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 2025 due to economic constraints. Additionally, ongoing concerns about inflation, higher interest rates, geopolitical instabilities and industry disruptions are expected to play important roles in pushing many companies to restructure as a form of risk management. 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.
The most common timeline of the restructuring process looks like this:
- Assessment and Planning: The company’s needs are identified, and advisors including investment bankers, turnaround specialists and consultants work to devise a plan that will meet those needs.
- Implementation: Company leadership implements the process of system integrations, asset relocation, debt restructuring and employee communications according to the plan developed earlier.
- Transition and Adjustment: This is the phase during which leaders work on smoothing out any challenges they encounter, such as managing employee morale, implementing training programs and overseeing operational alignment.
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. Some of the most common reasons for divestment include regulatory pressure, raising capital or dropping non-core assets.
- Legal restructuring: A company or its departments change their legal entity, policies or procedures. This can be triggered by compliance concerns, tax advantages or corporate governance changes.
- Cost restructuring: A company consolidates to weather an economic downturn through layoffs, outsourcing and/or process automation.
- 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.
Important Considerations in Corporate Restructurings
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.
It’s also critical to be aware of any regulatory complications that may be encountered during the restructuring process. Preparing for any potential legal implications that may result from the restructuring requires due diligence and may call for hiring an outside consultant.
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.
One of the biggest recent trends regarding restructuring is the rise of technological tools. Digital solutions including data analytics and artificial intelligence are transforming the way companies approach these situations and giving them the ability to streamline certain aspects of the process.
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 and virtual deal rooms.
