Framework library · M&A and corporate strategy

Corporate restructuring

Restructuring changes what a company owns, how it operates, how it is financed or how it is organised, usually because its present shape cannot meet its obligations or its owners' expectations. Setting the levers side by side shows how much cash each releases and when, so the plan can be sized to the gap, timed to the deadline, and checked for how much of it rests on the levers least likely to deliver.

LevelAdvanced
TimeOne to two weeks with finance to build the lever list; the plan itself runs for one to three years
Who to involveThe chief executive and finance director, with the leaders of each business, the treasurer and legal counsel, and the lenders once the balance sheet is in question.
Also calledrestructuring plan, turnaround levers, portfolio restructuring, financial restructuring, organisational restructuring, organizational restructuring

Use it when

  • A debt maturity, covenant test or funding gap is coming and the current plan does not close it.
  • Returns have sat below the cost of capital for several years and the owners want a change of shape, not another efficiency programme.
  • A shift in the market has stranded part of the business, such as a legacy network or product line, whose costs now outweigh its revenue.
  • You need to compare selling assets, cutting costs, refinancing and reorganising on one basis before choosing a combination.

Avoid it when

  • The business is sound and the question is where growth comes from. Use the Ansoff matrix or a revenue bridge.
  • The company is insolvent or close to it. A formal process run with insolvency advisers takes precedence over a management plan.
  • The decision concerns one business. Use divestiture strategy for whether to sell it and spin-off analysis for how to separate it.

How to run it

  1. Size the gap and the deadline

    The cash, debt reduction or improvement in returns the restructuring must deliver, and the date by which it must be delivered.

  2. List levers in all four groups

    Portfolio (sell or close businesses), operational (cost, capital spending, working capital), financial (refinance, extend, raise equity, sale and leaseback) and organisational (structure, layers, locations).

  3. Estimate the net cash and its timing

    The cash each lever releases after its own costs, tax and any debt that must be repaid with it, and when it lands. A sale that completes after the maturity date does not close the gap.

  4. Rate the risk and name the stakeholders

    How likely each lever is to fail or slip, from 1 (very unlikely) to 5 (very likely), and whose agreement it needs: lenders, regulator, staff representatives, customers.

  5. Choose a set that covers the gap with a margin

    Start with what management controls, add the levers that need others' consent, and name one owner for each.

  6. Track cash released against the gap

    Report each month. Replace a lever that is slipping before its date, not after it.

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Mistakes to avoid

  • Relying on asset sales for cash needed by a fixed date. Sales slip, and buyers soon learn the deadline.
  • Cutting the costs customers notice, such as field engineers or care, to protect overhead. Churn rises, and the revenue lost can exceed the saving.
  • Counting gross proceeds. The cash that counts is net of tax, fees, debt secured on the asset and separation costs.
  • Bringing the lenders in when the plan is finished. Lenders who see it late assume the worst and price accordingly.
  • Redrawing the organisation chart when the problem is the portfolio or the balance sheet. The evidence favours financial and portfolio moves.

Where it comes from

No single originator. Edward Bowman and Harbir Singh wrote "Corporate restructuring: reconfiguring the firm" (Strategic Management Journal 14, 1993). With Michael Useem and Raja Bhadury they later reviewed the evidence on three forms of restructuring (portfolio, financial and organisational) and found financial and then portfolio restructuring most often followed by better performance ("When does restructuring improve economic performance?", California Management Review 41(2), 1999). This register adds operational levers as a fourth group. Source.

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