Founder of VFDS Paul Collis FCCA, talks about the lessons he learnt being part of restructuring programmes with two FTSE 250 businesses, Savills plc and DTZ plc, during the last global recession – the credit crisis which began in 2007. This article is part-two of a three-part series on Restructuring.
In part-one of this three-part series on restructuring, I briefly discussed cost savings and turnaround programmes and my own personal experience of being involved in such programmes.
This article looks some of the other types of restructuring programmes undertaken by companies in financial turmoil or distress.
Now commonly known as ‘pivoting,’ in the modern business world, this is when a company changes its business model and service offering in order to grow and become more profitable. You can refer to my previous article on pivoting to get some real-life examples of how businesses have repositioned themselves and gone on to huge success.
A company’s senior management team may look to change the debt structure of the company, in order to put the company on a better financial footing. There are numerous ways of doing this including:
- A share issue
- Refinancing existing credit facilities such as term loans and overdrafts
- Asset finance – borrowing against physical assets such as land and buildings
- Factoring & invoice financing
- Director’s loans
The above examples are just a few of the options for companies and is not an exhaustive list of ways to raise working capital.
Mergers & Acquisitions
There are main three types of merger, when two companies come together:
- Horizontal – this is done to increase market share e.g. two competing companies may combine
- Vertical – this aims to exploit existing synergies between to two companies, who may not necessarily be in the same industry
- Congeneric – two companies may be in the same industry but don’t offer the same product. Therefore by coming together, the overall product offering is expanded
An acquisition, as the word suggest, is simply when one company buys a majority stake in another company. The company names and organisational structures may remain unchanged following the transaction. Three of the most common types of acquisition are:
- Acquisition of Assets – this can occur during bankruptcy proceedings, where one company bids for the assets of the distressed business, which is then liquidated upon transfer of the assets
- Management buy-out – senior executives buy a controlling stake in a company and then take the business private. These types of transactions are usually financed with debt and the buy-out needs shareholder approval
- Consolidation – a new company is formed and the shareholders of the two businesses to come together – this also approach also need needs shareholder approval
A decision may be made to make a business unit its own legal entity. There may be plans to sell off this particular division in the future or management may want to analyse this business units performance. Being its own legal entity may allow more scrutiny and make the business units head more accountable for performance.
Following the decision to making a business unit its own entity, senior management may sell off or close the business unit if it becomes unprofitable, doesn’t fit in with the overall strategy of the wider organisation, or if it has become problematic in some way. Management time may be better served focussing on other parts of the organisation.
When heading into or actually in the midst of financial distress, business owners and senior management teams need to discuss and explore what kind of restructuring programme will best serve their organisation and act quickly to implement those plans.
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