Corporate Restructuring

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Chapter 4 Corporate Restructuring and Value Creation
4.1. Introduction Restructuring is widely used in both the developed and developing countries nowadays. Companies and economies are restructuring to achieve a higher level of performance or to survive when the given structure becomes dysfunctional. Restructuring takes place at different levels. At the level of the whole economy, it is a long-term response to market trends, technological change, and macroeconomic policies. At the sector level, restructuring causes change in the production structure and new arrangements across enterprises. At the enterprise level, firms restructure through new business strategies and internal reorganisation in order to adapt to new market requirements. In section 4.2, we define restructuring and value creation and then in section 4.3, we discuss restructuring and value creation of enterprises in developed economies and in section 4.4, we present restructuring and value creation models. In section 4.5, we present restructuring and value creation of enterprises in transition and in section 4.6, we analyse when to restructure the enterprise in transition. Finally, in section 4.7, we conclude the chapter by highlighting the main points and analysing the lessons learned form the experiences of developed and transition economies.

4.2. Definitions of Restructuring and Value Creation “The word structure used in an economic context implies a specific, stable relationship among the key elements of a particular function or process. To restructure means the (hopefully) purposeful process of changing the structure of an institution (a company, an industry, a market, a country, the world economy, etc.) [Sander et al., 1996, p.1].” This structure defines the constraints under which institutions function in their day-to-day operations and their pursuit of better economic performance. Restructuring can therefore be interpreted as the attempt to change the structure of an institution in order to relax some or all of the short-run constraints. Restructuring is concerned with changing structures in pursuit of a longrun strategy. Crum & Goldberg [1998, p.340] define restructuring of a company as “a set of discrete decisive measures taken in order to increase the competitiveness of the enterprise and thereby to enhance its value”. In this study, we define restructuring as a change in the operational structures, investment structures, financing structures and governance structure of a company. The objective of restructuring is to transform the company into an enterprise that is of high value to its owners. McTaggart, Kontes and Mankins [1994] define value creation as managing the performance of individual business units with respect to the cash flow generated or rates of return earned over time. In our study, the term value creation refers to improvements of the return on investment of owners by increasing the cash inflows and reducing risk. The value created in a business is measured by comparing the rate

Chapter 4

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of return on assets (ROA) to the cost of capital (k) of a company. Value is created only when a business unit or a company can earn a return on assets that exceeds its cost of capital; when return on assets (ROA) falls short of the cost of capital, value is destroyed.

4.3. Corporate Restructuring and Value Creation in Developed Economies The literature review on restructuring and value creation in the developed economies provides insight in the experience of success or failure of restructuring actions taken by management in creating value and the determinants of value in a business. These experiences can be useful for countries in transition in the Central and Eastern Europe and Sub-Saharan Africa too because the main goal of privatisation and restructuring enterprises is to transform the entities into value creating capitalist firms. Restructuring involves diverse activities such as divestiture of underperforming business,...
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