India is dynamic. So is India Inc. The Wadias, Tata, Birlas, Parry group of businesses were incorporated in the British era. These corporates have constantly re-oriented / reorganized /restructured themselves and stood the test of time. 

From being a closed economy with strict regulations India adopted liberalization of economic policies from 1991 onwards. With liberalization came the globalization of the Indian economy. Indian corporates had to compete with global corporates within India. Hence the need to reorganize itself through various methods of restructuring.       

An insight into corporate restructuring in its present state.

The Basics

1. Restructuring is the corporate term used for reorganizing the corporate structure. Such reorganizing could be for ownership, operations, organizational, finances, debt and legal.
2. The need for restructuring could be manifold – dip in revenues, lack of profits, consistent losses, adverse effect of competition on performance of the company, mitigate debt, avoid bankruptcy. Sometimes, corporates seek restructuring to seize better commercial opportunities.

Types of Restructuring

Usually, restructuring can be financial or of debt. However, broadly the following are the types of corporate restructuring:

• Mergers 
• Demergers 
• Reverse mergers 
• Acquisitions 
• Joint Venture
• Strategic alliance / Partnership

Mergers

Simply put, merger is a voluntary coming together of two corporates or companies into one which will become a new corporate entity. Such corporates are near equal – in terms of size, functionality, status, earnings etc. the main objective of such merger is to enjoy economies of scale. Usually, mergers are executed through elaborate agreement(s) detailing threadbare all aspects of functioning – ownership, operations, personnel, legal and financial aspects of the merged corporate entity.

Mergers could further be of various kinds:

1. Horizontal mergers – Two companies engaged in providing similar products and services can merge through a horizontal merger.
   The most notable horizontal merger – Vodafone with Idea Cellular in 2018. Both telecommunication giants merged to form Vodafone Idea Limited. This merger was touted to have few players in the fiercely competitive telecom industry and ultimately seemed to have benefited the customers with reduced tariffs.
2. Vertical mergers – two companies engaged in production or provision of same goods or services but at different stage of production or provision of services can vertically merge for conserving production costs. Typically, vertical mergers take place between a manufacturer and supplier. Zee Entertainment executed a vertical with cable operator Dish TV. Google vertically merged with Android. A search engine tool with the worlds largest social media platforms, Google merged with Android and forayed into the mobile industry.
3. Concentric / Congeneric merger – a merger where the two entities are in the same industry but with no mutual products or services. The merger of Citicorp with Travelers group is a classic example of congeneric merger. Both Citigroup and Travelers group were in the financial services industry. Citicorp was engaged in core banking services while Travelers group was engaged in insurance and brokerage business. The totally unrelated entities merged to form Citigroup as the largest financial services provider.
4. Conglomerate merger – Merger between two entirely unrelated businesses is called a conglomerate merger. Such entities have nothing in common. Tatas, Birlas, ITC group and even Amazon- Facebook-WhatsApp-Instagram is a conglomerate. The biggest advantage – Diversification into various businesses mitigates risk of losses besides brand building.
5. Market extension merger – Merger between companies the sell the same products but in entirely different markets – the idea being to gain wider market across the globe. Mittal Steel – Arcelor Steel is the most notable merger in this regard.
6. Product extension merger – Merger between companies offering related products in the same market. The products or services are not the same but are related. There is no merger of this kind in India but globally, PepsiCo (the beverage giant) merged with Pizza Hut (engaged in food) to collectively provide food and beverage services.

Demergers

The absolute reverse of a merger, demerger is the process of splitting a large company or conglomerate into two or more entities. This is done either for better operational and control purpose or to further sell of one or mor entities and downsize the entity. Typically, the valuation and value of the larger entity falls consequent to the split into smaller entities. Piramal enterprises demerged and created two entities – a pharma and a financial services companies in 2021.

Reverse Mergers

This method is usually adopted by private companies as an alternate to going public by way of an initial public offering (IPO). Since the IPO process is relatively time consuming, private companies reverse merge by getting substantial stake in a public company. The reverse merger of ICICI group with ICICI bank in India. Ideally, companies not in urgent need of capitalization prefer this method of reverse merger due to its less time and money consuming advantage. However, there are disadvantages as slump in valuation and inexperience of management of private company in running the public company.

Acquisitions

When a larger entity outright and absolutely purchases a smaller entity, the larger entity is said to acquire the smaller entity. Such purchase could be either a share and stock purchase or purchase of assets. At the core, merger and acquisition may be the same. However, in a merger two entities synergize to form a new entity whereas in an acquisition, one entity acquires an another. However, ‘mergers and amalgamation’ (“M&A”) are being used interchangeably. Like in mergers, synergy of activities, larger market share and economies of scale are prime movers for acquisition.

Few notable acquisitions in India over the years – Tata’s acquisition of Air India (2022), Zomato’s acquisition of Blinkit (2022) and Uber Eats (2021); Tata Motors acquisition of Jaguar Land Rover in 2008.

Joint Venture (JV)

One of the popular methods of corporate restructuring, a joint venture or “JV” results in the creation of an entity when two entities agree to combine and use resources – capital, technology, know how, execution. Such joint ventures are usually for a specified period and or objective. Such JVs could be either between private entities or between a government entity and private entity.  This is usually governed through an express JV agreement wherein all parties to the agreement get equal common ground. Typically, several JVs are found in the insurance industry: ICICI-Prudential Life Insurance company, Star Union – Dai-ichi Life insurance Co. Ltd, Tata – AIG General Life insurance to name a few.  Besides insurance companies there are other successful JVs. Google-NASA JV to provide ‘Google Earth’ service.  

Strategic Alliance / Partnerships

A partnership or alliance between two entities that is however not a full-fledged partnership firm or corporate entity. The alliance is more contractual in nature with various types of agreements governing such alliance. Both parties gain profits while retaining their businesses outside the strategic alliance / partnership. Music streaming service Spotify entered a strategic alliance with Cab aggregator Uber enabling passengers to listen to music during the car ride. A win -win for both parties.

Laws governing restructuring

Restructuring is a complex change or reorganization that a company undergoes and hence there are various laws – Companies Act and its rules, Insolvency and Bankruptcy laws – the IBC 2016.  The Reserve Bank of India (RBI) has several laws governing the restructuring process.

The Reality Check

Innumerable corporates have opted for restructuring of one kind or another. The onset of the Covid19 pandemic and resultant shutdowns across the world disrupted supply chains. This forced corporates to look at restructuring options to ensure business continuity. At ground level though the success rate of restructured entities is limited. Corporates must take an objective long-term view in deciding on restructuring their entities. They must identify what they seek from such restructuring – capital or know how or execution, identify what they seek and what they can offer to a new entity or alliance. The corporates must seek help of professionals for better understanding of the various methods of restructuring – their pros and cons and the method best suited to their entity. There is no “one size fits” all when it comes to corporate restructuring. It is a delicate balance based between past strengths and future goals.