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BUSINESS RESTRUCTURING

AND INDUSTRIAL SICKNESS


SYED MUHADDAM HASSAM HAIDER TIRMIZI
STRATEGIC FINANCE
MS (MANAGEMENT SCIENCES)
MAJU
SIR UMAIR BAIG
SM16-ES-0002

When a firm analyses itself to alter or to refocus itself toward specific task to perform better, this
process called corporate restructuring. Organization tries to enhance the worth of firm by doing
changes in capital structure, their assets and even organization. The world is a global village
therefore competition between organizations is rising day by day, new styles of management are
introducing, newer and better technologies are introducing and other factors are forcing
organization to take some serious actions to survive in this globally competitive world.
By doing restructuring organization try to achieve their objective more effectively and tries to
enhance their profitability. Organization restructure itself by two modes i.e. organizational
restructuring and financial reorganization. Organizational restructuring includes merger, expansion,
takeover etc while financial reorganization involves buybacks, issuance of share and debentures
etc.
When firm tries to continue its business and improves its profitability by reorganizing its operation
are termed as organizational restructuring. While corporate restricting is done to keep running
business. Corporate restructuring is a broad term, it include mix of financial, technological,
marketing and manpower restructuring. The best mix of these four strengthens the position of a
firm by achieving its pre-determined objectives. Corporate restructuring may include transfer of
shares and assets from one firm to another within a group of companies under the same
management.
Globalization of business encourages the firm to reach newer market and the concept of global
market makes firms to restructure themselves. The firms which reluctant to change themselves
with the time are facing difficulties and risking their product line. Businesses are trying new
products to explore and capture new markets and customers by changing work polices and system
of work, by hiring new experts, by eliminating obsolete and unprofitable business line. Pressure on
profit margin from the low price strategy of the competitor and competition pushes the firms to cut
their input cost which leads company to downsize the workforce. Downsizing-induce restructuring
by re-defining the job description, rearrangement of teams and groups to make sure that remaining
workforce does well for the firm. Change in government policies are also the reasons of
restructuring, change in any policy related to the any sector may lead firms to restructure the
organization to capture new markets and customer segments. Its an era if advance information
technology and the revolution of information technology made firms to adopt for the improvement
of corporate performance. Restructuring can help out a sick industry in its rehabilitation and make
it profitable again. It may need a merger of sick or successful units, write-off of accumulate losses
or adjusting out the depreciation.
To achieve balanced operative results firms made changes in their capital structure, this
phenomenon is termed as financial restructuring or financial reorganization of a firm. This aims
improvement in capital structure by minimizing the cost of capital, comparative cost of capital of
same firms of the industry, rescheduling of debt, best utilization of funds for both long-term and
short-term requirement to achieve firms growth, values of share and values to all stakeholders.
There will be no benefit of financial restructuring if it fails to increase earnings per share and equity
return while reducing the cost of capital. Firms adopt this technique to capture its share in
emerging market or the loss of market share in current market, external competition is another

reason of financial restricting and sometimes firms adopt this technique due to poor financial
performance of the firm.
While doing financial restructuring these points must remains in focus. Valuation of business which
involves the present situation and prospective growth of the business. It includes the earning
power and the assets valuation of the firm. Formulation of new capital structure, equity to debt
ratio should remain low to increase earnings per share. But higher debt ratio would results in
bankruptcy of the firm. To balance the debt-equity ratio and strengthen the firm, financial
reorganization is practiced by the formulation of new capital structure. Another important point to
remember is the exchange of old securities to new securities by doing valuation of all old securities.
This helps in changing capital structure and the mix of shares.
Expansion techniques and divestment techniques are two pillars on which corporate restructuring
techniques are standing. When firms try to restructure themselves by combining two or more firms
to make one unit for the long-term business interest or by taking over another firm, or by making
joint ventures by singing a legal contract to share capital risk, technology, patent, trademarks,
brand names and both firms will enjoy benefits at agreed ratio/share, or by making strategic
alliance between difference organization to achieve certain commercial objectives. All above
techniques are part of expansion technique some other examples of expansion technique are
franchising, holding companies, reverse mergers, going private etc. Few examples of divestment
techniques are, sell-off in which firm selloff its non-core business units firm to third part, another
example of divestment techniques is spin-off its a technique in which a firm or a group splits itself
into two or many firms or group. Management buy-out, liquidation or share repurchase are few
other examples of corporate restructuring techniques.

According to reserve bank of India sick industrial company is one which has incurred a cash loss for
one year and is likely to continue incurring losses for the current year as well as in the following
year and the unit has an imbalance in its financial structure, such as current ratio is then 1:1 and
there is worsening trend in debt-equity ratio
When a industry start using excessive external credit while losing its revenue and faces short-term
liquidity problems and reaches the point where its debt are too high and not generating sufficient
cash to pay them off is said to be a industrial sickness.
Industrial sickness occurs due to both internal and external causes. Internal causes are;
mismanagement in functional areas of the firm due to bad decision making. Technical feasibility,
means organization is not situated where it need to. If you are willing to earn huge revenue chose
your location wisely. Old methods of production why use old costly methods of production when
there is a simpler and low cost method of production are available. There is a serious risk of lose if
firm having a higher break-even point or there is inadequate investment in fixed assets or the
demand estimation in sot right or firm is not utilizing its financing correctly. There is an unbalances
product mix, bad quality control cost of production is too high, and inventory management is not
good enough or wastage is above average. Poor financial planning, cost issues, poor funding, bad
management of debt to equity ratio, deficit working capital, high level of human resources, while

low level of technically trained or skilled labor. Other internal cause of industrial sickness are
professionalism and feed back to management, work management information system, higher cost
of research and development, inadequate know-how of marketing techniques and market research
limited target market.
External causes includes infrastructure and financial shortage means shortage of requires raw
material, energy crisis, recession or shortage of finance. Other causes includes control of
government and extraneous factors like changing in tax-rates, change of import and export policy,
strikes, unstable political situation, technology factor etc.
Results of industrial sickness are adverse as it triggers the employment problem due to closure of
industries, blockage of capital equipment result low productivity and wastage of useful resources.
No or low level of financial support to new industries due to low recovery rate of funds from sick
units even losses of revenue at government level.
Industrial sickness can be cured by the formation of carefully designed strategy and well planned
implementation of the designed strategy. By carefully identifying the problems of sick unit and
taking corrective measures for those problems. By providing advance level of training to the
workforce as per their needs and evaluating them critically. Create dedicated commitment of the
employees of all level towards reviving the industry from industrial sickness.