators from a Melbourne restructuring firm to oversee its turnaround while appointing a new CFO to succeed an incumbent CFO and interim CFO who stepped down.
FAQs
What are the different types of restructuring?
A company has numerous options for restructuring, such as legal adjustments, turnaround efforts, cost reduction strategies, divestiture, spin-offs, repositioning initiatives, and mergers and acquisitions.
Does restructuring always involve job cuts?
During a company restructuring, there is often a reduction in workforce as part of efforts to streamline operations, which may involve consolidating departments, shutting down certain divisions, and seeking overall efficiency gains and cost reductions.
Is there a restriction on the frequency of a company’s restructuring efforts?
There is no statutory restriction on the frequency of a company’s restructuring efforts. A company retains the flexibility to adjust its operations as required to enhance efficiency and reduce expenses. Nonetheless, restructuring is a intricate endeavour demanding considerable time and strategic planning; therefore, it should not be undertaken casually or frequently.
Conclusion
Companies embark on restructuring to address financial or operational challenges, often during times of financial strain. While restructuring can be a challenging and disruptive process, ultimately reshaping both internal and external company structures and leading to job cuts, it should ideally result in smoother and more financially sustainable business operations once completed.
DISCLAIMER: This article is for informational purposes only and does not replace official business advice. AVANTE PARTNERS is not affiliated with any mentioned company.