FREE online courses on Financial Management and Creating Value - Chapter 1 -
Financial Restructurings
One area where finance can play a lead role in creating value
is through financial restructurings. There are a variety of reasons why
financial restructurings are appropriate:
- Improving the allocation of resources between
business units, divisions, or other parts of the business.
- Realigning the operating units of the business for
a better fit with the rest of the organization. All parts of the business need
to work together within a single strategic framework.
- Increasing the focus of the business on what is
important.
- Introducing shared services and transfer pricing
to better leverage the resources of the business and reduce redundancy.
- Initiating a sense of urgency and change to move
the organization in a new direction.
- Increasing the capacity of the organization to
borrow.
When it comes to arranging a restructuring, it is important
to be creative since the restructuring must fit with the reasons for change.
When Gary Wilson, CFO (Chief Financial Officer) of Walt Disney was asked how
does a CFO create value, Wilson
replied: "Just like any other great marketing or operating executive, by being
creative. Creativity creates value. In finance that means structuring deals
creatively."
Restructuring can take many forms. Some typical approaches to
financial restructuring include:
- Vertical Restructuring: Changing the configuration
of assets within a business unit or part of the organization. A sale and lease
back arrangement can be used to restructure assets between business units.
Franchising and subcontracting are two other forms of vertical restructuring.
- Horizontal Restructuring: Change in the overall
business through a new joint venture, new acquisition, sale of a business unit,
or other form. A leveraged recapitalization is a common form of horizontal
restructuring where debt is used to change the capital structure of the
organization.
- Corporate Restructuring: A corporate restructuring
relates to how the business will operate in the future. There are several ways
to initiate a corporate restructuring:
- New issue of stock and/or debt
- Change in business form (such as partnership,
corporation, trust, etc.)
- Repurchase of stock
- Leveraged Buy Out (LBO) - Borrowing against the
assets of the firm to take the company private.
- Liquidation of the business when the break-up
value exceeds the fair market value of the organization.
