What are Corporate Restructures and when are they needed? Restructuring an organization is an unavoidable process that is considered a primary contribution to high performance and productivity.
Changes in market trends and the rise of competitiveness often lead to points of inflection in business, and many corporations consider restructuring in management, finance, and operation as a solution. It sounds possible yet is it truly effective? Is it a must-do strategy in today’s business and who will be the most affected?
Let’s learn about this issue in general, and more importantly, how companies manage and support their employees during corporate restructures.
Table of Contents:
Table of Contents:
What Do Corporate Restructures Mean?
Corporate restructures refers to a process of making significant changes to a company’s organizational structure, operations, and financial management. These changes may include downsizing, mergers and acquisitions, divestitures, and the creation of new business units.
The goal of corporate restructuring is to improve the company’s efficiency and profitability, often by reducing costs, increasing revenue, improving the allocation of resources, becoming more competitive, or more effectively responding to changes in the market.
What Are The Major Categories of Corporate Restructures?
Corporate Restructures is a broad term, that is categorized into 2 main types: Operational, and financial restructuring, and bankruptcy is the final stage. Each category then involves a different restructuring form, which is explained below:
Operational Restructuring refers to the process of changing an organization’s operations or structure. The goal of operational restructuring is to create a more streamlined and effective organization that is better equipped to succeed in its industry.
- Merger and Acquisition (M&A) – involves the consolidation of two companies, either through a merger (two companies coming together to form a new entity) or an acquisition (one company purchasing another).
- Divestment – is the process of selling or disposing of a portion of a company’s assets, business units, or subsidiaries.
- Joint Venture – refers to a collaborative arrangement between two or more companies to undertake a specific project, share resources, or create a new business entity.
- Strategic Alliance – involves a broader collaboration between companies that remain independent but agree to work together on specific projects, initiatives, or shared goals.
- Workforce Reduction – also known as downsizing or rightsizing, involves reducing the number of employees within an organization.
Financial restructuring focuses on the process of reorganizing a company’s financial structure to improve its financial position and performance. It aims to improve a company’s liquidity, profitability, and overall financial stability, often in response to financial difficulties or changing market conditions.
- Debt Reduction – refers to the strategic effort to decrease the overall level of debt within a company’s capital structure. This can involve paying off existing debts, refinancing at more favorable terms, or actively managing and controlling debt levels over time.
- Rising Debt to Reduce WACC (Weighted Average Cost of Capital) – suggests intentionally increasing the proportion of debt in the capital structure to lower the overall WACC. It assumes that the benefits of lower financing costs outweigh the risks associated with higher debt levels.
- Share Buyback – also known as stock repurchase, is a corporate action where a company buys back its own shares from the open market or directly from shareholders. This results in a reduction of the total number of outstanding shares.
The final stage of corporate restructures is Bankruptcy, it happens when:
- A company is in financial despair and struggling to meet debt obligations (interest or principal payments)
- When the market value of its liabilities surpasses that of its assets
In fact, a company is not considered bankrupt until it files for bankruptcy or if its creditors initiate reorganization or liquidation petitions.
Real-world Examples of Corporate Restructures
Tesla is one of the most prominent examples of corporate restructuring with continuous layoffs. In 2018, its CEO, Elon Musk, announced a layoff of 9% of its workforce – 3500 employees in an attempt to boost profitability. In early 2019, Tesla laid off 7% of its staff in its second round of dismissals in just seven months. Then, it laid off 10% of employees and executed a hiring freeze in June of 2022. The company’s reorganization is proving successful. Its share price is recovering, and market analysts predict that the company will soon meet production and cash flow goals.
In March 2019, Savers Inc., the largest for-profit thrift store chain in the United States, underwent a restructuring agreement that reduced its debt load by 40%. The company was taken over by Ares Management Corp. and Crescent Capital Group LP. The out-of-court restructuring was approved by the company’s board of directors and involves refinancing a $700 million first-lien loan to lower the retailer’s interest costs. Under the agreement, the company’s existing term loan holders received full payment, while senior noteholders exchanged their debt for equity.
When mentioning successful operational restructuring examples, the Google and Android acquisition case in 2005 can be considered the biggest one. The acquisition was seen as a brilliant strategic move by Google to enter the mobile space for the first time. In 2022, Android has become the dominant mobile operating system globally, powering over 70% of the world’s mobile technology across different brands.
When Covid-19 crashed in 2019, A surge of financial distress in service industries like restaurants, and hospitality. Many firms announced bankruptcy, and large corporations like FIC Restaurants also can’t avoid it. Friendly’s was sold to Amici Partners Group for just under $2 million, though they have been making progress in a turnaround over the past two years before the pandemic disruption.
Why Do Corporate Restructures Matter?
Corporate Restructures has both positive and negative impacts on overall business, but in this part, we’ll discuss more about employees.
One of the most significant negative impacts is the potential for job losses. Restructuring often involves downsizing, like the above example, or some departments are often merged, whittled down, or eliminated, leading to layoffs. Everyone, even the talented ones can be under consideration. Because the company needs suitable ones who align more closely with the newly defined strategic objectives and organizational needs.
💡 You’ll never know when the next time you will be put on the layoff list, or forced to relocate to new offices. Change is unpredictable and preparation is the key. Investigating in a Personal and Professional development program can be a great idea.
Stress and Uncertainty
Corporate restructuring often brings about stress and uncertainty among employees. The fear of job insecurity, changes in roles, or a shift in the organizational landscape can contribute to heightened stress levels. Employees may experience anxiety about their future within the company, affecting their well-being and potentially impacting overall morale.
Disruption to Team Dynamics
Changes in reporting structures, team compositions, and roles may create a period of adjustment where teams need to reestablish working relationships. This disruption can temporarily impact productivity and collaboration as employees navigate the evolving organizational landscape.
Amid the challenges brought about by corporate restructuring, there can be opportunities for employees. The creation of new roles, the introduction of innovative projects, and the need for specialized skills can open avenues for career growth and development. The initial period of adjustment may present challenges as employees navigate unfamiliar territory, but organizations can communicate these opportunities effectively, providing support and resources to help employees capitalize on the positive aspects of change.
How Does A Company Manage Effects on Employees During Restructure?
When a company undergoes restructuring, managing the effects on employees is crucial to ensure a smooth transition and maintain a positive work environment. Here are some suggestions that employers can take to handle the negative effects of restructuring on their workforce:
- Conduct open and transparent communication: It is the responsibility of employers and leaders to keep employees informed about the changes, including their impact on job roles and responsibilities, and the expected time frame for implementation.
- Feedback and Support: Create avenues for employees to express their concerns, ask questions, and provide feedback, to discuss how individuals can make a successful transition into their new positions.
💡 Leverage AhaSlides to create an anonymous feedback survey among employees in real-time, before, during, and after training.
- Internal Training: Cross-train employees to handle diverse tasks within the organization. This not only enhances their skill set but also ensures flexibility in staffing arrangements.
- Employee Assistance Programs (EAP): Implement EAPs to provide emotional and mental health support. Restructuring can be emotionally challenging for employees, and EAPs offer confidential counseling services to help them cope with stress and anxiety.
Frequently Asked Questions
What is a corporate level restructuring strategy?
The most common corporate restructuring strategies include:
- Mergers and acquisitions
- Cost restructuring
- Debt restructuring
- Legal restructuring
What is the difference between M&A and restructuring?
M&A (Merger and Acquisition) is part of the restructuring which refers to growing companies seeking expansion possibilities with the involvement of capital (borrowing, buybacks, stock sales, etc.) and changing the fundamental business operations.