Corporate restructuring is typically designed to manage corporate debts, improve profitability and efficiency, or to incorporate other firms. Bankruptcy and negotiations with creditors are commonly used to reduce the burden of debt carried by a company. Changes to the structure of a corporate workforce or to the organizational system used by a firm can improve profitability. Mergers and takeovers allow a firm to gain control over other companies.
A large debt burden can greatly hinder corporate operations. One variety of corporate restructuring involves the modification of some or all of a corporation’s debts. This may involve securing new loans at more favorable terms or negotiations with creditors. In some cases, a corporate bond issue may be used to restructure debts.
In other cases, bankruptcy can be used as a tool for corporate restructuring. If a business is burdened by unsustainable levels of debt or faced with other serious difficulties, management may elect to enter bankruptcy proceedings. The specific laws governing this process vary, but bankruptcy typically allows a corporation to renegotiate some of its financial obligations and often involves giving bondholders an equity stake in a restructured firm.
Some types of corporate restructuring are used to improve the operational efficiency of a company. It is sometimes advantageous for a firm to reduce payroll, and a program of targeted layoffs may be part of a restructuring drive. In other cases, the relationships between different units within a firm may need to be reconfigured in order to improve efficiency and increase profitability.
Firms sometimes also find it advantageous to spin off smaller companies. In some instances of this sort of corporate restructuring, part of a corporation’s business may be less profitable and may be spun off in order to strengthen the primary business. Other companies may determine that different units might simply operate more efficiently and profitably if they were separated from one another. This tactic is especially common when changes in technology fundamentally alter the business environment in which a company does business.
Corporations periodically find it advantageous to pursue joint operations with other firms. Mergers feature a roughly equal union between two businesses whose economic ventures are likely to work better together than apart. The business activities of both firms involved in a merger are typically reorganized to some extent. In other cases, one firm may simply acquire another outright. Such acquisitions also often lead to corporate restructuring and are especially useful when a smaller company has proprietary control over some product or process that might be especially profitable when developed or marketed using the resources of a larger firm.