[Learn About] What is Re-organization >
In their quest for efficiency and competitiveness, business and companies keep re-organizing themselves.
- When companies seek re-organization pro-actively, to meet the demands of the customers or creditors or financial markets or governments, it is a case of voluntary re-organization.
- Re-organization can also be involuntary, when the customers or creditors or financial markets or the government force a company to re-organize. In communist and socialist economic structures, governments are more inclined to support weak companies and businesses. Such support can allow a company or business to survive longer than would have been otherwise possible. Business re-organization is therefore more common in capitalistic economic structures.
Types of Re-organization
Internal Re-organization
In an internal re-organization, the affected parties are mostly within the organization. For example, the company may choose to offer a voluntary retirement scheme (VRS) to its workers or change its organization structure. These may or may not be linked to a decision to enter a new market, or exit from a market that is operating in or close down a factory. Internal re-organization is easier and quicker to execute.
External Re-organization
This affects not only parties within the organization, but also external stake-holders. The following are a few illustrations of external re-organization:
Capital Re-structuring
The company may re-organize the capital by consolidating shares of different classes or splitting the shares into different classes. To the extent the rights of share-holders are affected, the company will need to take permission of the share-holders for the arrangement. In India this is covered by Section 391 of the Companies Act, 1956. Sections 100 to 105 of the Companies Act, 1956 provide a framework for reduction of share capital outside the Section 391 requirements.
When merger is between two companies that are into the same products or services, it is called a horizontal merger.
- In a vertical merger, the companies are in different points in the value chain. For example, a supplier and customer. When the supplier acquires the customer, it is an example of forward integration. When the customer acquires the supplier, it is an example of backward integration.
- A conglomerate or diagonal merger is one where the merging companies are neither into the same products or services, nor in the same business. It may be part of the diversification strategy of the amalgamated company.
Reverse Merger
Normally, in a merger, a smaller or weaker company merges into a larger or healthier company. When the reverse happens viz a larger or healthier company merges into a smaller or weaker company, it is called a reverse merger. One reason for such a transaction is to let the weaker company continue to carry forward its losses to set off against future profits of the merged entity.
De-merger / Hive-off / Spin Off
This is the reverse of a merger. The company transfers one or more businesses into a separate company. The company doing the transfer is called ‘demerged company’. The separate company into which the businesses are transferred is called ‘resulting company’. The resulting company is either a subsidiary of the demerged company, or has an initial share-holding pattern that is a mirror image of the share-holding pattern of the demerged company. Such transactions are covered by Sections 391 to 394 of the Companies Act, 1956.
Demergers are done for various reasons such as:
- Family split. Control of the demerged company and resulting company are vested in different branches of the family.
- Better focus – The demerged company and resulting company can take their own paths that are suitable for their underlying business.
- Divestment of the resulting company, when that business is no longer of interest for the demerged company.
- Dilution of stake in the resulting company, to help the demerged company to mobilize money, without dilution of stake in the demerged company.
What is Slump Sale?
A slump sale is the sale of an entire undertaking, without values being assigned to individual assets or liabilities. In a slump sale, the net worth of the undertaking is taken to be the cost of acquisition and improvement. These are easier to implement. Since no high court approval is required, the transaction can be executed faster.
What is Acquisition of Control?
Instead of merging the businesses or companies, promoters may choose to acquire control through a substantial acquisition, but keep the businesses distinct in different legal entities. The company can also choose to reduce the role of public share-holders through a buy-back, or go completely out of the public radar by de-listing the company.
