Restructuring as a pandemic necessity
COVID-19 has brought a new reality to commerce. Companies face a myriad of issues, many for the first time: low consumer demand, the increased risk caused by mistrust, disruption of the supply chain, the search for multiple sources of supply, the decentralization of distribution centers, the centralization in the provision of services, the accelerated adoption of electronic commerce and teleworking, the increase in the request for financing, the increase in extraordinary expenses, changes in the prices of products due to the volatile exchange rate, as well as the partial or total closure of business lines, among others. In response, companies have had to reinvent themselves.
What is corporate restructuring?
Restructuring seeks to renegotiate contracts and change the structure of a company by, for example, selling a division to obtain greater liquidity or focus on the main business.
There are several types of restructuring, such as:
- Renegotiation of financial instruments in the quest for temporary relief from certain clauses in the company’s credit agreements or to renegotiate existing obligations with creditors.
- Financing of new debt or equity to satisfy liquidity needs.
- Operational restructuring through an evaluation of options to optimize operational efficiency, cost savings, stabilization of performance, and liquidity.
- Sale of assets or secondary lines of business non-essential to the core activity and use the proceeds to reduce company debt or provide cash to reinvest in the business.
- Sale of the company if a study shows that the best way to maximize value and access liquidity is to sell the entity to a third party that has more resources and potential synergies with which it can achieve superior value for shareholders than the company can achieve on its own.
Restructuring through Merger or Acquisition
In these uncertain times, many investors with sufficient liquidity to do so are willing to invest in companies that are in distress because of the pandemic. For investors, many benefits to such an acquisition may exist, since they can increase the market power of the buying company, overcome entry barriers, increase the competitive scope of the company, diversify its portfolio with less risk than developing new products or services and create synergies and value for the company. When combining two companies, integration must seek to generate synergistic results.
- Cost savings: Elimination of expenses by reorganizing and consolidating logistics, operations and business lines, or by creating economies of scale by acquiring competing companies.
- Revenue enhancements: The buyer and the acquired company can achieve higher levels of sales growth together than alone, by combining capabilities, business development, and portfolios.
- Process improvements: The transfer of best practices and basic skills from one company to another often results in cost savings and revenue improvements.
A successful restructuring requires an effective strategy and expert advice.
Any restructuring process must comply with a series of phases, carefully executed, to achieve its objectives:
- Evaluation and assessment
- Restructuring plan
- Execution and mitigation of operational, legal and fiscal risks
Restructuring, buying, and selling distressed businesses means overcoming a series of complex financial, legal, and operational challenges. The evaluation, execution, and integration phases are key to achieving the restructuring objectives; therefore, financial and legal advice plays a fundamental role in the process.
The evaluation process requires the identification of business areas or lines that must be restructured through a diagnosis of the operations (i.e., the reason for the business, support or financing activities) and the definition of specific activities that help to estimate the economic position of the company before and after the restructuring. The evaluation also requires examining the economic benefits of the transaction, financing methods, the structure appropriate to the transaction, the identification of risks through due diligence, the planning of the correct tax structure, the eventual actions to merge or separate workforces successfully, as well as the tangible and intangible costs of integration such as the impact on management and personnel.
This restructuring plan must have the documentation that supports the business objectives, as well as an evaluation of the management and allocation of risks within the restructuring and transfer pricing model specific to each company or GMs (if applicable).
An ineffective due diligence process can lead to paying an excessive price to acquire a business. Conversely, an inaccurate valuation can result in the sale of the company or line of business for well below its real value, hurting its shareholders.
At BLP our experienced team of merger and acquisition specialists stands ready to advise on corporate restructuring from start to finish.