Today’s globalised world poses many challenges to the corporate community. These challenges are as a result of dynamism and ever increasing competition that in turn poses a daunting challenge to corporate business manager to use appropriate strategies to create competitive advantage and retain market share. Corporate restructuring as a business strategy has been the focus and debated extensively, while at the same time it has been practiced by business practitioners to an equivalent. Many organizations and scholars argue that employing corporate restructuring enables business to achieve higher operating efficiency and greater growth opportunities. However, amidst these assertions there is need to examine if the use of strategy delivers on the perceived benefits from a historical perspective.
In this regard, this paper shall explore the effectiveness of corporate restructuring on economic performance in relation with transformation it creates to financial performance using variables such as: revenue, profit margin, return on assets and the total asset turnover ratio; and corporate market by checking on such variable as stock price reaction to the restructuring announcements using two selected cases.
The numbers of business corporations that have employed restructuring strategy have sky rocked in the recent past up to date. But the worth question as it shall be addressed by this paper is whether or whether not restructuring results to desired outcome rather than its popular application. In order to address this thorny issue that has proved to be at center stage for controversial debates in corporate business practices, it is a point of worth to shade light on the essentials of restructuring.
According to Blair et al. (1991), corporate restructuring or as other scholars terms it either financial restructuring or debt restructuring; as a business strategy refers to the practice of reorganizing a firm for the purpose of making it more profitable. There are three basic forms of restructuring: financial, organizational, and portfolio. But scholars assert that financial restructuring has the highest positive impact on performance, while portfolio restructuring is placed second with organizational restructuring coming third due to perceived little consistent impact on performance. In most cases, corporate restructuring is done as part of: a strategic takeover by another firm in form of a leveraged buyout or a bankruptcy. Outsourcing of financial and legal expertise is a more prominent practice during restructuring with an aim of reducing losses and tension between equity and debt holders to have quality resolutions (Vishny and Shleifer, 1992).
Essentials of corporate restructuring
Blair et al. (1991) offers a guideline of how to conduct successful restructuring that can result to desired outcomes. These guidelines are: to ensure the company has enough liquidity to operate during implementation of a complete restructuring; produce accurate working capital forecasts; provide open and clear lines of communication with creditors who mostly control the company’s ability to raise financing; and update detailed business plan and consideration. After getting right these essential steps in restructuring a business there is a need to have key functions reengineered. Reengineering of the key functions shall include: stay bonus, sale of underutilized assets like brands or patents, outsourcing of operations from effective third party, moving of operations to lower-cost locations, reorganization of functions such as sales, marketing, and distribution (Shivdasani, 1997). Additionally, there is labor contracts renegotiation to reduce overhead, reduce interest payments by refinancing of corporate debt and lastly there ought to be major public relations campaign through investing in massive advertisements to reposition the company with consumers (Shivdasani, 1997).
The outcomes resulting from the application of the above process in a careful and planned manner should be to: produce viable and cost effective alternatives to customers, focus on revenue activities and value creation processes and offer price flexibility and business precision. Moreover, the business should be able to provide unbridled control over cost to customers, incentivise and reinforce labour productivity and leverage geographical advantages of cost, skill and scale for example the Airbus case (Shivdasani, 1997). Therefore, all these outcomes can be summed up that corporate restructuring should enhance sustainable competitive advantage by leading to dramatic enterprise level performance, long term sustainability and market leadership, and gain substantial financial benefits. Hence, Vishny and Shleifer (1992) conclude that corporate restructuring means two implications for the business: leading the firm to differentiating the way it produces a product or/and service by differentiating the techniques, process, or material used; and leading the firm to produce a differentiated product or/and service it offers.
Past Business Restructuring
Business restructuring is not a new phenomenon, but it has been used by various business practitioner s since past to boost performance. An inconclusive body of literature gives further evidence on this issue. For instance, Opler, T. et al. (1996), reports that in the US alone from 1976 to 1990 there were 35,000 corporate restructurings with a total market value of $2.6 trillion. In another findings, Blair et al. (1991), reports that the dollar value of horizontal mergers in US and UK increased from $25 billion in 1970 and 1978 to $261 billion in 1979 and 1987. On a contrary opinion, Opler, T. et al. (1996) advocate that corporate restructurings are mainly motivated by consolidation and that they would decrease competition, thereafter, hamper business operations in long term. In reacting to these ideas, Valsan (2001) views that corporate restructuring enhances market discipline, force the firms to focus on the industries in which they have a competitive advantage and reduce capacity at both the firm and industry levels; therefore, improves productivity and efficiency
On the international scene, Shivdasani (1997) open the stage with their study of impacts of corporate restructuring during performance declines in Japan. Using their study sample of 99 corporations that were experiencing decline in performance, but after restructuring their findings reported an improved performance. In other studies in relation to international restructuring, Valsan (2001) studied restructuring in newly privatized Romanian firms and reported that restructuring increases the likelihood of their survival. The study of the effects of corporate and financial restructuring of late 1990 following IMF bailout, indicated that massive restructuring in Korea helped to reduce the unemployment rate and helped the recovery process though the unemployment rate initially rose.
However, despite these proofs from the bodies of literature that forms a rich source of confirmation that corporate restructuring can serve a purpose to boost performance, there is more to be done than to desire to affirm the extend of usefulness of restructuring to financial performance and corporate market transformation.
Financial performance and Corporate market transformation
The main focus of any given corporate restructuring is to result in better: customer operations, return on assets, product operations and corporate operations that produce better profits, and better positioning for the future for sustainable competitive advantage. However, the outstanding question that is worth a study curiosity remains to be the quality of the approach to restructuring itself rather outcome of restructuring. This is because many corporate restructuring processes don’t necessarily return transformational results.
Therefore, there is a need to know how does process of restructuring produce transformation? And when do we know the results they produce are transformational? (Blair et al., 1991) The response to these two fundamental questions enables creates a lee way toward a more meaningful and compelling assessment of extends of corporate restructuring in transforming financial performance and corporate market. In this regard, empirical based examples are used.
The cases of Britannica and Salesforce.com
This is a simpler empirical based finding that can shade light on the impacts of restructuring on financial performance and corporate market. For Britannica, its competitors Grolier and Encarta engaged in extensively CD-ROM based production that produced cheaper alternative to the market (Vishny and Shleifer, 1992). As a consequence, Britannica’s value delivery model was challenged due to their competitor’s production which was relatively cheaper and with added features like accessibility, searchability and portability that caused decline in Britannica’s sales by 80% between 1990 and 1995 (Vishny and Shleifer, 1992). This necessitated it as a buy for Swiss financier in 1996.
While on the other hand, Salesforce.com bridged down the cost per user of CRM down by 75 percent targeting the small and medium enterprises and definitely assumed leadership in the CRM market. This step earned Slaesforce.com 444,000 subscribers, 150 application partners and resultant 22,700 customers, thus the projection of its growth is expected to be $10.7 billion by end of this year 2009 at a CAGR of 21% (Vishny and Shleifer, 1992). This positive result were accrued Salesforce.com transformation strategy to use technology to re-invent a developer “ecosystem” at a time when technologies became mature to support application sharing and hosted applications.
Thus, it can be seen that they restructured their business and processes model to provide price flexibility to customers in a high value product offering. In addition to that, their ability to see price as a dynamic function of scale that offered customers extreme control over costs, greatly contributed to this good transformational results. It is evident from these technology based operation that restructuring offers business facilitate financial performance and enhances positive corporate market and leadership transformation.
The case of China’s traditional industries 1998-1999
The analysis and study of the 77 Chinese firms by Zhenhu (2009) which employed restructuring is a comprehensive case that can help in gaining understanding of the transformational impact of restructuring. In late 1990s after China’s entry into the World Trade Organization that opened the door wider for imported foreign goods and services, Chinese traditional industries such as textile, chemical and machine building experienced increasing foreign competition and declining domestic demand, this lead to poor financial results or/and disappearing markets. In a move to secure their business, about 192 listed companies went through restructuring between 1998 and 1999 (Zhenhu, 2009). The resultant restructuring took place in three different ways: merger and acquisition; building new production facilities; and purchase of large block of shares in an existing company. Importantly, these firms that went through restructuring withdrew from traditional industries such as textile, machinery, steel and chemical because they exhibited excess capacity or/and severe competition. Instead, the firms ventured into industries such as telecommunications, network, computer hardware or software and biotechnology.
The results of these massive restructuring was analyzed basing on 77 firms in comparison with control cluster of firms who did not employ restructuring. In terms of corporate market transformation the analysis was based on the market reaction to the restructuring announcements aided by use of the conventional market model to estimate the cumulative abnormal returns. Results of the market reaction were statistically significant and positive. Restructuring announcements significantly contributed to an increase in stock price before the announcement due to information leakage or/and market anticipation by about 8.13% (Zhenhu, 2009). While after 30 days results decline slightly because after announcement of restructuring, investor’s analysis may make them less optimistic about the prospects of the firms. However, it is evident that restructuring does lead to positive gain in terms of corporate market.
Financial performance transformation can be best reported by its key variables. The analysis conducted of these 77 firms revealed an increase in total revenue of structured firms by 24.3 percent and 35.9 percent in 1998 and 1999 respectively due to investment in the new business. While the control group of firms that did not restructure their business reported a negative impact in the market. The profit margin reported showed that the restructured firms increased their profit margin by a statistically significant average of 4.493 percent (Zhenhu, 2009). While the control firms average profit margins increased by 2.06% but was not statistically significant. Return on Assets increased by 11% that clearly indicate that restructuring does improve return on assets (Zhenhu, 2009). In terms of Asset Turnover, there was no significant change in the asset turnover ratio before and after restructuring. Therefore, this means that corporate restructuring does not significantly improve the restructuring firms’ asset management efficiency (Shivdasani, 1997). This is because the total revenue may not increase as fast as the value of the total asset due to large investments of the firms. Despite this stagnant change, it is clear corporate restructuring transforms financial performance positively.
In conclusion, the paper contends that many corporate businesses that employ restructuring achieve new growth opportunities. Furthermore, based on the extended example used in this paper it is clear that restructurings fundamentally improves the firm’s operating financial performance as measured by revenue, profit margin, return on asset, and the asset turnover ratio. Additionally, restructuring, transforms corporate market positively in the sense that market reaction to the restructuring announcement was positive and statistically significant.
However, the challenge remains to the process and procedures employed in corporate restructuring that can lead the firm to differentiate the way it produces a product or/and service by differentiating the techniques, process, or material used; and produce a differentiated product or/and service it offers. This can be manifested through: producing viable and cost effective alternatives to customers; focus on revenue activities and value creation processes; and offer price flexibility and business precision. This way, corporate restructuring can be seen as to not only help restructuring firms, but also represents a capital reallocation in response to changing market conditions which has the potential to provide significant social benefits and improve overall productivity.
Table1. Chinese firm’s analysis as result of restructuring
Changes in revenue
Changes in profit margin
Changes in return on assets
Changes in total asset turnover ratio
(* = significant at 5% and ** = significant at 1%)
Source: Zhenhu, J. (2009), “The impact of business restructuring on firm performance-evidence from publicly traded firms in China”: Academy of Accounting and Financial Studies Journal, vol. 2, p. 206
Blair, M. et al. (1991), Patterns of corporate restructuring: an overview: Brookings Institution, Washington.
Dohyung, K. (1999). “IMF bailout and financial and corporate restructuring in the Republic of Korea”: The Developing Economies, vol. 32, p. 459-512.
Shivdasani, A. (1997). “Corporate restructuring in Japan during performance decline”: Journal of Financial Economics, vol.47, p. 28-66
Shleifer, A. & Vishny, R. (1992), “The takeover wave of the 1980s”: Journal of Applied Corporate Finance, vol.5, p. 48-57.
Valsan, C. (2001). “Three measures of corporate restructuring in a transition economy: the case of newly privatized Romanian companies”: Post-Communist Economics, vol. 13, p. 120-129.
Opler, T. et al. (1996), “Corporate restructuring and the consolidation of US industry”: Journal of Industrial Economics, vol. 32(1), p. 54-67
Zhenhu, J. (2009), “The impact of business restructuring on firm performance-evidence from publicly traded firms in China”: Academy of Accounting and Financial Studies Journal, vol. 2, p. 203-212