Economic turbulence and financial distress is part of the natural cycle of business. It falls into a rhythm — things get worse; things get better (though not with any predictable timeline). The government does its part to flatten the extreme highs and lows by doing what it can — adjusting interest rates, increasing the money supply and reducing taxes. But sometimes catastrophic events happen that no amount of fiscal policies can do much to help against, such as the COVID-19 pandemic, which hit big in March 2020.

But in the wake of the COVID-19 pandemic, which has occupied the news cycle for the majority of 2020, there is uncharted territory ahead of all of us. And that will impact things, whether we’re directly involved in businesses that are susceptible to the seismic changes in the economy or not. While the stock market has (mostly) bounced back from its initial dips, there is still a great unknown that lies ahead.

So, in this era of economic upheaval, there are companies that will likely have to turn to organizational restructuring and apply a corporate restructuring strategy in order to not only stay in business, but to survive (and thrive) in the long run. Many industries have an uncertain future. Sectors, including travel and hospitality, commercial real estate and small businesses of all types may never return to pre-COVID-19 levels and have the daunting task of transitioning to the “new normal.”

So, What Is Corporate Restructuring?

Generally, there are two types of corporate restructuring strategies — financial restructuring and organizational restructuring. In both cases, the name aptly describes what is involved: 

  • The financial restructuring process is more of a numbers game, where a company will adjust its equity patterns, debt-servicing schedule and/or cross-holding patterns. 
  • The organizational restructuring process is when a company alters its hierarchy, which could mean a change in leadership, elimination of positions and/or merging of departments or divisions.

The reasons for needing to restructure are numerous. These include a shift in corporate strategy, financial issues (lack of profitability, lack of adequate cash flow) or reverse synergy, a situation where the parts of a company are worth more separately than they are as a whole. In the case of reverse synergy, an offer from an outside bidder could buy one division for a higher price than that particular division is worth to the parent company.

Common Corporate Restructuring Strategies

Mergers, Demergers and Reverse Mergers

A merger is when two (or more) businesses combine to create a new company, generally with one company (the acquiring company) “taking over” another company (referred to as the target company), but ultimately forming a new, third company. Similarly, a demerger is when two (or more) companies are combined into a single company. Unlike a merger, there is no exchange of securities between the companies in a demerger. While fairly uncommon, a reverse merger occurs when a private company becomes public by acquiring control of an existing public company.

Takeovers and Disinvestments

A takeover (also commonly called an acquisition) is when one company acquires control of the target company, commonly by purchasing a majority share of it. Typically, a larger company acquires a smaller one. Disinvestment occurs when a company sells or otherwise liquidates a division or subsidiary, or sometimes disposes of certain assets of its organization.

Strategic Alliances and Joint Ventures

Strategic alliances are arrangements between two distinct and separate companies that both benefit from, yet both remain structurally independent from one another. Similarly, a joint venture (JV) is an arrangement between two (or more) companies to combine resources to reach a goal, most commonly a new product or service. However, unlike a strategic alliance, the joint venture is usually a separate entity, separate from any of the other’s business interests, and all parties involved are responsible for the costs as well as any profits or losses involved in the joint venture. In most cases, a strategic alliance is far less complex and legally entangling than a joint venture.

Internal Strategies

Of course, the goal of all of this is to enhance your company’s financial situation. While this may involve bringing another company or investor on board, it may also require internal changes to shore up costs and reduce redundancies. This can be accomplished by one (or more) of the following:

  • Staff reduction; also known as “downsizing,” a process when an employer initiates one (or several) terminations in its employee base.
  • Changes in corporate leadership; often new faces (and ideas) are necessary for a company to move forward in uncertain times.
  • Selling, spinning off or eliminating underperforming assets; ridding a company of unprofitable divisions is a common practice when attempting to become more profitable and competitive.
  • Outsourcing operations; when a company hires another to handle a specific duty or task, such as warehousing and distribution, HR functions or hiring a virtual data room to help it securely store (and distribute) its business files.
  • Eliminating (or consolidating) outstanding debt; this can include consolidating existing debt, writing it off or even reverting to legal measures, such as Chapter 11.

The End Game

The goal of any of these restructuring options is to prepare for (and grow in) the competitive

post-COVID-19 business environment. Although nobody can predict what this scenario will look like (or how long the current situation, including restrictions, will last), smart business and financial sense will dictate that companies that are flexible and forward-looking enough will be the ones that weather the current storm, along with any future ones. 

If you’re considering any of the above strategies, having a virtual data room partner you can trust is key to ensuring the necessary paperwork and documentation can be easily shared within your organization, with potential partners and with financial institutions. CapLinked offers best-in-class solutions for document management, sharing and security. Ready to learn how? Start your free trial today. 

Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.