Business restructuring explained

Corporate restructuring may follow several different routes, each has their own strategy and goal:

Divestiture

Divestiture means selling a company’s non-core assets to another party. This usually involves an organisation selling off an unprofitable company, subsidiary, division, or other business unit rather than continue to invest it. This may be done to make the organisation more efficient and profitable by decreasing losses and maintaining a low debt-to-equity ratio, however it may also be done to avoid insolvency, or to raise emergency cash when other business loans are not forthcoming.

Joint Venture

A joint venture is the creation of a new business entity between two or more companies. Each of the participating organisations agrees to provide specific resources and to split the costs, earnings, and control of the new business formed as a result of the collaboration. A joint venture makes good business sense when the new company will give the participants a more dominant role within their sector, opens new markets or launches a new type of product or service, or it brings together businesses with complimentary operations that will benefit more from a merger – such as a company with a new type of product joining forces with a company with an extensive distribution network.

Mergers and Acquisitions (M&A)

A merger or acquisition is when another firm takes over an existing company, or a new company is formed by merging two or more existing companies. M&A transactions typically occur for the same reasons that joint ventures are made – although with mergers and acquisitions, one company usually absorbs the other and no new entity is formed. M&A transactions may also be conducted to eliminate market competition, or to capture a business innovation or rare resource. Businesses in financial trouble also commonly employ M&A transactions to avoid insolvency.

Reverse Merger

Reverse mergers allow private companies to become listed on the stock market without the necessity of an initial, and often unpredictable, public offering (IPO). In a reverse merger, a private firm acquires a controlling stake in an existing and publicly-traded company, gains control of the board of directors, and then merges all operations. This strategy can allow the private firm to become publicly traded very quickly and without the increased scrutiny of an IPO. Divestiture of some or all of the purchased company’s assets often follows a reverse merger, as the buying firm reshapes the operations of the newly combined business.

Spin-off

A spin-off involves a company separating a business unit, division, or even a product line, from the main organisation, and setting it up as a new stand-alone business. Spin-offs are often the target of a management buyout, where members of the main organisation’s leadership team see an opportunity in a portion of the combined business and offer to buy it out of the group and set up on their own. Spin-offs can provide useful cash for core organisations and, depending on the performance of the target business unit, can divest them of a venture that is not performing as well as desired. Sometimes, the main organisation may maintain a seat on the board of the spin-off, as well as playing a key role in their continued operation – such as with distribution.

Strategic Partnership

A strategic partnership does not change the ownership of the participating businesses. Instead, they form an alliance, where the businesses may work together whilst still maintaining their own identities and line of operations. A strategic partnership is usually agreed to generate commercial synergies or exploit a resource or special opportunity. Some reshaping of each party’s operations may occur as they adjust to better fit the new partnership’s way of working.