Corporate Restructuring before Divestitures?

Corporate Restructuring

Many companies restort to corporate restructuring  before deciding to divest a business. The current uncertainty in market environment where technology continues to disrupt the existing business models, has made companies think about reassessing their portfolio of business operations to come to a decision whether they need to change their business models to align to their growth objectives.
With many companies constantly assessing their existing service offerings against the demand from the customers, business are looking to provide services in the market that are in demand.
Companies should not only look at acquisitions as their growth strategy but also should be ready to divest some of their business’s which are no longer strategic. For instance, when a company that provides data center operations and support to customers think of moving their business model to cloud services, then it would be prudent for the company to divest some of its datacenter businesses that holds a significant portion of its capital expenditures.
After taking a decision to divest their non core assets, successful businesses exit their businesses when they are doing well, as this helps them to raise significant capital.This capital can be used to invest in strategic initiatives that companies intends to accomplish in next few years.

Business strategies employed by successful companies

  1. Successful companies ensure that both the parent company and the divested businesses performs well after exit.For instance, PayPal which was spunoff from Ebay, is currently a leader in payments businesses with no of active user accounts for PayPal increasing year on year.
  2. Successful companies start the restructuring exercise, before it decides to put the divested business on sale.Study shows that the restructuring charges for companies before divestment increased the shareholder returns, compared to companies who did the restructuring post divestment.
  3. The restructuring activities focuses on the businesses of parent as well as the divested business.The parent company decides to make the divested business lean by consolidating it’s backoffice businesses like Finance, HR and IT and keep a flat organization structure.This cost cutting strategy adopted by the parent company increases the margins of the divested business.This makes it attractive for acquisitions from PE firms and other strategic acquirers.
  4. Successful companies complete their restructuring activity before creating a separate legal entity to house the divested assets for sale.This prevents the parent company from bearing additional IT and stranded costs.
  5. Successful companies benchmarks the divested businesses against its peers to finalize on the target cost structures.For instance, when a company focusing on digital business has decided to divest its call center operations, then the company should benchmark its call center business with other leading call center businesses to finalize on the cost targets.This exercise takes a lot of analysis, but if done correctly generate significant productivity benefits for both parent and divested business.
  6. Once the cost targets are decided, then the parent and the target management teams can start working together to attain the cost targets by making significant changes to its backoffice businesses.
  7. This restructuring activity would help the companies improve its bottom line.Both the entities would be ready to launch any transformation initiatives to grow its market share.This would enable both the companies to become market leaders in their respective business segments.

Conclusion

  1. Any corporate restructuring exercise causes significant disruption within the company causing anxiety among employees, customers and suppliers.Successful Companies that have decided to divest their non strategic businesses resort to a restructuring exercise, which benefits both the parent and divested company.
  2. By making the divested business more leaner and cost efficient, the parent companies were able command a premium price during the sale.The divested business also provide benefits to it’s new management as they can launch transformation initiatives immediately without needing to spend time and efforts to restructure the business.


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