Restructuring Blues: What Should Business Be Concerned About

Updated: Aug 31 2002, 05:30am hrs
We are into the second year of what has been dubbed by management gurus as the decade of restructuring. There are many indicators to prove this: turnover of chief executive officers (CEOs) is 22 per cent higher, insolvencies are up 20 per cent and mergers and acquisitions (M&As) in 2001 were 70 per cent lower than the year 2000. During the first half of 2002, global M&As deal activity declined 56 per cent.

In value terms, M&A activity fell to $ 448 billion during the period, compared to $ 1020 billion in the first half of 2001. In India, lenders will play a decisive role in restructuring. The government has set in motion the process of setting up asset reconstruction companies and also issued an ordinance, giving sweeping powers to lenders to recover money from defaulters. But there are still some concerns.

These were brought out in a detailed presentation on restructuring opportunities at a CEOs conclave organised by Assocham at Agra this week by KPMGs executive director (corporate finance) Ramit Sethi. Hee went on to highlight some of the other concerns.

It was felt that guidelines for ordinance are yet to be framed. A fair valuation of assets taken over will be a question and trigger happy lenders may opt for recovery over restructuring.

And if a lender takes away a critical asset, will a company survive without it For example, if a lender who financed a captive power plant in a steel unit decides to take over the power plant, what will happen to the steel unit Tax implications, he felt are also yet to be tested.

But why do companies underperform to reach a stage where they go down and need a restructuring Mr Sethi says that mature businesses go off plan for a number of reasons: powerful competitors enter the market and there is cost competition as new entrants start pushing out dominant players (take example of television or automobile industry). Businesses can be caught off guard by new legislation and standards and significant unhedged foreign currency debt as well. Another issue which has been a bane of many Indian companies is excessive diversification into unrelated businesses or large expansions which are undertaken without tying up the funds. Mr Sethi also believes that equal joint ventures may not be healthy in the long run for there are issues like who owns and who controls. On the other hand, if one partner has a higher stake, he is more accountable and involved in the business since he is firmly in control.

Management related issues such as perceived corporate governance and key man risk (where a business gets affected if one or more key executives leave) can also affect companies. So what are the alert signals for restructuring Mr Sethi says there are many and companies should consider each one of these carefully to see where they stand.

Comparatively high cost or inefficient working capital management, negative press reports, change in regulatory environment and consequent impact on financial performance, underperforming subsidiaries or non-core businesses and poorly integrated businesses post acquisition are some them.

Companies should also see whether their business is in a mature or declining market or one with falling sales and if there has been loss of key customers.

On financial front, profit warning, collapse in share price, high gearing competitive benchmarking, inability to service debt and interest costs, mismatch in cash versus debt maturity profile and deployment of short term funds to fund long term assets.

Mr Sethi further says that underperforming businesses should immediately take remedial measures: focus on the right people (find management solutions), do the right things (undertake operational restructuring and have the right balance sheet (implement financial restructuring).

A company can follow a five-stage approach: first, crisis management; second, stabilisation phase; third, have a robust planning where it builds a three year road map, evaluates risks and builds contingency plans and in fourth and fifth stages, implement financial and operational restructuring.