Corporate restructuring: an analysis of select cases

Abstract

Intense competition, rapid technological changes, major corporate accounting scandals, and rising stock market volatility have increased the pressure on managers to deliver superior performance and value for their shareholders. In the modern winner takes all economy, companies that fail to meet this challenge face the consequence not only through beaten down share price but sometime creditors force companies to bankruptcy. Corporate restructuring has enabled thousands of organizations to respond more quickly and effectively to new opportunities and unexpected pressures. It has an equally profound impact on the suppliers, customers, and competitors that do business with the firm. Corporate restructuring provides the necessary objectivity and methodical support to bring a company back on the road to success. It involves making radical changes in the composition of the businesses in the company s portfolio. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy. The hope is that through restructuring, a company can eliminate financial harm and improve the business. The last two decades have witnessed a dramatic increase in various forms of corporate financial restructuring, in the western economies. India companies too are now slowly taking the footsteps of the western companies to bolster its business fundamental through corporate restructuring. In India corporate restructuring has picked up momentum in last decade after the introduction and amendment of various acts, rules and regulations. In this paper we have empirically analysed a few forms of financial corporate restructuring, namely share buyback, de-merger and debt reduction. We have selected a few Indian companies to analyse each form of restructuring by accessing how much value was delivered through this restructuring initiatives. Apart from the conventional parameters like PAT, ROCE etc, we have analysed the cases based on one of the most modern parameter called Economic Value Added (EVA) which measures amount of excess profit generated over and above the cost of capital. This study establishes that for Indian corporate the long term advantage of share buyback is not clear. Rate of return generated for the shareholders through share re-purchase is not significant. The study also ascertains that demerger generally unlocks value for the core company and it is helpful in de-risking business units. The paper establishes the fact that the high cost debt reduction can improve company s profitability. But debt reduction below a certain level is detrimental to the profitability of the company as it removes the benefit of tax shield and debt reduction alone cannot guarantee any increase company s profitability.