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Introduction:
Corporate restructuring is one of the most complex and fundamental phenomena that management
confronts. Each company has two opposite strategies from which to choose: to diversify or to
refocus on its core business. While diversifying represents the expansion of corporate activities,refocus characterizes a concentration on its core business. From this perspective, corporate
restructuring is reduction in diversification. Corporate restructuring is an episodic exercise, not
related to investments in new plant and machinery which involve a significant change in one or
more of the following
Pattern of ownership and control
Composition of liability
Asset mix of the firm.
It is a comprehensive process by which a co. can consolidate its business operations and strengthen
its position for achieving the desired objectives:
(a)Synergetic
(b)Competitive
(c)Successful
It involves significant re-orientation, re-organization or realignment of assets and liabilities of the
organization through conscious management action to improve future cash flow stream and to
make more profitable and efficient.
MEANING & NEED FOR CORPORATE RESTRUCTURING
Corporate restructuring is the process of redesigning one or more aspects of a company. The
process of reorganizing a company may be implemented due to a number of different factors, such
as positioning the company to be more competitive, survive a currently adverse economic climate,
or poise the corporation to move in an entirely new direction. Here are some examples of why
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corporate restructuring may take place and what it can mean for the company. Restructuring a
corporate entity is often a necessity when the company has grown to the point that the original
structure can no longer efficiently manage the output and general interests of the company. For
example, a corporate restructuring may call for spinning off some departments into subsidiaries as
a means of creating a more effective management model as well as taking advantage of tax breaks
that would allow the corporation to divert more revenue to the production process. In this scenario,
the restructuring is seen as a positive sign of growth of the company and is often welcome by those
who wish to see the corporation gain a larger market share . Corporate restructuring may also take
place as a result of the acquisition of the company by new owners. The acquisition may be in the
form of a leveraged buyout , a hostile takeover , or a merger of some type that keeps the company
intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile
takeover, corporate raiders often implement a dismantling of the company, selling off propertiesand other assets in order to make a profit from the buyout. What remains after this restructuring
maybe a smaller entity that can continue to function, albeit not at the level possible before the
takeover took place.
In general, the idea of corporate restructuring is to allow the company to continue functioning in
some manner. Even when corporate raiders break up the company and leave behind a shell of the
original structure, there is still usually a hope, what remains can function well enough for a new
buyer to purchase the diminished corporation and return it to profitability.
Purpose of Corporate Restructuring -
Business restructuring is a means towards an end. It is a tenacious, long drawn out process that is
embarked upon to achieve identified business goals provided by the corporate vision. Companies
experiencing a major restructuring are generally doing poorer than expected and wish to increase
future earnings by writing down their assets.
If a firm is operating in an environment where changes in competition, technology, product,
customer mix and cost of financing are minimal or if the firm is in a steady or dominant position in
the industry, there may not be a need for the firm to restructure. With the onset of competition,
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rapid obsolescence in technology, skills and product market and rising volatility in money and
capital market, the steady state is virtually non-existent.
Overnight, companies that were known to dominate the respective industries for decades have
begun to underperform and are showing signs of extinction. The reasons can be traced to:
Absence in growth segments of the market. Lack of economies of scale. Poor efficiency in operations. Changes in business structures . both domestic and global. Declining competitiveness of the product, technology and value creation process. High cost structure and high cost of capital. 7. Mismanagement of fixed and working
capital. Lack of funds to support brand and distribution network. Changes in environment in areas like technology, competition, regulations etc. It can prevent a competitor from establishing a similar position in that industry. It offers a special timing advantage because it enables a firm to leap ahead in the process of
expansion. It may entail less risk and even less cost In a saturated market simultaneous expansion and replacement (through a merger) makes
more sense than creation of additional capacity through internal expansion. Changes in government policy regulating a given industry.
Hence restructuring becomes crucial whenever there is a major shift in the business environment,
which is beyond the control of the firm. Such restructuring, given the volatility of present day
business environment has to be a continuous process.
The main purpose of corporate restructuring is as follows:
To enhance the share holder value, The company should continuously evaluate its:
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1. Portfolio of businesses,
2. Capital mix,
3. Ownership &
4. Asset arrangements to find opportunities to increase the share holders value.
To focus on asset utilization and profitable investment opportunities.
To reorganize or divest less profitable or loss making businesses/products.
The company can also enhance value through capital Restructuring, it can innovate
securities that help to reduce cost of capital.
Characteristics of Corporate Restructuring -
1. To improve the companys Balance sheet, (by selling unprofitable division from its core
business).
2. To accomplish staff reduction (by selling/closing of unprofitable portion)
3. Changes in corporate mgt
4. Sale of underutilized assets, such as patents/brands.
5. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party.
6. Moving of operations such as manufacturing to lower-cost locations.
7. Reorganization of functions such as sales, marketing, & distribution
8. Renegotiation of labor contracts to reduce overhead
9. Refinancing of corporate debt to reduce interest payments.
10. A major public relations campaign to reposition the co., with consumers.
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11. Forfeiture of all or part of the ownership share by pre restructuring stock holders (if the
remainder represents only a fraction of the original firm, it is termed a stub).
Benefits of Business Restructuring
The benefits of Business Restructuring will be explained through 2 corporate examples: A.B
Group and the merger between Dabur & Balsara.
The Aditya Birla group merged group companies, Indo Gulf Fertilizers and Birla Global Finance
into Indian Rayon & Industries. The company has been renamed Aditya Birla Nuvo.
The benefits of the above restructuring are stated below:
1. It created shareholder value.
2. It created a company that captures opportunities in the evolving Indian economy through
leadership in focussed value businesses and driving high growth businesses.
3. It provided the shareholders of Indo Gulf Fertilizers - so far restricted in its growth due to
regulatory uncertainties - a broader canvas to participate in value creation.
4. It also extended the participation of Birla Global Finance shareholders beyond mutualfunds into life insurance.
5. With such strong financials, Indian Rayon would be in a better position to tap possible new
opportunities.
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6. In the emerging environment of consolidation in the mutual funds industry, Indian Rayon's
strong balance sheet will help it compete better.
Another most important acquisition that happened is the acquisition of Balsara group by Dabur .
The benefits of this restructuring are as follows:
1. It strengthened Daburs position in oral care: Balsaras were the pioneers in herbal oral
care products launched in the seventies. Balsaras herbal oral care range (Promise, Babool
and Meswak) is a good strategic fit for Dabur whose products are also positioned on the
herbal platform.
2. Added a new avenue of growth - Household care: Balsara had a diverse portfolio of brands
in extremely attractive categories. The acquisition enabled Dabur to enter the Rs.20 billion
household care business through well entrenched brands.
3. Enabled Dabur to expand regional presence: 45% of Balsara revenues were from west &
south. This complemented Daburs regional saliency.
4. Economies of scale from combined business: The acquisition provided several synergies to
Dabur on the manufacturing and marketing front.
Combined business provided economies of scale in marketing, sales and distribution.
Backend synergies in supply chain, operations, purchase, IT, etc. The acquisition also marked Daburs entry into niche segments of household care
products providing it completely new area of growth.
Corporate Debt Restructuring In India
Corporate Debt Restructuring (CDR) is more than a mere fad for India Inc. As the global
economic resurges after several months of an economic slowdown, analysts fastidiously evaluate
the impact of debt restructuring processes on the overall well being of the economy. It may be
argued that these prevailing conditions are perhaps the appropriate litmus test to assess the success
of the CDR system in emerging economies such as India.
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CDR & India: A Fad which is here to Stay?
For Corporate India, CDR has remained at the receiving end of constant media-attention. With a
formalized CDR system which was put in place over half a decade ago by the RBI, and an ever
growing number of corporations taking refuge under its provisions, CDR has established a strong
foothold in the field of banking and finance.
Current Trends: The Global Crisis & Debt Restructuring
What do giant companies such as Wockhardt, Vishal Retail, India Cements, HPL, Subhiksha,
Sakthi Sugars, Jindel Steel, Essar Steel, have in common? They are all recent participants of the
Indian CDR system.
In between 2001 and 2005, the CDR Cell restructured 138 cases with an aggregate debt of over Rs
75,000 crore. Of these, 75% of the cases were a success they performed well and met their debt
obligations in time. The total references received by the cell at the end of December 2009 stood at
208 with an aggregate of Rs 90,888 crores.Of these, 29 cases totaling Rs 5,018 crores were
rejected and 173 cases with a total debt of Rs 84,510 crores were implemented under the program.
These proposals came from all quarters of the industry. While in the year 2008-09 alone the CDR
Cell in India received proposals from 34 companies, the number of cases received for restructuring
tripled in the year 2009-10.
It is believed that investments earmarked for CDR constitute 60% of the total industrial
investments. Waajid Siddique in his comment published in a popular business law magazine,
observed that at a macro level, the current situation (referring to the global economy in the wake
of the sub-prime crisis) constitutes the largest global restructuring ever attempted.
The primary reason for this surge has been attributed to the mounting debt of companies along
with a drop in the returns causing a sustained period of debt. Although India outperformed
expectations riding through the global economic slowdown relatively unaffected, its exposure to
the crisis was unavoidable. Therefore, CDR has had, and shall continue to play, an integral role inthe Indian restructuring efforts in the post-crisis phase.
CDR: what is it and why do we hear so much about it?
it is a proactive step to avoid companies from slipping into a mess from where it may become
difficult to make any recovery.
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- An executive, quoted by a leading Indian financial daily.
Adam Smith, way back in the late 18 th century, spoke about the invisible hand of self-interest that
motivated the proliferation of business. Today, the situation has changed, but not by much. In the
working of corporations within todays complex mechanisms, it is the self-interest of the various
creditors and the members of the company which are the driving force.
Simply put, CDR is a non-statutory and voluntary method for companies to resolve their unmet
financial obligations. It is founded on the understanding that making such restructuring facilities
available to companies in a timely and transparent matter goes a long way in ensuring their
viability which is sometimes threatened by internal and external factors. Corporate debt
restructuring as a remedial measure prevents incipient delinquency in corporate accounts.
Therefore, this system resolves the financial difficulties of the corporate sector and enables entities
to become viable.
Other available options to restructuring may include re-financing or filing for bankruptcy. In
practice, restructuring brings to the table the interests of the company along with those of the
creditors. This is what sets restructuring apart from other creditor friendly approaches.
This restructuring is multi-faceted. It usually involves the waiver of part of interest or concessions
in payment, or converting the un-serviced portions of interests into term loans, re-phasement of
recovery schedules, reduction in margins, reassessment of credit facilities including working
capital, restructuring the management, reduction in equity capital to make more capital available
for expansion, conversion of debentures into equity to give relief on the compulsory payment of
interest on the debentures. In addition to these, often, additional finance may be sought for
bringing about change in the working of the corporation.
A look at the Indian Insolvency
& Restructuring Regime
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2.1 A Look at the Insolvency / Restructuring Laws
A need has long been felt for India to develop a comprehensive code of insolvency and
restructuring laws. Currently, the regime is highly fragmented and consolidation would be a move
in the right direction.
When companies in India are faced with financial turmoil, they may consider a number of options
to achieve restructuring or liquidity. There are six ways for them to attempt to achieve the desired
results. These include winding up, arrangements or compromises under the Companies Act,
restructuring under the Sick Industrial Companies (SIC) Act, reconstruction of assets under the
Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest
(SRFAESI) Act, and restructuring as per specific governing statutes which is mostly in the case of
public sector banks and insurance companies. Lastly, informal debt restructuring as per the RBI
guidelines also provides a forum to address these concerns.
A. Winding-Up
Background:
The Companies Act, 1956 lays down procedures for companies to wind-up. The winding up may
be ordered by the court in circumstances where the company is unable to pay its debt or it may be
consequent to a petition filed by the creditors or the shareholders or by the company itself.
Voluntary winding up may also follow the occurrence of a trigger- event as specified in thearticles of the company.
After the appointment of a liquidator, in whom the estate of the company vests, assets are
distributed in a preferential order. While the winding up process is under way, the operations of
the company are halted and there is a bar on initiating any other legal proceedings against the
company without the leave of the court.
Foremost priority is given to the dues of the workmen and debts owed to secured creditors who
often choose to enforce their securities outside of the winding up process. From the proceeds of the companys estates, amounts owed to the government are paid first. Thereafter, the dues of the
unsecured creditors and those secured creditors who participate in the winding up process are
settled. Any remaining surpluses are then divided amongst the shareholders.
Drawbacks:
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One of the major drawbacks of this process is that the Act as such does not provide for a time
frame for winding up. The average time taken for the procedure to complete is as high as 10 years.
In addition to this, the recoveries are often low and the creditors usually suffer losses.
B. Schemes of Compromise or Arrangements
Background:
The Companies Act also allows for formation of schemes of compromise or arrangements,
facilitating the entering into such schemes in between debtor companies and their creditors or
members. In the course of such an arrangement, the creditors who stand to be affected by the
proposed scheme are divided into appropriate classes. These individual classes must consent to the
scheme with a 75% majority. Once approved, the scheme needs to be sanctioned by the court
which reserves the right to modify the scheme. Pending the execution of the scheme, companiesare usually granted moratoriums on actions their pending dues to the creditors.
Drawbacks:
Once again, this procedure involves convening several meetings and court approvals and is
therefore time consuming. Nonetheless, since the court does not look in to the commercial benefits
of the scheme and only assesses whether the scheme is in the interest of the company or not,
constructive schemes can be implemented. For these reasons, and its ability to bind dissenting
creditors, this process has been successful in the past.C. Restructuring under the Sick Industrial Companies (Special Provisions) Act, 1985
Background:
An industry is considered to have become sick when it accumulates losses equal to, or more than,
its net worth. Under the SIC Act, if a company turns sick, the directors of the company must refer
the matter to the BIFR (Board of Industrial and Financial Reconstruction) which has extremely
broad powers. BIFR, on its satisfaction that the company may be restructured, sanctions a scheme
which is binding on the members and the creditors.
Drawbacks:
In practice, this process has been widely implemented by debt-struck companies. Unfortunately,
the process rarely culminates in a successful restructuring because of the inordinate delays in the
implementation. Companies, in fact, use the reference to BIFR as a tactic to defeat debt claims.
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Efforts are under way to reform the law in this regard and to make the Act a potent mechanism to
address sick companies.
D. Reconstruction of Assets under the SRFAESI Act, 2002
Background:The Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SRFAESI) envisages private sector participation in asset reconstruction companies to
manage NPAs acquired from creditors and grants them certain special rights to aid in the
reconstruction of the assets. The secured creditors may exercise their rights outside of this
mechanism without interference from the BIFR.
Drawbacks:
Although the Act dates back to the year 2002, this process has not been fully tested and
commentators are of the opinion that its success rate as such remains unknown.
E. Statute Specific Remedies
Background:
Where the corporation in question has been incorporated under a specific statute, which is the case
with public sector banks and insurance companies, they may reconstruct as per the provisions of
that specific statute.
Drawback:
To the creditors of these corporations, other aforementioned remedies are not available.
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Restructuring Types
The broad types of Restructuring are displayed in the following diagram:
Each of these can be further classified into various types or methods of restructuring depending
upon the objectives to be achieved.
2.3.1 Portfolio & Asset Restructuring
Broadly, these types of restructuring affect distinctly the asset base or the product / service
portfolios of the organizations in consideration, as also the power and control related issues. Also,
these types of restructuring initiatives are usually undertaken to enhance the profitability of the
both companies in a mutually rewarding situation - as in a Merger scenario . or either of the
dealing parties . as in the case of Acquisitions . or even certain objective decisions as the
divestments of certain businesses to ensure growth and sustainable development.
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I. Mergers & Amalgamations: It is a combination of two or more business enterprises into a
single enterprise. Usually mergers occur in a friendly setting where executives from the respectivecompanies participate in a due diligence process to ensure a successful combination of all parts.
The Shareholders of each company must agree to it prior to undertaking it. Mergers can be of three
types; namely:
a). Horizontal Mergers: A horizontal merger is when two companies competing in the same
market merge or join together. This type of merger can either have a very large effect or little to no
effect on the market. When two extremely small companies combine, or horizontally merge, the
results of the merger are less noticeable. These smaller horizontal mergers are very common. If a
small local drug store were to horizontally merge with another local drugstore, the effect of this
merger on the drugstore market would be minimal. In a large horizontal merger, however, the
resulting ripple effects can be felt throughout the market sector and sometimes throughout the
whole economy. E.g. the Daimler Chrysler Merger.
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b. Vertical Mergers: A merger between two companies producing different goods or services for
one specific finished product. By directly merging with suppliers, a company can decrease reliance
and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire
company. Vertical Mergers can be in the form of Forward Integration of Business [E.g. A
manufacturing company entering in the Direct Marketing Function . which was not its foray in the
erstwhile times) or in the form of Backward Integration of Business [E.g. A manufacturing
company also focussing on the producing the required raw materials and managing its supply
chain activities on its own . which was not its foray earlier].
c. Conglomerates: This type of merger involves mergers of corporates in related as well as
unrelated businesses to achieve three objectives; a. Product Extension b. Entry into new
Geographic Markets c. Entry into unrelated yet profitable businesses. E.g. most big businesshouses such as Reliance Industries, Aditya Birla Group, etc. undertake such mergers to expand
their businesses.
Benefits of undertaking Mergers & Amalgamations:
Entry into new businesses Asset / Competencies Acquisitions
Development of New Capabilities
Issues in undertaking Mergers & Amalgamations:
i. Selection and Financial Analysis of the Target Firm (the company to be merged with).
ii. Valuation of the Target Firm
iii. Establishing the Basis of Exchange
iv. Rightsizing the new entity
v. Maintaining Employee Productivity
vi. Reorganizing the organization
Some Corporate Examples:
ICICI Bank Limited and Bank of Madurai, Proctor & Gamble and Gillette, Dabur and Balsara, etc.
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II. Joint Ventures: A joint venture (often abbreviated JV) is an entity formed between two or
more parties to undertake economic activity together. The parties agree to create a new entity by
both contributing equity, and they then share in the revenues, expenses, and control of the
enterprise. The venture can be for one specific project only, or a continuing business relationship
such as the Sony Ericsson joint venture. This is in contrast to a strategic alliance, which involves
no equity stake by the participants, and is a much less rigid arrangement.
a. Project Based JV: These are Joint Ventures entered into by companies in order to accomplish a
specific project.
b . Functional JV: These are Joint Ventures wherein, companies agree to share their functions and
facilities such as production, distribution, marketing, etc. to achieve mutual benefit.
Motives for forming a joint venture
Internal reasons
1. Build on company's strengths
2. Spreading costs and risks
3. Improving access to financial resources
4. Economies of scale and advantages of size
5. Access to new technologies and customers
6. Access to innovative managerial practices
Competitive goals
1. Influencing structural evolution of the industry
2. Pre-empting competition
3. Defensive response to blurring industry boundaries
4. Creation of stronger competitive units
5. Speed to market
6. Improved agility
Strategic goals
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1. Synergies
2. Transfer of technology/skills
3. Diversification
Benefits of Joint Ventures
Complementary Benefits Acquiring and Sharing Expertise New Business / Product Development Capacity Expansion
Issues in Joint Ventures
Due Diligence Business Strategy Development of HR Strategies Implementation
III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (thetarget) by another. An acquisition may be friendly or hostile. In the former case, the companies
cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the
target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a
smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control
of a larger or longer established company and keep its name for the combined entity. This is
known as a reverse takeover. There are two major types of Acquisition. These are explained as
follows:
1. Management Buyouts : It is a form of Acquisition wherein the management of a company
decides to take their company private because it feels it has the expertise to grow the business
better if it controls the ownership. Quite often, management will team up with a venture capitalist
to acquire the business because its a complicated process that requires significant capital. Hence,
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large borrowings are made by managers to buy stocks held by large shareholders - who later
become the shareholders of the new entity to earn higher returns for themselves.
2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one
company purchases a majority interest in the target company resulting in loss of management
control for the target company. Incidentally, the acquiring company has a stronger market standing
than the target company in this case. It is definitely not a merger of equals. Typically, this type of
acquisition is undertaken to achieve market dominance. There are three types of Takeovers;
namely:
a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is
undertaken by purchasing the majority of outstanding shares of the target company in the open
stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle
Corp. and Peoplesoft Inc. Hostile Takeover
b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large
amount of Debt . financing to pay the target company its valuation at the time of the takeover in
cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as
junk bonds.) E.g. Oracle Corp. and I . Flex Takeover
3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased,
rather than its shares. This is particularly popular in the case of bankrupt companies, who might
otherwise have valuable assets which could be of use to other companies, but whose financing
situation makes the company unattractive for buyers (an asset buyout strategy may be pursued in
almost any case where the potential target company has an unattractive financing structure).
Motives behind Acquisitions
To achieve Market Dominance. To achieve Economies of Scale. To Increase Revenues. To enable Cross - Selling. To improve Technological Capabilities.
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To enable better Tax Management. To expand into new Geographies. To expand Customer Base, etc.
Benefits of Acquisitions
Fairness of Price Paid Lower Cost to the Acquiring firm Market Dominance
Issues in Acquisitions
Resistance from the target company Inability to secure adequate shares to gain Management Control Hostility Reputation Assaults
III. Acquisitions: An acquisition, also known as a takeover, is the buying of one company (the
target) by another. An acquisition may be friendly or hostile. In the former case, the companies
cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the
target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of asmaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control
of a larger or longer established company and keep its name for the combined entity. This is
known as a reverse takeover. There are two major types of Acquisition. These are explained as
follows:
1. Management Buyouts : It is a form of Acquisition wherein the management of a company
decides to take their company private because it feels it has the expertise to grow the business
better if it controls the ownership. Quite often, management will team up with a venture capitalist
to acquire the business because its a complicated process that requires significant capital. Hence,
large borrowings are made by managers to buy stocks held by large shareholders - who later
become the shareholders of the new entity to earn higher returns for themselves.
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2. Takeovers: Takeovers are normally viewed as unfriendly acquisitions as in this case, one
company purchases a majority interest in the target company resulting in loss of management
control for the target company. Incidentally, the acquiring company has a stronger market standing
than the target company in this case. It is definitely not a merger of equals. Typically, this type of
acquisition is undertaken to achieve market dominance. There are three types of Takeovers;
namely:
a. Hostile Takeover: It is a takeover attempt that is strongly resisted by the target firm and is
undertaken by purchasing the majority of outstanding shares of the target company in the open
stock market. The technique that the acquirer adopts in this case is .Street Sweep.. E.g. Oracle
Corp. and Peoplesoft Inc. Hostile Takeover
b. Leveraged Buyout: It is a type of acquisition wherein the acquiring company uses a large
amount of Debt . financing to pay the target company its valuation at the time of the takeover in
cash and / or Junk bonds (i.e. the bonds are usually not investment grade and are referred to as
junk bonds.) E.g. Oracle Corp. and I . Flex Takeover
3. Asset Buyout: A buyout strategy in which key assets of the target company are purchased,
rather than its shares. This is particularly popular in the case of bankrupt companies, who might
otherwise have valuable assets which could be of use to other companies, but whose financingsituation makes the company unattractive for buyers (an asset buyout strategy may be pursued in
almost any case where the potential target company has an unattractive financing structure).
Motives behind Acquisitions
To achieve Market Dominance. To achieve Economies of Scale.
To Increase Revenues. To enable Cross - Selling. To improve Technological Capabilities. To enable better Tax Management. To expand into new Geographies. To expand Customer Base, etc.
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Benefits of Acquisitions
Fairness of Price Paid Lower Cost to the Acquiring firm Market Dominance
Issues in Acquisitions
Resistance from the target company Inability to secure adequate shares to gain Management Control Hostility Reputation Assaults
IV. Divestitures: The partial or full disposal of an investment or asset through sale, exchange,
closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of
time, or in large lots over a short time period. E.g. Volvo AB sold passenger business to Ford for
$6.5B.
There are four types of Divestiture initiatives; namely:1. Spin Offs: A company owns or creates a subsidiary whose shares are distributed on a pro rata
basis to the shareholders of the parent company where the Parent usually retains some ownership
of approximately 10 to 20%. There are two approaches to spin offs.
The first approach deals with disinvesting the corporation in terms of keeping equitable
shareholding pattern for the newly formed companies. In this case, the company distributes, on a
pro-rata basis, all shares that it owns in its subsidiaries, to its shareholders, thereby creating two
separate corporations with the same proportional equity in place of the one corporation that existed previously. E.g. Hilton spin-off Park Place Entertainment Corp (casino business) . 1 share for 1
share.
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The second approach resorts to floating a new entity, with the selling company (i.e. the company
which is disinvesting) participating in its equity and later selling off the assets or division proposed
to be spun . off to the new company. E.g. Kimberly Clark spin-off Midwest Express Airlines
2. Splits: As the term denotes, Splits refer to splitting the corporate entity into two or more parts to
achieve its strategic objectives such as enhanced profitability by removing non . core businesses
from the mainstream businesses, etc. There are two types of Splits; namely:
a. Split-ups: When a firm splits into 2 or more entities - usually accomplished with carve-outs and
spin-offs of individual parts, it is said to have split-up. The result of a split-up is that the parent
company ceases to exist. E.g. In September 1995, AT&T spilt into 3 publicly traded companies
and the 4th business was sold.
b. Split-offs: In this case, some of the shareholders of the parent company receive a subsidiary's
shares on condition that they return the shares they hold of the parent company. Family owned
businesses with complex cross holdings in all subsidiaries use this approach to separate the interest
of different family streams. e.g., The Reliance Industries Group has now split-off into Reliance
Industries Limited, Reliance Infocomm, Reliance Energy, etc.
3. Equity Carve-outs: It is the IPO of some portion / some percentage of the common stock of the
wholly owned subsidiary of the Parent Company. It is sometimes known as .split-off. IPO. It is
one method of equity financing when the assets of the parent company and the subsidiary are
separated. It initiates the public trading of the Subsidiarys shares and is not reversible a it is in
case of redeemable preference shares. E.g. In 1999, General Motors did a carve-out and spin-off of
Delphi - Delphi had many customers though GM remained protected.
4. Disinvestment: Disinvestment, sometimes referred to as divestment, refers to the use of a
concerted economic boycott, with specific emphasis on liquidating stock, to pressure agovernment, industry, or company towards a change in policy, or in the case of governments, even
regime change. The term was first used in the 1980s, most commonly in the United States, to refer
to the use of a concerted economic boycott designed to pressure the government of South Africa
into abolishing its policy of apartheid.
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Motives behind Divestitures
1. Dismantling conglomerates
2. Abandoning core business
3. Changing strategies
4. Adding Value by Selling into a better fit
5. Large Additional Investment required
6. Harvest past successes
7. Discard unwanted business from prior acquisitions
8. Finance prior acquisitions done before LBO
9. Ward off takeover
10. Meeting Government requirements
Benefits of Divestitures
i. Shedding Excess Flab
i.i Effective Market Regulation
ii. Financial Support
Issues in Divestitures
i. Market Reactions
ii. Government Interventions
Some Corporate Examples:
AT&T sold Global Network to IBM, Hoechst AG sold its Paint Division to DuPont, etc
Capital Restructuring
Capital is generally the assets, often monetary, that are available to generate more assets. Thus the
liquidity of capital should be high. Restructuring them means reallocating them to improve their availability (liquidity). The process requires selling assets to buy different ones in order to improve
your capital (monetary) position so that you can improve your asset position thus enabling you to
earn more with them. It is generally undertaken by companies that are generally doing poorer than
expected and wish to stabilize future performance of their assets.
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Capital / Financial Restructuring touches upon the following aspects:
1. Leverage of the company: This is essentially the Debt: Equity Ratio. Here, companies have the
option of undertaking Debt Restructuring - especially if it is a Debt - laden company (high debt
leveraged company).
> Debt Restructuring: It is a process that allows a private or public company - or a sovereign
entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent
debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.
2. Investment Pattern: This relates to ability of corporations to identify the various investments
opportunities that would lead to higher returns.
3. FDI Participation: This aspect relates to the change in structure of the shareholding due to the
increasing FDI inflows.
4. Divestitures: As stated earlier in the types of Divestiture in Portfolio and Asset Management,
this aspect relates to divesting divisions and / or businesses to improve the financial standing of the
organization.
Motives of Capital Restructuring
1. To enhance liquidity.
2. To lower the cost of capital.
3. To reduce risk.
4. To avoid loss of Control.
5. To improve Shareholder Value.
Benefits of Capital Restructuring
Greater Financial Muscle Access to Better / Greater Technologies Focus on Core Competencies
Issues in Capital Restructuring
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> Loss of Management Control
2.3.3 Organizational Restructuring
Organizational Restructuring hovers around the changes in organizational design. It brings about
changes in decision making, information flow and management style. Though this restructuring,
just like all other restructurings, is initiated by the CEO, it requires the participation of all
hierarchies of an organization, especially the employees. Organizational restructuring, combined
with portfolio restructuring and financial restructuring makes meaningful changes materialize and
touches upon the following aspects:
1) Centralization/decentralization of the organization: Functions or units of the organization
may be centralized or decentralized to create new linkages to better implement the strategy. Nature
of Decision making in the organization may be changed due to the changes in reporting levels and
hierarchy.
2) Organizational Culture: The essential fabric of the firm i.e. its culture is affected as a
consequence of changes in reporting levels and hierarchical levels.
3) Training and Redeployment: Imparting training to the workforce enables the organization to
cope better with the changing environment. At the same time some employees need to be
redeployed. However, training and redeployment may be inadequate at times and therefore
inducting educated and skilled professionals at different levels becomes necessary.
4) Changes in HR Policies: The current HR policies of the organization need to be changed in
accordance with the changing scenario. The HR department needs enable change management.
5) Rationalization of Pay Structure: The present pay structure should be modified and re-
evaluated to maintain the internal and external equity among the employees.
Symptoms indicating the need for organizational restructuring
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Parts of the organization are significantly over or under staffed. Organizational communications are inconsistent, fragmented, and inefficient. Technology and/or innovation are creating changes in workflow and production processes. Significant staffing increases or decreases are contemplated. New skills and capabilities are needed to meet current or expected operational
requirements. Accountability for results are not clearly communicated and measurable resulting in
subjective and biased performance appraisals. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating. Morale is deteriorating
Benefits of Organizational Restructuring
i. Lower cost
ii. Better formulation and implementation of strategies
Issues in Organizational Restructuring
i. Culture.
ii. Downsizing
iii. Loss of Employee Morale.
The approaches that various companies, large and small, public and private, adopted in their
efforts to restructure in terms of DOWNSIZING differed in terms of how they viewed their
employees.
One group viewed employees as costs to be cut. These are the "downsizers". The other group viewed employees as assets to be developed. These are the "responsible
restructurers."
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Various strategies for business restructuring are available. In our study of the subject, we found out
that following strategies play an important role in the business restructuring:
1. Smart-sizing: It is the process of reducing the size of a company by laying off employees on
the basis of incompetence and inefficiency.
Some Examples
Acquisitions: HLL took over TOMCO. Diversification: Videocon group is diversified into power projects, oil exploration and
basic telecom services. Merger: Asea and Brown Boveri came together to form ABB. Strategic alliances: Siemens India has got a Strategic alliance with Bharati Telecom for
marketing of its EPABX. Expansion: Siemens is expanding its medical electronics division- a new factory for
medical electronics is already come up in Goa.
2. Networking: It refers to the process of breaking companies into smaller independant business
units for significant improvement in productivity and flexibility. The phenomenon is predominant
in South Korea, where big companies like Samsung, Hyundai and Daewoo are breaking
themselves up into smaller units. These firms convert their managers into entrepreneurs.
3. Virtual Corporation: It is a company that has taken steps to turn itself inside out. Rather than
having managers and staff sitting INSIDE in their offices moving papers from in basket to out
basket, a virtual corporation kicks the employees outside, sending them to work in customer's
offices and plants, determining what the customer needs and wants, then reshaping the corporate
products and services to the customer's exact needs. This is a futuristic concept wherein companies
will be edgeless, adaptable and perpetually changing. The centrepiece of the business revolution isa new kind of product called a "Virtual Product" Some of the these products already exist,
camcorders create instant movies, personal computers and laser printers have made instant desktop
publishing a reality. And for all these we can obtain cash instantly at ATMs.
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4. Verticalization: It refers to regrouping of management functions for particular functions for a
particular product range to achieve higher accountability and transparency. Siemens in 1990
moved from a "function-oriented" structure to a vertical "entrepreneur-oriented" structure
embracing size business and three support divisions.
5. Delayering- Flat organization: In the post world war period the demand for goods was ever
increasing. Main objective of the corporations was production and capacity build up to meet the
demand. The classical, pyramidal structure was well suited to this high growth environment. This
structure was scalable and the corporations could immediately translate their growth plans into
action by adding workers at the bottom layer and filling in the management layers. But the price
paid in the whole process was much higher. The overall process became complicated; number of
middle managers and functional managers grew making the coordination of various functionscomplex. Senior/top management was alienated from the front-line people as well as the end users
of the product or service. Decision-making became slower. Hence, a need is felt to attack the
unproductive, bulky and sluggish network of white-collar staff. A powerful strategy would be to
remove the layers of senior and middle management i.e. making the organization structure flat.
6. Business Process Reengineering: The Business Process Reengineering method (BPR) is
defined by Hammer and Champy as 'the fundamental reconsideration and radical redesign of
organizational processes, in order to achieve drastic improvement of current performance in cost,service and speed'. Value creation for the customer is the leading factor for BPR and information
technology often plays an important enabling role. Business process reengineering is also known
as BPR, Business Process Redesign, Business Transformation, or Business Process Change
Management.
Category of corporate restructuring
Corporate Restructuring entails a range of activities including
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Financial restructuring and organization restructuring
.
FINANCIAL RESTRUCTURING
Financial restructuring is the reorganization of the financial assets and liabilities of a corporation
in order to create the most beneficial financial environment for the company. The process of
financial restructuring is often associated with corporate restructuring , in that restructuring the
general function and composition of the company is likely to impact the financial health of the
corporation. When completed, this reordering of corporate assets and liabilities can help the
company to remain competitive, even in a depressed economy. Just about every business goes
through a phase of financial restructuring at one time or another. In some cases, the process of
restructuring takes place as a means of allocating resources for a new marketing campaign or the
launch of a new product line. When this happens, the restructure is often viewed as a sign that the
company is financially stable and has set goals for future growth and expansion.
Need For Financial Restructuring
The process of financial restructuring may be undertaken as a means of eliminating waste from
the operations of the company. For example, the restructuring effort may find that two divisions or
departments of the company perform related functions and in some cases duplicate efforts. Rather
than continue to use financial resources to fund the operation of both departments, their efforts are
combined. This helps to reduce costs without impairing the ability of the company to still achieve
the same ends in a timely manner. In some cases, financial restructuring is a strategy that must take
place in order for the company to continue operations. This is especially true when sales decline
and the corporation no longer generates a consistent net profit. A financial restructuring may
include a review of the costs associated with each sector of the business and identify ways to cut
costs and increase the net profit. The restructuring may also call for the reduction or suspension of production facilities that are obsolete or currently produce goods that are not selling well and are
scheduled to be phased out. Financial restructuring also take place in response to a drop in sales,
due to a sluggish economy or temporary concerns about the economy in general. When this
happens, the corporation may need to reorder finances as a means of keeping the company
operational through this rough time. Costs may be cut by combining divisions or departments,
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reassigning responsibilities and eliminating personnel , or scaling back production at various
facilities owned by the company. With this type of corporate restructuring, the focus is on survival
in a difficult market rather than on expanding the company to meet growing consumer demand.
All businesses must pay attention to matters of finance in order to remain operational and to also
hopefully grow over time. From this perspective, financial restructuring can be seen as a tool that
can ensure the corporation is making the most efficient use of available resources and thus
generating the highest amount of net profit possible within the current set economic environment.
ORGANIZATIONAL RESTRUCTURING
In organizational restructuring, the focus is on management and internal corporate governance
structures. Organizational restructuring has become a very common practice amongst the firms in
order to match the growing competition of the market. This makes the firms to change the
organizational structure of the company for the betterment of the business.
Need For Organization Restructuring
New skills and capabilities are needed to meet current or expected operational
requirements.
Accountability for results are not clearly communicated and measurable resulting in
subjective and biased performance appraisals.
Parts of the organization are significantly over or under staffed.
Organizational communications are inconsistent, fragmented, and inefficient
Technology and/or innovation are creating changes in workflow andproduction processes.
Significant staffing increases or decreases are contemplated.
Personnel retention and turnover is a significant problem.
Workforce productivity is stagnant or deteriorating.
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Morale is deteriorating.
Some of the most common features of organizational restructures are:
Regrouping of business
This involves the firms regrouping their existing business into fewer business units. The
management then handles theses lesser number of compact and strategic business units in
an easier and better way that ensures the business to earn profit.
Downsizing
Often companies may need to retrench the surplus manpower of the business. For that purpose
offering voluntary retirement schemes (VRS) is the most useful tool taken by the firms for
downsizing the business's workforce
Decentralization
In order to enhance the organizational response to the developments in dynamic environment, the
firms go for decentralization. This involves reducing the layers of management in the business so
that the people at lower hierarchy are benefited.
Outsourcing
Outsourcing is another measure of organizational restructuring that reduces the manpower andtransfers the fixed costs of the company to variable costs.
Enterprise Resource Planning
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Enterprise resource planning is an integrated management information system that is enterprise-
wide and computer-base. This management system enables the business management to
understand any situation in faster and better way. The advancement of the information technology
enhances the planning of a business.
Hurdles of Business Restructuring
Restructuring is not as simple as "Making the mission statement in the morning, assessing the
corporate strengths and weaknesses in the afternoon and articulating the strategies by evening".
Some of these are discussed below:
Culture: Culture is an important intermediary which determines whether the strategy will or will
not be successfully implemented. Culture either helps or hinders an organization as it seeks toachieve competitive advantage. The right culture for an organization is the one that best supports
its strategic objectives. The challenge for an organization is thus to assess the fit between the
current culture and the culture required to implement the chosen strategy successfully and to take
steps to change the organization's culture to better align it with what is required.
Inadequate focus and commitment of top management towards change program: Any change
program will be successful only if it gets adequate support and commitment of the top
management. If the top management themselves are not focused or committed the restructuring
will be a failure.
"What is in it for me" attitude: Say in case of a merger or an acquisition, if each party is
concerned only about itself rather than the organization as a whole, the restructuring would not be
effective nor successful i.e. if each party tries to gain benefits for itself at the cost of the others, the
new organization would fail.
Mind set/resistance to change: Any restructuring activity involves some amount of change. Be it
a merger or a joint venture or a takeover, the management as well as the employees require to align
themselves the new structure. If they are not willing to change their mindset, the restructuring will
not be successful.
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Lack of involvement of employees: A restructuring activity requires a lot of change: change in
the mindset, change in the working, change in the reporting, a change in the structure, etc. Since
human tendency is to resist change, the best way to incorporate any change is to involve people in
the formation of this change. Failure to do so would invite resistance from them which in turn will
affect a successful restructuring.
Poor planning: As goes the phrase "Well started is half done". If your planning stage itself is
faulty, the whole activity would be affected.
Resource Availability: Resource availability could be another constraint. Lack of availability of
adequate resources could affect the working of the business and affect the restructuring activity as
a whole.
Cost and time: The cost and time involved for the gains to seep through into the organization may
at times make the firm retreat from the process of restructuring.
Poor communication: At times, due to poor communication, the need and benefits of the
restructuring activity has not been percolated to the lower levels of the organization. This in turn
would affect the effective working of the employees and their performance. Unstructured
communication flow, unclear reporting structures, etc, after a restructuring activity, could also
affect the efficient working of the organization.
Restructuring At Lucent Technologies (A Success Story)
Lucent Technologies was a technology company composed of what was formerly AT&T
Technologies, which included Western Electric and Bell Labs. It was spun-off from AT&T on
September 30, 1996.
About Lucent Technologies
In September 1995, the US based telecom giant AT&T announced that it would be
restructuring itself into three separate companies- a services company(AT&T), a products
and systems company (Lucent technologies) and a computer company (NCR). In February 1996, AT&T divested Lucent off into a separate company
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At the time it was spun off, Lucent was already a major player in many business-mobility,
data, optical and voice networking technologies, professional network designs and
consulting services, web-based enterprise solutions which linked public and private
networks and optoelectronics and communications semiconductors By 1997, Lucent was the leading telecom equipment maker and was lauded as one of the
biggest success stories of the 1990s. Lucent had acquired many technology companies in the late 1990s.
Surfacing of the Problems
In the late 1990s, as the internet and data traffic businesses gained ground, Lucent lost its
competitive advantage in its core business of telecom equipment. Though Lucent invested in a few Internet and wireless companies after 1996, the company
focused more on its core competencies and failed to evolve in line with the changing
market dynamics towards convergence of voice, data and internet. With the growing popularity of wireless technologies, Lucent began to lag behind its
competitors, who were quick to recognize the potential of Internet. Compared to its competitors, Lucent had been very slow to respond to it customers? need
for higher-speed optical networking equipment which resulted in a severe blow to its
revenue as well as its market reputation By late 1999, Lucent's high priced acquisitions were not earning reasonable profits and the
company was also unable to integrate the operations of the acquired companies effectively,
leading to problems on the corporate culture front. The poor integration of corporate cultures led to a major exodus of talent from the acquired
companies, as a result of which, Lucent could not launch new technologies to match its
competitors Besides, Lucent had diversified workforce of over 1,38,000 people across its businesses,
and the workforce at each business unit had its own unique culture. Lucent became a hub
of diversified cultures and varied service delivery models. This made it difficult for the HR
staff to integrate the HR functions across the business units and to develop and implement
efficient retention strategies.
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In 1997, Lucent launched a major strategic initiative called "GROWS" an acronym for its
key elements - Global, Results, Obsessed, Workplace and Speed. This initiative promoted
an open supportive and diverse workplace at the company. However, by late 1999, under
McGinn's leadership, Lucent's focus on HR diminished. When Lucent had increased its sales to customers, many of them defaulted on their
payments as the technology and telecom industry reeled under an unprecedented slump in
2000, which threw Lucent into a deep financial crisis. Analysts and industry observers attributed Lucent's miserable performance to the wrong
strategies and mis-execution by the top management.
In 2001, Lucent announced a new restructuring plan. The plan concentrated on the following
things:
Elimination of product lines Significant cost cuts to the extent of $2bn a year Workforce reduction by 10,000 jobs Reduction in working capital
Restructuring Activity
In 2001, Lucent came up with the Service Delivery Project Team. The major objective of this team
was to simplify and standardize global HR policies and processes, in order to improve efficiency
throughout the organization, giving HR management a position of strategic importance in the
entire transformation process.
Tiger Team
In Feb 2002, Lucent selected six HR leaders from its domestic and global operations to serve full-
time for six weeks on HR restructuring exercise. The major objective of this team was to create a
road map indicating how the company could meet the financial challenges of its various
businesses, without disrupting the company's day-to-day Hr operations. The Tiger Team undertook
an analysis of Hr operations. The team also studied the possibilities of making HR activities more
efficient through policy changes, automation and process improvements.
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Expert Help
Lucent established a Project Management Office to oversee the implementation of findings and
suggestions of the Tiger Team. During the implementation period, the PMO was assisted by
Hewitt Associates.
Focus on IT
Lucent also focused on IT to save on the costs and time consumed in transactional and repetitive
HR activities by transferring them to global IT platforms and regional HR operating centres.
Workforce Reduction
Between 2000 and 2002, Lucent resorted to workforce reduction By early 2003, Lucent had cut its
workforce from 1,35,000 in late 2000 to 45,000 through various means like outsourcing, spinoffs
and lay offs.
Service Delivery Model
Lucent consulted the experts in compensation strategies and policies, staffing and talent
management and also other companies which had been through similar organizational
transformations. Lucent then went through a rigorous strategy setting phase, which helped it to lay
the foundation for its long-term HR vision.
Effects of Restructuring
1. Since the function of the HR organisational segments were clearly defined the decision making
process became very easy and quick.
2. The focus on IT, enabled the company to:
Manage HR functions efficiently. Reduce workforce costs Drastically reduced the need for manual interfaces.
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Encouraged employees to take advantage of various online training programs offered by
the company. Helped HR business partners to align their working closely with senior managers.
3. A strong shared vision, leadership support and clear communication was responsible for the
success Lucent
4. Lucent not only met cost reduction target but also exceeded its targets through its cost-cutting
initiatives.
Analysis
Proper planning phase: As goes the phrase "Well started is half done" - Lucent went through a
rigorous three-month strategy setting phase, which helped it to lay the foundation for its long-term
HR vision. Because of this Lucent could develop a detailed HR organization structure i.e. the
"service delivery model" which led to its success.
Proper Implementation: Implementation was done only after communicating the changes to the
workforce and in consultation with the employees. This enabled the employees to accept the
change easily.
Strong shared vision and full support of their top management greatly expedited the decisionmaking process.
Aligned Hr activities to Strategic Business Goals: Lucent tried to standardize global HR policies
and processes, to align it with strategic business goals thus giving HR management a position of
strategic importance in the entire transformation process.
Clear definition of functions: Since, function of the HR organisational segments were clearly
defined, the decision making process became very easy and quick.
Restructuring At Hewlett Packard
The Hewlett-Packard Company, commonly referred to as HP, is an American information
technology corporation, specializing in personal computers, notebook computers, servers, printers,
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digital cameras, and calculators, network management software, among other technology related
products.
Stanford University classmates Bill Hewlett and Dave Packard founded HP in 1939. The
company's first product, built in a Palo Alto garage, was an audio oscillatoran electronic test
instrument used by sound engineers. One of HP's first customers was Walt Disney Studios, which
purchased eight oscillators to develop and test an innovative sound system for the movie Fantasia.
Surfacing of the Problems
Notwithstanding the efforts made by the top management to generate synergies across
divisions, the decentralized structure that HP had, till the 1980s, created major problems
for the company. HP began to be perceived by users as three or four companies, with little co-ordination
between them. In 1990s, HP found that its elaborate network of committees was slowing down its ability
to take quick decisions - slow decision-making. To solve this problem, the then CEO John
Young, dismantled the committee network and also cut a layer of management from the
hierarchy. He further decentralized decision-making and divided the computer business
into two primary groups. One group was made responsible for PCs, printers and other products sold through dealers and the other for work stations and minicomputers sold to
large customers. With the growth in size of operations - 83 different product divisions, the bureaucracy had
increased significantly. This bureaucracy was hindering innovation as well. The company's stagnant revenues and the declining profit growth rate in 1998 compounded
its problems. HP's culture, which emphasized teamwork and respect for co-workers, had over the years
translated into a consensus-style culture that was proving to be a sharp disadvantage in the
fast growing Internet business era.
Restructuring Activity by the New Ceo .Carleton S. Fiorina
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Fiorina began by demanding regular updates on key units. She also injected the much-
needed discipline into HP's computer sales force. Sales compensation was tied to performance and the bonus period was changed from once
a year to every six months. To boost innovation and new product development, Fiorina increased focus on
"breakthrough" projects. She started an incentive program that paid researchers for each
patent filing. Fiorina developed a multiyear plan to transform HP from a "strictly hardware company" to
a Web services powerhouse. To achieve this plan, Fiorina dismantled the decentralized
organization structure. Fiorina reorganized the units into six centralized divisions. She expected the new structure
to strengthen the collaboration, between sales & marketing executives and productdevelopment engineers thus helping to solve the customer problems faster. This was the
first time a company with thousands of product lines and scores of businesses had
attempted a front-back approach, a strategy that required laser focus and superb
coordination.
Negative Repercussions
1. Earlier HP's product chiefs had run their own operations from designing of the product to providing sales and support. In the new set-up, they had a very limited role.
2. In the new structure, the back end product designers would not be able to stay close enough to
the customers to deliver products as per their requirements.
3. While productivity linked commissions to the sales force were intended to boost revenues and
profitability, they only helped in raising sales for low margin products that did little for corporate
profits.
4. The new structure did not clearly assign responsibility for profits and losses. There was less
financial control and more disorder.
5. With employees in 120 countries, redrawing the lines of communication and getting personnel
from different divisions to work together was proving very troublesome.
6. The front back reorganization had created confusion internally.
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7. These changes had affected employee morale. Many employees had lost faith in Fiorina?s
ability to execute her restructuring plans.
Analysis
What went wrong at HP?
Improper Implementation of Restructuring Strategies - Sweeping changes were initiated in a
very short span of time without allowing employees time to understand the changes in the spirit in
which they were introduced & adjust to the same.
Improper Allocation of Authority & Lack of Coordination - This can be substantiated by the
following reasons:
With no authority to set sales forecast, back-end managers were unable to allocate the
R&D funds effectively. At the same time, if the back-end colleagues came up with the wrong products - because of
their lack of close association with the customers - the front-end sales representatives had
trouble meeting their forecast, thereby not being able to contribute positively to the
corporate financial objectives.
Top down Management Approach & Autocratic style of Leadership by C. FIORINA -
According to some analysts, the major reason for the shortfall in HP's revenues was Fiorina's
aggressive management restructuring.
Improper Timing: The time chosen for initiating Business Restructuring was inappropriate as
there was a global slowdown in the technology sector.
Lack of Prioritization - Fiorina was accused of being over-ambitious and trying to tackle all of HP?s problems together at the same time.
Improper Timing: The time chosen for initiating Business Restructuring was inappropriate as
there was a global slowdown in the technology sector.
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3.3 Comparative Analysis
Lucent Technologies HPEmployee Involvement in Implementation
enabled the employees to accept the change
easily. It ensured greater cooperation to the
management from the employees.
Sweeping changes were initiated in a very short
span of time without allowing employees time to
understand the changes in the spirit in which they
were introduced & adjust to the same.
Decision making process became very easy and
quick.
Decision making though extremely quick washighly efficient but hardly effective in the long
run.Prioritized the need to restructure HR activities
firstLack of Prioritization
Participative Management restructuring Aggressive Management restructuringAligned their working closely with senior
managers
Front Back reorganization made work together
was proving very troublesome
Case Study: Business Model of Napster
Pages: Page 1 Page 2
The Napster brand has had a varied history. Its initial incarnation was as the first widely used
service for free peer-to-peer (P2P) music sharing. The record companies mounted a legal
challenge to Napster due to lost revenues on music sales which eventually forced it to close. Butthe Napster brand was purchased and its second incarnation offers a legal music download service
in direct competition with Apples iTunes.
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The original Napster
Napster was initially created between 1998 and 1999 by a 19 year old called Shawn Fanning while
he attended Bostons Northeastern University. He wrote the programme initially as a way of
solving a problem for a friend who wanted to find music downloads more easily online online. The
name Napster came from Fannings nickname.
The system was known as Peer to Peer since it enabled music tracks stored on other Internet users
hard disks in MP3 format to be searched and shared with other Internet users. Strictly speaking,
the service was not a pure P2P since central services indexed the tracks available and their
locations in a similar way to which instant messaging (IM) works.
The capability to try a range of tracks proved irresistible and Napster use peaked with 26.4 million
users worldwide in February 2001.
It was not long before several major recording companies backed by the RIAA (Recording
launched a lawsuit. Of course, such action also gave Napster tremendous PR and millions of users
used the service. Some individual bands also responded with lawsuits. Rock band Metallica found
that a demo of their song I disappear began circulating on the Napster network and was
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eventually played on the radio. Other well-known artists who vented their ire on Napster included
Madonna and Eminem. However, not all artists felt the service was negative for them. UK band
Radiohead pre-released some tracks of their album Kid A on to Napster and subsequently became
Number 1 in the US despite failing to achieve this previously.
Eventually as a result of legal action an injunction was issued on March 5th 2001 ordering Napster
to cease trading of copyrighted material. Napster complied with this injunction, but tried to read a
deal with the record companies to pay past copyright fees and to turn the service into a legal
subscription service. In the following year, a deal was agreed with German media company
Bertelsmann AG to purchase Napsters assets for $8 million as part of agreement when Napster
filed for Chapter 11 bankruptcy in the United States. This sale was blocked and the web site
closed. Eventually, the Napster brand was purchased by Roxio, Inc who used the brand to rebrandtheir PressPlay service.
Since this time, other P2P services such as Gnutella, Grokster and Kazaa prospered which have
been more difficult for the copyright owners to purse in court, however, many individuals have
now been sued in the US and Europe and the associations of these services with spyware and
adware has damaged these services, which has reduced the popularity of these services.
New Napster in 2008
Fast Forward to 2008 and Napster now has around 830,000 subscribers in the United States,
Canada and United Kingdom who pay up to 14.95 each month to gain access to about 1.5 million
songs. The company is seeking to launch in other countries such as Japan through partnerships.
Revenue for financial year 2008 is expected to exceed $125 million, representing growth of 17%.
The online music download environment has also changed with legal music downloading
propelled through increasing adoption of broadband, the success of Apple iTunes and its portable
music player, the iPod which by 2005 had achieved around half a billion sales.
Napster gains its main revenues from online subscriptions and permanent music downloads. The
Napster service offers subscribers on-demand access to over 1 million tracks that can be streamed
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or downloaded as well as the ability to purchase individual tracks or albums on an a la carte basis.
Subscription and permanent download fees are paid by end user customers in advance either via
credit card, online payment systems or redemption of pre-paid cards, gift certificates or
promotional codes. Napster also periodically licenses merchandising rights and resells hardware
that its end users use to store and replay their music.
BBC estimated that the global music market is now worth $33 billion (18.3 billion) a year while
the online music market accounted for around 5% of all sales in the first half of 2005. Napster ,
quoting Forrester Research estimates that United States purchases of downloadable digital music
will exceed $1.9 billion by 2007 and that revenues from online music subscription services such as
Napster will exceed $800 million by 2007.
BBC reports Brad Duea, president of Napster as saying: The number one brand attribute at the
time Napster was shut down was innovation. The second highest characteristic was actually free.
The difference now is that the number one attribute is still innovation. Free is now way down on
the list. People are able to search for more music than was ever possible at retail, even in the
largest megastore.
The Napster online music service
Napster subscribers can listen to as many tracks as they wish which are contained within the
catalogue of over 1 million tracks (the service is sometimes described as all you can eat rather
than a la carte). Napster users can listen to tracks on any compatible device that includes
Windows Digital Rights Management software, this includes MP3 players, computers, PDAs and
mobile phones. Duea describes Napster as an experience rather than a retailer. He says this
because of features available such as: Napster recommendations Napster radio based around
songs by particular artists Napster radio playlists based on the songs you have downloaded
Swapping playlists and recommendations with other users
iTunes and Napster are probably the two highest profile services, but they have a quite different
model of operating. There are no subscribers to iTunes, where users purchase songs either on a per
track basis or in the form of albums. By mid 2005, over half a billion tracks had been purchased on
Napster. Some feel that iTunes locks people into purchasing Apple hardware, as one would expect
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Duea of Napster says that Steve Jobs of Apple has tricked people into buying a hardware trap.
But Napsters subscription model has also been criticised since it is service where subscribers do
not own the music unless they purchase it at additional cost, for example to burn it to CD. The
music is theirs to play either on a PC or on a portable player, but for only as long as they continue
to subscribe to Napster. So it could be argued that Napster achieves lock-in in another form and
requires a different approach to music ownership than some of its competitors.
Napster Strategy
Napster describe their strategy as follows. The overall objective is to become the leading global
provider of consumer digital music services. They see these strategic initiatives as being
important to achieving this:
Continue to Build the Napster Consumer Brand as well as increasing awareness of the
Napster brand identity, this also includes promoting the subscription service which
encourages discovery of new music. Napster (2005) say We market our Napster service
directly to consumers through an integrated offline and online marketing program
consistent with the existing strong awareness and perception of the Napster brand. The
marketing message is focused on our subscription service, which differentiates our offering
from those of many of our competitors. Offline marketing channels include television(including direct response TV), radio and print advertising. Our online marketing program
includes advertising placements on a number of web sites (including affiliate partners) and
search engines Continue to Innovate by Investing in New Services and Technologies this initiative
encourages support of a wide range of platforms from portable MP3 players, PCs, cars,
mobile phones, etc. The large technical team in Napster shows the importance of this
strategy. In the longer-term, access to other forms of content such as video may be offered.
Napster see their ability to compete depend substantially upon our intellectual property.
They have a number of patents issued, but are also in dispute with other organizations over
their patents. Continue to Pursue and Execute Strategic Partnerships Napster has already entered
strategic partnerships with technology companies (Microsoft and Intel), hardware
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companies (iRiver, Dell, Creative, Toshiba and IBM), retailers (Best Buy, Blockbuster,
Radio Shack, Dixons Group, The Link, PC World, Currys, Target), and others (Molson,
Miller, Energizer, Nestle).
Continue to Pursue Strategic Acquisitions and Complementary Technologies This is another
route to innovation and developing new services.
Advantages and Disadvantages of Corporate Restructuring
Corporate restructuring is a process in which a company changes the organizational structure and processes of the business. This can happen through breaking up a company into smaller entities,
through buy outs and mergers. When a company uses one of these methods, it could strengthen the
company or it could create more problems than it is worth.
Increasing Value of Parts
One of the main reasons that businesses use corporate restructuring is to divide the business up for
sale. If a company is trying to sell as a conglomerate, it will likely get lower offers from investors.
When the company is split up into separate parts, it can often get better offers for those individual
parts. This can increase the value of the company as a whole and help get a higher sales price for
the business.
Reduce Costs
Another benefit of restructuring a company is to reduce business costs. For example, a company
could merge with another company that is very similar and use economies of scale to run more
efficiently. It could cut back on employees and equipment to streamline business operations. Inthis way, the company can expand its reach without adding too much to the overhead of the
business. If handled correctly, the company can add significant value for its shareholders.
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