The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes.

Following a merger or acquisition, corporate restructuring is often required. This makes sure that the new entity functions efficiently. Corporate restructuring helps streamline operations, eliminate redundancies, and reduce costs. However, corporate restructuring must be executed strategically to be effective.

What Is Corporate Restructuring?

The term “corporate restructuring” refers to reconfiguring a company’s hierarchy, internal structure, or operations procedures. Corporate restructuring is often viewed negatively. This is because it is associated with financial challenges and mass layoffs. While restructurings are often motivated by financial considerations, other reasons exist. These include responding to market changes, improving efficiency, and boosting competitiveness. Short form merger processes can provide efficient alternatives for certain types of corporate restructuring initiatives.

Corporate restructuring can take several forms, which include:

Organizational Restructuring: Organizational restructuring involves realigning a company’s internal structure, processes, and resources. It is generally undertaken to improve efficiency, reduce costs, streamline processes, or integrate new acquisitions. Examples include reducing bureaucracy, altering the leadership hierarchy, eliminating redundant roles, and redistributing employees.

Operational Restructuring: Operational restructuring involves changing how a company conducts its core business activities. This includes manufacturing, marketing, servicing, distribution, or warehousing to increase efficiency and lower costs. Examples include creating strategic alliances to leverage synergies, implementing new technology, and eliminating unprofitable product lines. Other examples include divesting low-growth business units or reducing the workforce.

Divestiture: Divestiture is the strategic process of selling a business unit, asset, or collection of assets. Such assets may include heavy machinery, equipment, a product or service line, real estate, or intellectual property. The goal of a divestiture is to generate value. This happens by selling or spinning off underperforming, redundant, or non-core assets.

Corporate Finance and Restructuring

Corporate finance and restructuring often go hand in hand. Financial restructuring can improve a company’s financial outlook by freeing up cash flow. It also reduces debt obligations and positions the company for sustainable growth or sale.

Financial restructuring can take a variety of forms. In a debt restructuring, a business consolidates its debt or negotiates decreased interest payments. Meanwhile, debt for equity swaps involve a business selling equity in exchange for debt reduction from creditors. In equity financing, a business issues new equity to raise capital. The restructuring might result in two or more entities, where one holds control over the other. Understanding bankruptcy trends can help businesses navigate financial restructuring options and avoid insolvency.

Corporate Restructuring Following an M&A Transaction

In the mergers and acquisitions process, two businesses join to form a single entity. One or both businesses typically restructure to accommodate the new business. In many cases, the new entity may merge, reduce, or eliminate business units and roles with similar functions. For instance, after an M&A, the new company may not require two human resources departments. The same may be true for real property assets in the same geographic area. This includes office buildings or distribution centers.

While restructuring is often necessary following a merger or acquisition, it is not without challenges. Because workforce reductions are often involved, restructuring can be disruptive to employee morale and productivity. This happens at least in the short term. Effective communication is needed following any M&A transaction and subsequent restructuring. Legal compliance is also paramount, particularly with regard to employment matters.

Key Considerations When Restructuring After a Merger

Restructuring can help merging companies come together smoothly. It also helps streamline and standardize their operations. However, these benefits can be lost if the merging companies lack a comprehensive plan and strong leadership. Below are a few considerations that can improve your likelihood of success:

Honestly Evaluate the Strengths/Weaknesses of Both Entities

A thorough and accurate assessment of each entity is needed for any reorganization. After all, how else can you incorporate the best aspects of each entity? This includes both operations and personnel as you move forward. Insight from managers, staff, and third parties can help verify the validity of the process.

Focus on People and Processes

When merging two companies, it is easy to get bogged down in the details. In situations involving significant overlap of staff, leadership may focus on staff reductions, maintaining morale, and building culture. While these are important considerations, the two merging entities also likely have very different processes. These processes may include everything from day-to-day operations to strategy. Devoting adequate resources to both personnel and operations is needed for successful post-merger restructuring.

Consider a Third Option

When planning what their new company should look like, merging companies often view each company’s approach differently. They see it as Option A vs. Option B. However, in some cases, the best decision or strategy may be another option entirely. When devising a restructuring plan, companies should carefully evaluate all their alternatives. This often includes a third or even fourth option. These additional options include new possibilities that arise for additional acquisitions or mergers. This is based on the strength resulting from the initial merger. Other options include employee stock ownership participations and larger equity and/or debt financing opportunities. These are available for public, private or government industry supporting funding programs. Employee phantom equity plans can provide creative alternatives for incentivizing key personnel during restructuring transitions.

Develop a Strong Team

An integration team comprised of executives, managers, and staff from different business areas can help. They should come from both companies to help the restructuring proceed smoothly. Transition leaders can be appointed within each business unit to manage day-to-day integration activities. They also make sure that the targets and expectations set forth in the restructuring plan are met. When issues arise, they should be reported directly to a C-level executive who can take prompt action. They can also seek input from the Company’s Board of Directors, legal counsel, accountants or other advisers.

Monitor Your Progress

Corporate restructuring is not a one-time event but a continuous process. It is important to regularly evaluate the impact of your changes. You should also be prepared to make further adjustments as necessary. If you are effective, efficient or fortunate in executing the plan, you can expect improved results. This includes improved stability and growth for your company.

How We Can Help

Scarinci Hollenbeck has a proven track record of helping companies successfully navigate corporate restructuring. We help them emerge stronger and more competitive. Our Mergers & Acquisitions team works tirelessly alongside our clients to develop a comprehensive restructuring plan. We also manage the complex legal issues that come with implementation. This includes issuing new equity, selling existing assets, and conducting layoffs. Contact us today to learn how we can help with your corporate restructuring needs.