Corporate restructuring reorganizes (or restructures) parts of the company to make it run better. Some experts predict the corporate world will see a rise in business restructuring in 2023 due to economic constraints. Dive into the significance of corporate restructuring and different types to be prepared for this trend.
Understanding the Restructuring Process
No matter what form of restructuring a company undergoes, the process is fairly straightforward. Consultants and advisors are often brought in to implement changes. Sometimes a new CEO comes on as well.
Working together, advisors and leadership identify procedures, workflows, systems, personnel and other changes to help the company operate smoothly. Frequently, restructuring involves consolidation. When roles are eliminated or combined, a percentage of employees will be laid off.
Once these changes are made, the business can focus on new operations. This might include rolling out new systems or workflows, cross-training employees in new roles or adopting new technologies.
As with anything new, there may be bumps along the way. Restructuring can be very challenging, particularly when it involves cuts and layoffs, but in time the company will return to a streamlined operation. Business should be better than before.
Types of Restructuring
Corporate restructuring tends to fall into these buckets:
- M&A: A company merges with, or is acquired by, a competitor. These restructuring deals are complex and demand unique M&A solutions.
- Divestment: A company unwinds a division to operate more efficiently.
- Legal restructuring: A company or its departments change their legal entity, policies or procedures.
- Cost restructuring: A company consolidates to weather an economic downturn.
- Turnaround restructuring: A company changes strategy, product lines or organization, for example, by discontinuing a non-profitable product line.
- Repositioning restructuring: A company expands its business line, i.e., by expanding into a complementary niche.
Restructuring is a complex process. However, two things stand out when it comes to planning for, and going through, a restructuring. First, there is cost. While restructuring is intended to streamline the business and help it become more profitable, it does not come cheap. Consultants and advisors can command hefty fees for helping the business through the transition period.
Then, there are employee considerations. Many business restructurings include layoffs; there may be severance packages as well. If the business is consolidating locations, some personnel may need to relocate if they wish to keep their jobs. If the business is changing the way it operates, there will probably be new training to consider.
These costs can add up significantly. In the short term, they can have a hefty impact on the company's income statement.
Latest Trends in Corporate Restructuring
Companies have been impacted by the same rising interest rates that have given consumers sticker shock from 2022 through the present. Rising interest rates make it harder for companies to borrow money. As a result of economic headwinds, many companies have used restructuring to free up capital and operate more efficiently.
Should these economic challenges continue, analysts expect to see an increase in bankruptcy filings. Bankruptcies decreased in 2021-2022, with levels the lowest in a decade. Supportive government policies helped contribute to the decrease in bankruptcies. Companies could borrow at favorable interest rates, lenders were flexible and lenient if companies needed to modify agreements, and there was governmental support in the form of stimulus payments and federal incentives.
Now that business-friendly policies have changed, companies are experiencing increasing challenges with less support and fewer options. Given these constraints, it should come as no surprise that the number of companies filing for bankruptcy is increasing.
While restructuring isn't pleasant, it can be the best solution in a difficult climate. Bankruptcies can drive mergers and acquisitions, financial restructuring and other types of restructuring as companies seek solutions to tough problems.
When it's time to restructure, DFIN offers a suite of solutions to help companies navigate the deal environment, including M&A solutions, contract analytics and virtual deal rooms.