Financial___organizational_restructuring.pptx

Financial & organizational restructuring

• Financial restructuring involves changes in the capital structure and capital mix of the company to minimize its cost of capital. • It deals with infusion of financial resources to facilitate mergers, acquisitions, joint ventures, strategic alliances, LBOs, and stock buyback. • All these initiatives depend on availability of free cash flows, takeover threats faced by the company, and concentration of equity ownership.

• Companies opt for financial restructuring for the following reasons: • Generate cash for exploiting available investment opportunities • Ensure effective use of available financial resources • Change the existing financial structure to reduce cost of capital • Leverage the firm • Prevent attempts at hostile take over. • (JV with rivals of the bidder, share repurchase, increase leverage, buy assets, Use excess cash, pay or declare higher dividends, entering into international partnerships)

• 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.

• 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.

• 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.

• 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.

• Financial Restructuring a.Change in Debt Structure b.Change in Capital Base • c.Change in Group Structure

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1. Buy Back Shares - The main reasons for following this route are return of surplus cash to the shareholders, increasing underlying share value, supporting share prices during temporary weakness, and preventing or blocking hostile takeovers. • Buy back is also used as a financial strategy by corporates for streamlining their capital structure, as well as for reducing the number of shareholders to reduce the cost for servicing them, etc.

• 2. Reduction in Capital - This occurs when a borrower makes a lump sum payment towards the capital owed on a mortgage. There are two circumstances in which this might take place. These are: • I. Where future operations of the company are expected to be on a reduced scale so that a smaller level of finance will be required; and • ii. Where it has to be accepted that past revenue losses can never be made good and that they amount to a permanent loss of capital

• Change in Group Structure .

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1. Merger and De-merger within the Group Companies i. Merger - A legal action resulting in the unification of two or more legal entities. Such an event can be advantageous because of Economies of Scale and also give a competitive edge by synergies derived from the unification ii. De-merger - The splitting of a company often originally formed as a result of a merger, into two or more separate companies. It gives the existing shareholders shares in both companies 2. Amalgamation - The combination of two or more commercial companies into one unit

• Organizational Restructuring • 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. • Some of the prime reasons for organizational restructuring are as follows: • Changing nature of the markets • The continuous innovations in technology, product, work processes, materials, organizational culture and structure • Various actions of work force values, global competitors, demands and diversity • Ethical constraints and regulations • Individual transition and development of the business

• 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 and transfers the fixed costs of the company to variable costs.

• Enterprise Resource Planning • 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. • Business Process Engineering • It involves redesigning the business process so that the business maximizes the operation and value added content of the business while minimizing everything else. • Total Quality Management • The businesses now have started to realize that an outside certification for the quality of the product helps to get a good will in the market. Quality improvement is also necessary to improve the customer service and reduce the cost of the business.

• The perspective of organizational restructuring may be different for the employees. When a company goes for the organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their jobs. This may decrease the morale of employee in a large manner. Hence many firms provide strategies on career transitioning and outplacement support to their existing employees for an easy transition to their next job.

Banks approve Air India's financial restructuring plan • A consortium of 19 banks, led by State Bank of India, has approved the financial restructuring plan of Air India. The plan, which includes debt restructuring of Rs 18,000 crore by the banks and a committed equity infusion by the government, will require Cabinet approval in April 2012 • Of the Rs 22,000-crore high-cost working capital debt of the airline, banks will restructure nearly Rs 18,000 crore — Rs 10,500 crore will be converted into long-term debt with a repayment period of 10-15 years and the remaining Rs 7,400 crore (approximately) will be repaid to banks through a government-guaranteed bond issue. • “The restructuring plan has been approved by the banks and we hope Cabinet approval will come by the middle of April. That will help reduce our interest outlay substantially in the first year, as we get a moratorium on the loan for the first year,” said a senior Air India official, who did not wish to be identified.

• The official said the amount of Rs 7,400 crore would have a moratorium of 12 months and the Rs 10,500 crore of six months. “We will be able to save around Rs 1,000 crore immediately in the first year after the restructuring plan is implemented,” he added. Air India has debt of over Rs 43,000 crore — Rs 22,000 crore short-term and Rs 21,000 crore long-term. It has an annual interest outlay of Rs 2,700 crore. Of the Rs 2,700 crore, Rs 1,600 crore goes to service working capital loans and the rest to service low-cost loans taken for aircraft acquisition. • In the second stage of the financial restructuring plan, the government has to infuse equity in the airline till 2020-21. A Group of Ministers (GoM), headed by finance minister Pranab Mukherjee, had recommended an infusion of Rs 23,000 crore in the airline till 2020-21. • As part Rs 4,000 crore for its dues. It has to clear dues of Rs 2,500 crore to oil companies; Rs 1,200 crore is due to be paid to airport operators and Rs 580 crore in employees’ salaries.

• This is the second time that banks have approved a debt restructuring plan for Air India. In the plan approved earlier, banks had to convert Rs 10,500 crore of shortterm loans into long-term and convert Rs 7,400 crore into equity shares. The banks later objected to converting debt into equity in the carrier, as they were not sure about the company’s revival and the finance ministry had rejected any board-level representation for banks. • Air India has accumulated losses of Rs 20,000 crore. It is losing Rs 15 crore a day.

• Nov 2015: • Air India, which has a total debt of around Rs 50, 000 crore, will be able to repay its entire aircraft-related debt which amounts to Rs 19,000 crore by 2019. As result of the fund infused by the government, the debt-to-equity ratio of Air India has been reduced to 2:1 from the previous 10:1. • “We are expecting to make an operational profit of around Rs 6 crore in the financial year 2015-16 and the management of the national carrier has taken a decision to induct 15 Airbus A320 aircraft on lease to improve the domestic operations,” Venkat told FE on the sidelines of the event. • Air india is also expected to induct six more Dreamliners in the year financial year 2017-18. The event was also attended by Go Air CEO Wolfgang Prock-Schauer and Airbus India MD Srinivasan Dwarkanath. • Go Air’s Prock-Schauer said the total passenger carried in 2015 is expected to be around 80 million, as against 70 million last year. “There are airports in places like Nashik, Pondicherry and Surat and we plan to increase our operations in those routes. We should have a predictable aviation policy and it should help everyone and promote growth,” added ProckSchauer, during his speech at the event.