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1 CORPORATE RESTRUCTURING Learning Objectives After Reading CORPORATE RESTRUCTURING Learning objectives After reading the chapter you will be able to understand The concept of corporate restructuring The organization restructuring The financial restructuring The portfolio restructuring The tools of portfolio restructuring The nature and scope of Alliances & Joint Ventures The nature and scope of Divestitures, spin-offs, demerger and sells offs The nature and scope of Mergers and acquisition Concept in practice In 2000 world’s biggest corporate brand coca cola and world’s first product Brand Company P&G decided to float a joint venture. The joint venture was aimed at combining Juice and chips of the two brands to achieve growth and long term value. The Joint Venture stood at $ 4 Billion named simply Juice; Coca Cola would make new health oriented beverages with the help of P&G’s expertise on the subject. P&G had large resources in R&D division that had to its expertise in health beverages. P&G agreed to Punica, Sunny delight and Pringles Chips. The two company joined forces with an intention to market snacks along with juice drinks globally, Coca Cola agreed to transfer its juice brands minute maid five alive, Fruitopia, Cappy, Capo, Sonfil, Qoo brands. P&G was to benefit from the Coke’s powerful global distribution network. The Joint Venture aimed at generally annual sales of about $4Billion with more than 5000 people and would reduce the cost by $50 million. Coke would share 50% of the profits from the fast growing business segment with a rival that could not compete in its core business. The advantage was more towards P&G which stood as the winner while Coca Cola was more on the loosing end. Market was abuzz with the fact that Coca Cola should have bought the health soft drink technologies it required rather than going for alliance with a weak rival in the core business. The share price of Coca Cola immediately after the announcement fell by 6% on the day of announced of Joint Venture while that of P&G rose by 2%. Both the companies specially Coke realized the mistake and called off the deal in July 2001. The deal announced in February 2001 was unable to take off because of the miscalculated alliance objective and synergy gains. A grand corporate brand like Coke should have opted for a buyout rather than an alliance. CHAPTER OUTLINE CORPORATE RESTRUCTURING Organizational Restructuring Organization restructuring models Financial Restructuring Portfolio Restructuring 1 Divestment or Divestiture Equity carve out Spin off /demerger Asset Sell Off Joint Venture and Strategic Alliances Mergers and Acquisition. Horizontal Merger Vertical Merger Conglomerate Merger CORPORATE RESTRUCTURING Markets world wide have become more competitive in an extremely challenging environment. The shareholders have become more demanding emphasizing more on corporate value creation. In this regard, companies attempt all efforts to create value for the shareholders. Any corporate activity or action that results in enhancing productivity, enhancing revenues, reducing cost (operational cost and cost of capital) or enhancing shareholder wealth is the flavour of the management. Many companies reorganize that is restructuring to attain the above objectives. Reorganization is aimed at streamlining the business operation, restructuring the business divisions, restructuring the funding sources (capital structure) or consolidating by spin off or demerger. Ultimately, all restructuring exercises lead to improving the wealth of the firm in the long run. Restructuring activities include diverse initiatives taken by firms like acquiring a new business, reducing debt from its capital structure, selling off traditional business or merging its business units or dividing existing business unit into subsets etc. Each activity of restructuring results in a different out comes smart execution of well thought and well crafted restructuring initiatives result in wealth maximization of wealth for the business. Generally the market gives a positive reaction to restructuring initiatives. The market movement as measured by firm’s stock price movement before and after announcement of corporate restructuring initiative. These movements may be positive or negative depending on the type of restructuring initiative and market trend. Apart from market performance measure restructuring initiative can also be measured in terms of internal performance metric like return on equity (ROE), return on capital employed (ROCE), gross margin and net margin, earning per share(EPS) etc. Comparison of pre and post restructuring performance of the firm helps to access and evaluate the financial performance of the firm due to restructuring. It is up to the analyst to choose between accounting based performance measure like ROE, ROC, EPS and market based performance measure like market price per share (MPS), price earning ratio (PE). Some analysts and shareholders like to use both the methods to access the performance of corporate restructuring. Corporate Restructuring at Accenture It is a global management consulting and technology outsourcing company spread across 120 counties. It is the largest consulting firm in the world. Accenture originated as an 2 accounting firm ‘Andersen, Delany & Co. named after its owners Arthur Anderson and Clarence Delany in 1913. In 1918 Delany exits the partnership and the firm was rebranded as Arthur Andersen. In 1950s, the company along with its accounting business started management consulting and advisory services. As consulting business grew dramatically in the next three decades, Arthur Anderson grew with a larger contribution to growth coming from consulting. In 1989 Arthur Andersen split the company in two independent units Arthur Andersen and Andersen consulting under the parent organization Andersen Worldwide Societe Cooperative (AWSC) (see figure 1). Next two decades consulting business unit overshadowed the accounting business unit and a bitter battle of ownership and split followed that lead to a resolution sought through Arbitration. In 2000, August the Andersen Consulting separated from Andersen Worldwide organization. AWSC 1989 Arthur Andersen Andersen Consulting 2000 Separated & Rebranded Accenture Figure 1: corporate restructuring at accenture In December 2000, the Company separated and was rebranded as Accenture which was a combination of words ‘accent’ and ‘future’. The new logo comprised of greater than sign hanging over the ‘t’ like an accent mark. In July 2001, the company came out with IPO and raised $1.7 billion on the very first day. The company thus charged its ownership structure from partnership to a corporation. Only 12% of the shares of the newly incorporated Co. were raised through IPO and the 82% of Companies shares were distributed among the 2400 partners in exchange for their partnership rights. 6% of the remaining shares were distributed to non-partner employees. Next the Co. explored organizational restructuring through layoffs. But unlike other companies that adopted direct layoff Accenture adopted a ‘Flex Leave’ policy where consultants are paid 20% of their salary and heath benefits are maintain 6-12 months provided they take leave from Co. It was a sabbatical program where the consultants could take up any profession or study program during the period and were guaranteed a job at same level when they 3 returned. Today Accenture is a leading worldwide example of corporate restructuring that involved: Rebranding, Restructuring and Repositioning to a highly successful level of high end consulting. Broadly, corporate restructuring can be categorized into three broad categories as developed by Bowman and Singh, namely, 1. Organizational Restructuring. 2. Financial Restructuring 3. Portfolio Restructuring Let us discuss the three corporate restructuring categories in detail. ORGANIZATIONAL RESTRUCTURING Organizational restructuring takes place when the firm makes important changes in its organizational structure like span of control, hierarchy and firm divisions. Redesigning the over all organizational structure of a firm, its divisional boundaries, markets, employees, product portfolio reduction etc form an integral part of organizational restructuring. This exercise should create wealth for the firm to put it simply it should result in improved financial firm performance. Organizational restructuring includes restructuring of business process and operations to align the organizational structure with the vision of the firm. The strategic fit for organizational restructuring is value creation through vision attainment of the firm. Over the last decade the firms across globe have reformed and redesigned there management hierarchy, divisions, span of control, performance linked compensation methods and corporate governance initiatives. Some firms have even gone to the extent of reducing its employees that is down sizing. For example, Xerox Corporation in 1980’s lost much of its market share to cannon a Japanese manufacturer of photocopiers. Cannon ate into the market share of Xerox by providing low cost, good quality copiers. Xerox reacted by improving the quality and reducing the cost of its product. However, the initiative and the exercise took around 10 years to regain the lost market share. As a matter of fact, Xerox focused on leadership initiatives by launching “Leadership through Quality” programme in 1984 and “Xerox 2000” programme in 1990. Both these programmes repositioned Xerox as a manager of documents and not as manufacturer of photocopiers. The important
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