Capital restructuring

From CEOpedia | Management online

Capital restructuring means radical and thorough changes that are carried out in the material sphere and financial management of the enterprise. These changes are designed to improve the efficiency and effectiveness of the company's operations, its structure and operating principles. In addition, the main task of capital restructuring is to ensure financial liquidity, shape the capital structure and improve the efficiency of the company's assets. The effect of such restructuring is the internal changes of the company, which will enable adaptation to new conditions for the functioning of the environment, and thus to achieve successes and intended goals on the market (K. Baker, H. Kiymaz, 2011, p. 28).

Stages of capital restructuring

The process of introducing changes in the enterprise requires proper planning and assumption of its appropriate effect, due to the fact that it is a purposeful process. A very important issue of restructuring is the full awareness of the consequences, the assumption of a predictable activity that is free of randomness, responds to competition, brings something new and is ready for the challenges of the environment. Failure to see the need for change at the right moment and lack of ability to effectively and quickly resolve problems that arise due to poor company adaptation to external conditions may have an impact on the crisis that may affect the survival and efficiency of the company's operation on the market. As a result, the change is commonly associated with the standard in the process of continuous adaptation, while the ability to make changes is treated as an important factor affecting the survival of the company on the market and maintaining its good position. The need for capital restructuring applies to almost every enterprise wishing to achieve a competitive advantage on the market, regardless of its size or economic situation (I. Mavlutova, 2013, p. 33-34).

Restructuring considerations

Capital restructuring as a process of radical change has its own special conditions. It is characterized by the need to adapt adaptation to changing external conditions, fundamental changes in the structure of the company striving to achieve goals, or causing permanent changes in a company with a very wide range. The specific features of restructuring changes that determine the whole essence of the process are (R. J. Recardo, 2013, p. 25-27):

  • radicality - the state of the company before and after the restructuring process is very different,
  • comprehensiveness - all changes include the financial situation of the company and areas related to its functioning,
  • revolutionary - changes introduced through capital restructuring should be new and positively surprising,
  • long-term - the effects of comprehensive restructuring are evident over a few years,
  • plan - that is, accurate and early planning of activities,
  • valuable - all changes involve a large financial and social effort,
  • universality - applies to or applies to almost every company.

Obstacles to the capital restructuring process

Many factors affect the effectiveness of the capital restructuring process. Their knowledge is very important and allows you to define ways to remove or alleviate the effects, which improves the efficiency of this process. The main and most important obstacles that hamper the capital restructuring process are (I. Mavlutova, 2013, p. 36-37):

  • uneven competition and price increase - it is mainly about raw materials,
  • unprofessional financial condition - lack of financial liquidity, large indebtedness causing the crisis to grow and the process of making changes difficult,
  • insufficient funds for investment and development - limited access to loans,
  • mistakes appearing from budgeting - generating high costs,
  • poorly functioning and insufficient controlling,
  • poor planning or lack of it, contributing to the selection of faulty investments,
  • errors in working capital management,
  • scale of activity - which may exceed the company's financial capabilities.

Examples of Capital restructuring

  • Mergers and Acquisitions: Mergers and acquisitions are a form of corporate restructuring that combines two or more companies into a single entity. This is done for a variety of reasons, such as to strengthen the combined entity’s market position, to diversify its product or service offering, or to increase efficiency by combining resources. In a merger, the two companies involved become one, while in an acquisition, one company is bought by another. Recent examples of corporate restructuring through mergers and acquisitions include the merger of AT&T and Time Warner, and the acquisition of Whole Foods by Amazon.
  • Spin-offs: A spin-off is a type of corporate restructuring in which a company splits off a portion of its business to form a separate company. This separation can be done for a variety of reasons, including to create a more focused business entity, to access capital markets, or to create a tax benefit. A recent example of a spin-off is the separation of Kraft Heinz into two separate companies, Kraft and Heinz.
  • Debtor-in-Possession Financing: Debtor-in-possession (DIP) financing is a form of corporate restructuring typically used in bankruptcy proceedings. It is a financing arrangement approved by a bankruptcy court that allows a company to raise capital to fund its operations while under bankruptcy protection. DIP financing typically has priority over other forms of debt, and is often secured by the company’s assets.
  • Equity and Debt Restructuring: Equity and debt restructuring is a form of corporate restructuring in which a company changes the structure of its equity and debt capital. This can be done for a variety of reasons, such as to increase the company’s liquidity, access new capital, or improve its credit rating. Recent examples of equity and debt restructuring include the restructuring of the debt of energy company Chesapeake Energy, and the restructuring of the equity of auto manufacturer General Motors.

Advantages of Capital restructuring

Capital restructuring has many advantages, which are listed below:

  • It allows companies to adjust their capital structure to meet the current market conditions, which can be beneficial in terms of both reducing costs and increasing profits. For example, it can help companies to reduce their debt burden and increase their equity capital, which can improve their credit ratings and attract more investors.
  • It also increases the efficiency of the use of the companys assets, as it can help to streamline operations and increase return on investment.
  • It can provide a company with the opportunity to raise additional funds for investment in new projects, or for the development of existing ones.
  • It can also help to improve the liquidity of the company by providing it with more liquid assets that can be used to meet short-term obligations.
  • Furthermore, it can help to improve the financial performance of the company, as it can help to reduce costs and improve profits.
  • Finally, it can help to improve the overall corporate image of the company, which can make it more attractive to potential investors and customers.

Limitations of Capital restructuring

Capital restructuring has certain limitations that should be taken into account when planning and carrying out the process. These limitations include:

  • Time constraints - Capital restructuring requires a lot of time and effort to be completed, and thus can be difficult to complete in a timely manner.
  • Cost - Capital restructuring can be expensive, and it can be difficult to find the necessary funds for the process.
  • Legal issues - There may be legal hurdles, such as taxes or regulations, that can complicate the process.
  • Risk - There is always a risk of failure when restructuring a business, and it can be difficult to predict the outcome of the process.
  • Lack of knowledge - Without the proper knowledge and experience, it can be difficult to carry out a successful restructuring.
  • Resistance to change - Employees, customers, and other stakeholders may be resistant to the changes that come with restructuring, which can slow down the process or even derail it completely.

Other approaches related to Capital restructuring

  • One of the other approaches related to capital restructuring is the use of mergers and acquisitions (M&A). This strategy involves the acquisition of another company in order to expand the market share, acquire new technologies or products, gain access to new markets, and reduce costs.
  • Another approach is the use of corporate debt restructuring. This strategy involves refinancing existing debt, reducing the interest rate and/or extending the repayment period. This can help reduce the company’s debt burden, improve cash flow and reduce the risk of default.
  • Equity financing is another approach used in capital restructuring. This involves raising capital by issuing new equity shares to investors. This can help generate additional funds for the company, increase its market capitalization, and attract new investors.
  • A fourth approach is the use of asset swaps. This involves exchanging one asset for another. This can be used to reduce costs, improve liquidity, and/or increase the company’s value.

In summary, capital restructuring is a process that involves making changes to the material and financial aspects of a company in order to improve its efficiency and effectiveness. This can be done through the use of mergers and acquisitions, corporate debt restructuring, equity financing and asset swaps.


Capital restructuring — recommended articles
Investment project — Funding Operations — Defensive strategy — Appropriation of retained earnings — Functional strategy — Availability of resources — Capital Base — Transformational outsourcing — Development cost

References

Author: Karolina Kurcz

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