Corporate Restructuring and Its Types

Corporate restructuring is a process by which companies evolve by changing their structure. There are many situations in which it may prove necessary. It is used to reorganize, improve competitiveness, or because of internal and external pressures. Corporate restructuring involves significant changes within the company.

The term “corporate restructuring” generates spine-tingling thoughts of mass layoffs and financial collapses. While it's true that corporate restructuring often takes place during economic downturns, the process of internal reorganization encompasses a wide variety of procedures that may be undertaken for a number of different reasons. Corporate restructuring refers to the process of reconfiguring a company’s hierarchy, internal structure, or operational procedures. Companies undergo restructuring to achieve certain aims, such as to become more competitive or to respond to changes in the market.

Corporate restructuring can cause employees and stakeholders to feel anxious about job security and the company's future. Change management is critical during corporate restructuring. It mitigates fear and resistance through communication and support. This is why change management strategies are essential during restructuring. With economic constraints tightening in 2024, experts predict a rise in business restructuring. 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. Change management can make the transitions during restructuring smoother by preparing and supporting individuals and teams. Employees and stakeholders are also informed and engaged.

How Does Corporate Restructuring Work?

Corporate restructuring often takes months to see through from beginning to end. While the actual process can be quite complex and involves a large number of internal and external stakeholders, you can simplify it down to three broad steps:

1. Identify Your Objectives

Prior to undertaking any course of action, it's important to articulate exactly why your company is going to be restructured. You should always be as specific as possible when determining your objectives. Rather than simply stating that you need to reduce your operating costs, for instance, set a target amount for those costs.

2. Form a Plan

Outline each strategy and action that you intend to perform in pursuit of your goals. It's also a good idea to draw up a short list of potential buyers. Ask your compliance department for assistance to help you stay on the right side of the law.

3. Set it in Motion

Implementation can take many forms. Depending on the corporate restructuring strategy that you intend to pursue, you may need to issue new equity, sell existing assets, hire, conduct layoffs, create new organizational guidelines, and more.

In charting the course for a corporate restructuring, pay careful attention to three key areas:

1. Legality

   Legal frameworks govern every restructuring decision and establish operational boundaries throughout the process. Securities laws require public companies to follow strict disclosure protocols when announcing material changes to shareholders. Existing contractual obligations-including lease agreements, supplier arrangements, and debt covenants-often impose significant constraints on restructuring options and timing.

2. Finances

   Financial considerations drive strategic restructuring decisions and determine implementation feasibility. Credit arrangements become increasingly complex during restructuring, as lenders typically impose higher interest rates and stricter covenants when assessing elevated risk profiles. Comprehensive financial modeling and scenario analysis become essential tools for evaluating restructuring alternatives and supporting executive decision-making throughout the process.

3. Communication Strategy

   Effective communication determines whether stakeholders view restructuring as strategic repositioning or an organizational crisis. Regulatory disclosure requirements often dictate timelines, particularly for public companies. Coordinating legal obligations with strategic messaging maintains stakeholder confidence throughout the process.

Why Business Restructuring Is Important

Businesses restructure for varied reasons, one of the most common of which is to cut costs. Businesses might also reorganize in anticipation of an acquisition or merger. The process allows a company to integrate into its new partner business more efficiently. A business might also adjust its internal structure to ensure regulatory compliance with new legislation.

For instance, a company might sell off underperforming divisions to streamline operations or reduce size. Corporate restructuring is necessary for long-term success as companies strive to adapt to new market conditions. But, for these changes to be successful, they need a plan or strategy to guide their restructuring initiatives.

What Happens to Employees When a Company Restructures?

Employee impact during corporate restructuring remains a primary concern for workforce planning. The effects on personnel depend significantly on the restructuring type, organizational scope, and implementation approach.

Restructuring often involves position elimination, with middle management layers frequently targeted as organizations pursue flatter hierarchical structures and operational efficiency. Simultaneously, however, restructuring creates new opportunities. Retained positions typically experience expanded responsibilities and modified reporting relationships. Organizations prioritize adaptable personnel who demonstrate flexibility and embrace expanded responsibilities.

Forward-thinking organizations invest substantially in employee development during transitions. Operational restructuring frequently involves technology implementation, necessitating comprehensive employee training on new systems and processes. Organizations that provide robust transitional support typically achieve better implementation outcomes.

Restructuring generates organizational stress that affects retained employees beyond direct position changes. Effective change management becomes essential during corporate restructuring to address employee concerns and minimize resistance. Organizations maintaining transparent communication practices throughout restructuring processes typically preserve higher morale and engagement levels.

Types of Corporate Restructuring

But, what are the types of corporate restructuring? There are many varieties depending on the purpose. There are multiple ways to approach corporate restructuring. Each typology suits different situations and scenarios. In most cases, firms combine multiple kinds to address complex needs. Ultimately, the strategy you pursue depends on the specific needs and goals of your organization.

Different types of corporate restructuring include financial ones. Financial restructuring seeks to enhance a company's financial health. It consists of changing the economic structure to improve stability through a better debt-to-equity ratio. Common methods include the following:

• Debt restructuring: A company consolidates its debt or negotiates lower interest payments
• Debt for equity swaps: A company sells equity in exchange for debt reduction from its creditors
• Equity financing: A company issues new equity to raise capital

Operational restructuring targets internal efficiency by modifying how a business functions from day to day. This approach focuses on improving core business activities to increase productivity or reduce costs. It is often adopted when the organizational structure has become too costly or inefficient and consists of waste reduction, productivity improvement, and workflow optimization. This may involve embracing automation technology and/or eliminating redundant procedures. The business may outsource certain tasks for cost-saving purposes or to allow the company to focus its energy more intensely on core processes.

Organizational restructuring deals with changing the company’s internal structure-department structure, roles, and lines of command. This approach can involve modifying organizational structure and hierarchies, redesigning job roles, or altering reporting lines. Organizational restructuring involves changing a company's internal hierarchy. The process may result in the elimination of certain roles and the merging of others. The company may create new jobs, departments, and teams while eliminating others, which might cause shake-ups in working relationships. Companies typically undertake all of these changes with the end goal of enhancing productivity, efficiency, and communication. The formation of Alphabet by Google's co-founders is an example of an organizational restructure.

Legal restructuring involves making changes to the company’s legal structure to simplify governance, protect assets, and ensure regulatory compliance. Legal restructuring involves modifying a company's legal framework to optimize liability management, enhance regulatory compliance, or achieve tax advantages. This involves changing the legal entity, policies, or procedures of a company or its departments. Organizations may establish new subsidiaries, consolidate existing legal entities, or transition between corporate forms. This approach facilitates entity consolidation or creation to segregate distinct business operations. Companies establish holding company structures to maximize tax efficiency and operational flexibility. Legal restructuring also ensures compliance alignment when regulatory requirements evolve across different jurisdictions.

Mergers and acquisitions involve entities outside of the company. They are processes by which one company merges with or acquires another. The mergers and acquisitions process involves two parties joining to create a single company. One or both parties commonly restructure to accommodate the new business. They may merge, reduce, or eliminate departments and roles with similar functions. Mergers are usually voluntary and involve companies of similar sizes, whereas acquisitions can be friendly or hostile. A company merges with or acquires a competitor to expand its market reach and diversify its product lines. In anticipation of this, companies may reorganize their internal hierarchies after the sale has been completed, ensuring a smooth and profitable integration.

Divestitures and spin-offs are often used when a company wants to simplify its operations or sharpen its focus. Divestment involves a company selling off assets, divisions, or subsidiaries to streamline operations, raise capital, or exit non-core business areas. A divestiture usually means selling, closing, or phasing out a part of the business that no longer fits the company’s direction. To divest of something simply means to get rid of it. A divestiture involves the sale or spinning off of underperforming or non-core assets, subsidiaries, or divisions. This may include selling heavy machinery, real estate, or intellectual property to raise cash. A business operating in multiple markets may spin off certain departments in order to focus on its core offering. For example, a company that owns both pencil and pen factories may establish the pencil division as a separate company to enhance operational efficiency. In contrast, a spin-off turns a specific division into an entirely new and independent entity, typically with its own leadership and goals.

Turnaround restructuring is used by societies in crisis or with declining performance. Sometimes it is essential to ensure business continuity by quickly returning to profitability and stability. This type of rearrangement involves long-term planning and repositioning. In fact, it aims to reposition the company in the market to take advantage of opportunities and changes in the target industry.

Vertical merger: Typical to improve supply chain control.

Selecting the most suitable consolidation approach depends on several variables. Business size, financial health, market trends, and regulatory conditions greatly influence decisions.

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.

Change Management in Corporate Restructuring

Change management ensures that the restructuring aligns with strategic goals at every level of the organization. When a company decides to restructure, it can cause a lot of employee resistance. By using a structured change approach, like the Prosci Methodology, you’ll have the strategies to communicate the need for change, its benefits, and how to implement it. The disruption caused by restructuring can lead to a temporary decline in productivity as employees adjust to new roles, structures or systems. Change management minimizes these disruptions by preparing, equipping and supporting people through their transitions.

Change management strategies focus on creating clear, open lines of communication that facilitate two-way dialogue. As part of their change management strategy, teams can conduct project risk assessments to anticipate resistance and roadblocks during the restructuring. Using this proactive approach, teams can avoid costly errors, maintain continuity, and minimize disruptions.

A comprehensive change strategy can help leaders and employees stay aligned even after the change is completed. Change management also focuses on the long-term sustainability of change. Reinforcing a change is important to achieving desired outcomes over time. Corporate restructuring can be stressful for employees, leading to decreased morale and productivity. Change management addresses these issues by actively involving employees in the change process, getting their input, and answering their questions.

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.

Real-world Examples of Corporate Restructuring

Real-world corporate restructuring cases demonstrate practical implementation across various business contexts.

• General Motors (2009)

  In 2009, General Motors (GM) experienced a major restructuring in response to the financial crisis. GM further divested non-essential assets, renegotiated labour contracts, and shifted its focus towards manufacturing more fuel-efficient vehicles. The company eliminated substantial debt obligations, reduced operational costs, and discontinued entire automotive brands, including Pontiac and Saturn. The restructuring involved facility closures and comprehensive contract renegotiations with unions and suppliers.

• IBM (2010s-Present)

  IBM’s evolution from a hardware-focused organisation to a leader in software and services began in the early 2010s. IBM has executed multiple restructuring initiatives over two decades, systematically divesting from lower-margin operations. The company sold its personal computer division to Lenovo and subsequently divested server hardware operations. Most recently, IBM spun off its infrastructure services division. Each restructuring phase repositioned IBM toward higher-margin business segments, transitioning from manufacturing operations to software and consulting services.

• Microsoft and Nokia (2013-2014)

  In 2013, Microsoft announced it bought Nokia’s handset business for $7.2 billion. This move aimed to boost Microsoft’s presence in the smartphone market. The deal included Nokia’s devices, services, and important mobile licenses. It was completed in April 2014, leading to the creation of Microsoft Mobile Oy. The goal was to strengthen Microsoft’s mobile capabilities and expand its range of devices and services.

• Netflix (2018)

  Netflix restructured its content operations into two distinct divisions. One division managed content licensing from external studios, while the other focused on original programming development and production. This organizational restructuring enhanced Netflix's competitive positioning against Disney and other media companies withdrawing their content from the platform.

Table: Examples of Corporate Restructuring

Images gallery