M&A

M&A

Introduction:

Mergers, acquisitions, and restructuring have become a major force in the financial and economic environment all over the world. On the Indian scene, too, corporate are seriously looking at the mergers, acquisition, and restructuring which have indeed become the orders of the day. Most of the business groups and their companies seem to be engaged in some kind of corporate restructuring or the other. From the house of Tatas to the house AV Birla, From an engineering giant like Larsen & Toubro to a banking behemoth like State Bank of India, from the troubled TELCO to the distressed NOCIL, every one seems to be singing the anthem of corporate restructuring has increased since the beginning of the liberalization era, thanks to greater competitive pressures and more permissive environment.

Mergers:

A merger refers to a combination of two or more companies into a single company. This combination may be either through absorption or consolidation. In absorption, one company absorbs another company, whereas under consolidation, two or more companies combine to form a new company. In general parlance, mergers are also referred to as amalgamations.

Classification of Mergers

Mergers can be classified into 3 main types.

Horizontal

A horizontal merger is one that takes place between two companies in the same line of business.

Vertical

A vertical merger is one in which the buyer expands backwards and merges with the company supplying raw materials or expands forward in the direction of the ultimate consumer. Thus, in a vertical merger, there is a merging of companies engaged at different stages of the production cycle within the industry.

Conglomerate

In a conglomerate merger, the merging companies are in totally unrelated lines of business.

Motives for Mergers

The motives of mergers are:

• Economies of scale

• Financial economies.

• Growth.

• Diversification.

• Managerial Effectiveness.

As a result of above aspects, the value of the merged company is expected to be greater than the sum of the independent values of the merging companies. This concept of synergy, can be explained symbolically as follows:

If company A merges with company B, the value of the merged entity, called say AB, is expected to be greater than the sum of the independent values of A and B, i.e.,

V (AB) > V (A) + V (B)

Where V (AB) = value of the merged entity

V (A) = Independent value of company A

V (B) = Independent value of company B

Let us examine the various motives in greater detail.

• Economies of scale:

When two or more companies combine, the larger volume of operations of the merged entity results economies of scale. Economies of scale arises when increase in the volume of production leads to a reduction in the cost of production per unit. Merger may help to expand volume of production without a corresponding increase in fixed costs. Thus fixed costs are distributed over a large volume of production causing the unit cost of production to decline economies of scale may also arise from other indivisibilities such as production facilities, management function and management resources and system.

This happen because a given function, facility or resources is utilized for larger scale of operation.

• Utilization of tax shields:

When a firm with accumulated losses and /or unabsorbed tax shelters merges with a profit-making firm, tax shields are utilized better as its losses and /or unabsorbed tax shelters can be set off against the profits of the profit-making firm and tax benefits can be quickly realized.

• Higher debt capacity:

It is frequently argued that the merged entity enjoys a higher debt capacity because the earnings of the merged entities are more stable than the independent earnings of the merging entities. A higher debt capacity, the argument continues, means greater tax advantage to a higher firm value.

• Reduction in floatation cost:

When two firms merge they can save on floatation cost of equity, preference, and debenture issues. In general, these costs (in percentage terms) decrease with the increase in size of the issue- such a reduction in cost represents a real benefit to the merged entity.

• Lower rate of borrowing:

The consequence of larger size and greater earning stability, many financial experts argue, is to reduce the cost of borrowing for the merged firm. The reason for this is that the creditors of the merged firm enjoy better protection than the creditors of the merging firms independently. If the two firms merge, the creditors of the merged firm are protected by the equity of both firms. While this additional protection reduces the cost of debt, it imposes an extra burden on the shareholders: shareholders of one firm must support the debt of the other and vice versa.

• Growth

Growth normally is a very important corporate objective. If a firm has decided to enter or expand in a particular industry, acquisition of a firm in that industry, rather than dependence on internal expansion, may offer several strategic advantages:

1. As a pre- emptive move it can prevent a competitor from establishing a similar position in that industry.

2. It offers a special ‘timing’ advantage because the merger alternative enables affirm to leap frog several stages in the process of expansion.

3. It entail less risk and even less cost.

4. In a saturated market simultaneous expansion and replacement (through a merger) makes more sense than creation of additional capacity through internal expansion.

Mergers and acquisitions, however, involve cost. External growth could be expensive if the company pays an excessive price for merger. Benefits should exceed the cost of acquisition for realizing a growth, which adds value to shareholders. In practice, it has been found that the management of a number of acquiring companies paid an excessive price for acquisition to satisfy their urge for high growth and large size of their companies. It is necessary that price may be carefully determined and negotiate so that merger enhances the value of shareholders.

• Diversification:

If two companies X and Y are merging and the shares of X are not traded in the stock exchange, after the merger, when company XY is formed, X’s shares also get traded along with the shares of company Y. Investors can thus automatically diversify their portfolio of shares by buying the shares of the merged company.

• Managerial Effectiveness

One of the potential gains of merger is an increase in managerial effectiveness. This may occur if a more effective management team replaces the existing management team, which is performing poorly. Often a firm, plagued with managerial inadequacies, can gain immensely from the superior management that is likely to emerge as a sequel to the merger.

A common argument for creating a favorable environment for mergers is that it imposes a certain discipline on management. If lackluster performance renders a firm more vulnerable to potential acquisition, existing managers will strive hard continually to improve their performance.

An example of HLL-TOMCO Merger

On the afternoon of 9 March, 1993, R.N. Thorat, Company Secretary, Tata Oil Mills Company Ltd (TOMCO) declared to the Bombay Stock Exchange authorities his company’s intentions to merge with Hindustan Lever Ltd.(HLL). For the loss making TOMCO, this link up seems to be the perfect prescription for its many ailments. TOMCO was on the brink of becoming a BIFR case. TOMCO’s shareholders are to get2HLL shares for every 15 of theirs surrendered. The clubbing together of HLL & TOMCO will create tremendous marketing synergies. After the merger, HLL’s network of stockiest will double from the present 3000 and its market share will rise to 75 percent. HLL whose production and marketing network in the south was weak, will gain an additional 7 TOMCO plants and the company’s and company’s strong marketing network in the south. Though from neither side stand to lose, the unions of both HLL & TOMCO have opposed the merger – the HLL union, understandably, because when 500 workers of their own plant at Bombay have been declared surplus and asked to accept the voluntary retirement scheme, the are wondering how the company can absorb TOMCO’s 5500 employees. On the other hand, TOMCO’s union views the merger as a sell out and the 2:15 exchange ratio as unfair. They are also worried about prospects of retrenchment. Whether the merger of two actually comes through remains to be seen. However HLL has past record turning around loss making ventures:

Cost and benefits of a Merger:

When firm A acquires firm B, it is making a capital investment decision and firm B is making a capital divestment decision. What is the net present value of this decision to firm B?

To calculate the net present value to company A we have to identify the benefit and the cost of merger. The benefit of the merger is the difference between the present value (PV) of the combined equity PVAB and the present value of the two entities if they remain separate (PVA + PVB). Hence,

Benefit = PVAB - (PVA - PVB)

The cost of the merger, from the point of view of firm A, assuming that compensation to firm B is paid in cash, is equal to the cash payment made for acquiring firm B less the present value of the firm B as a separate entity. Thus.

Cost = cash – PVB

The net present value (NPV) of the merger from the point of view of firm A is the difference between the benefit and the cost as defined above. So

NPV to A = Benefit – cost

= (PVAB-(PVA+ PVB) - Cash + PVB

The net present value of the merger from the point of view of firm B is simply the cost of the merger from the point of view of firm A

Example:

Firm A has a value of Rs. 20 million and firm B has a value of Rs 5 million. If the two firms merge, cost savings with a present value of Rs. 5 million would occur .Firm A proposes to offer Rs.6 million cash compensation to acquire firm B. calculate the net present value of the merger to the two firms.

Solution

In this example PVA = Rs.20 million, PVB = Rs5 million, PVAB = Rs.30 million, Cash = Rs.6 million. Therefore,

Benefit = PVAB – (PVA+ PVB) = Rs.5 million

Cost = Cash – PVB = Rs.1million

NPV to A = benefit – cost = Rs.4 million

NPV to B = Cash – PVB = Rs. 1 million

Acquisitions or takeovers:

A takeover generally involves the acquisition of certain block of equity capital of a company, which enables the acquirer to exercise control over the affairs of the company. In theory, the acquirer must buy more than 50 percent of the paid up equity of the acquired company to enjoy complete control. In practice, however, effective control can be exercised with a smaller holding, usually between 10 to 40 percent, because the remaining shareholders, scattered and ill-organized, are not likely to challenge the control of the acquirer. The main objective of a takeover bid is to obtain legal control of the company. The company takeover remains in the existence as a separate entity unless a merger takes place. Thus a takeover is different from a merger in that under a takeover, the company taken over maintains its separate existence, while under a merger both the companies merge to form a single corporate entity, and at least one of the companies loses its identity.

According to Charles A. Scharf, the element of willingness on the part of the buyer and seller distinguishes an acquisition from a takeover. If there exist willingness of the company being acquired, it is known as acquisition,. If the willingness is absent, it is known as takeover.

Arguments for and against takeovers

Proponents of takeover argue that takeovers improve the quality of management, facilitate forward and backward linkages with the other operations of the acquirer, and afford scope for realizing synergistic benefits. T.Boone Pickens,Jr., an eloquent votary of takeovers, regards them as a device for punishing weak managements and protecting the interest of the small shareholders.

The opponents of takeovers, of course, have disputed Picken’s view, vigorously. Accordingly to Warren law, managers do much more for their companies and shareholders than the raiders (or predators) who are primarily motivated by desire to make a ‘ fast buck’ and to see their pictures on magazine covers. Peter Drucker, too, is strongly opposed to takeovers. He argues forcefully that if managers have responsibility towards shareholders, then the latter should also have a reciprocal responsibility toward

The former for the larger good of society. He believes that takeovers tend to shatter employee morale.

Regulation of takeovers

Basically the framework for regulating takeovers must seek to

1. Impart transparency to the process,

2. Protecting the interest of shareholders and

3. Facilitate the realization of economic gains.

Transparency of the process:

A takeover affects the interests of many parties and constituents, such as the contending acquire, shareholders, in an open manner. If the process is transparent, all concerned and regarded as a legitimate device in the market for corporate control will view takeovers favourably.

Interest of shareholders:

In a takeover, the controlling, which often tends to be between 10percent and 40percent, is usually acquired through market purchases (occasionally it may be acquired from many sellers through market purchases.) Typically the controlling block is bought at a negotiated price, which is higher than the prevailing market price. The securities and exchange board of India (SBI) has come out with some guidelines on corporate takeovers. The essential thrust of these guidelines is to takeovers as transparent as possible in order to protect target companies and individual shareholders. The essential thrust of these guidelines are to make takeovers as transparent as possible in order to protect person who holds shares in a company has agreed to acquire further shares through negotiations, which when taken together with the shares already held by him, would carry more than10% of the voting capital, he has to make a public announcement of an offer to the remaining shareholders of the company, before he acquires those additional shares.

Realization of Economic Gains

The primary economic rational for takeovers should be to improve the efficiency of operations and promote better utilization of resources. In order to facilitate the realization of these economic gains, the acquirer may enjoy a reasonable degree of latitude for infusion of funds, restructuring of operations, liquidation of non- viable divisions, widening of product range, redeployment of resources, etc.

Role of financial Institutions:

Financial institutions, thanks to their substantial equity holding in a large number of companies, often hold the balance of power. Without their support, the acquirer may not be able to enjoy control. Hence, they have a crucial role to play. Ideally, they should serve as guardians of larger public interest and ensure that:

• The process of takeover is open transparent.

• Potential acquires operate on level ground.

• The takeover is likely to produce economic gains

• The interest of shareholders and other constituents is reasonably protected.

• No undue concentration of market power arises as a sequel of takeover.

Defensive Tactics

A target company in practice adopts a number of tactics to defend itself from hostile takeover through a tender offer. These tactics include a divestiture or spin off, poison pill, greenmail, white night, crown jewels, golden parachutes, etc.

• Divestiture. In a divestiture the target company divests or spins off some of its business in the form of an independent, subsidiary company. Thus , it reduces the attractiveness of the existing business to the acquirer.

• Crown jewels. When a target company uses the tactic of divestiture it is said to sell the crown jewels. In some countries such as the UK, such tactic is not allowed once the deal becomes known and is unavoidable.

• Poison pill. An acquiring company itself could become a target when it is bidding for another company. The tactics used by the acquiring company to make itself unattractive to a potential bidder is called poison pills. For example, the acquiring company may issue substantial amount of convertible debentures to its existing shareholders to be converted at future date when it faces a takeover

threat. The task of bidder would become difficult since the number of shares to have voting control of the company will increase substantially.

• Greenmail. Greenmail refers to an incentive offered by management of the target company to the potential bidder for not pursuing the takeover. The management of the target company may offer the acquirer for its share a price higher than the market price.

• White knight. A target company is said to use a white night when its management offers to be acquired by a friendly company to escape from hostile takeover. The possible motive for the management of Target Company to do so is not to lose the management of the company. The hostile acquirer may replace the management.

• Golden parachutes. When a company offers hefty compensations to its managers if they get ousted due to takeover, the company is said to offer Golden parachutes. This reduces their resistance to takeover.

Mergers and acquisitions may degenerate into the exploitation of shareholders, particularly minority shareholders. They may also stifle competition and encourage monopoly and monopolistic corporate behavior. Therefore, most countries have legal framework to regulate the merger and acquisition activities. In India, mergers and acquisitions are regulated through the provision of the companies act, 1956, the monopolies and Restrictive Trade practice (MRTP) Act, 1969, the foreign Exchange Management Act,(FERA),1973, The Income tax act,1961, and the Securities and Controls(Regulations)Act, 1956. The Securities and Exchange Board of India (SEBI) has issued guidelines mergers, acquisitions and takeovers.

Legal Measures against takeovers:

The Companies Act restricts an individual or a company or a group of individuals from acquiring shares, together with the shares held earlier, in a public company to 25 percent of the total paid-up capital. Also, the central Government needs to be intimated whenever such holding exceeds 10 percent of the subscribed capital. The companies’ act also provides for the approval of shareholders and the central Government when a company, by itself or in association of an individual or individuals purchases shares of another company in excess of its specific limit. The approval of the central government is necessary if such investment exceeds 10 percent of the subscribed capital of another company. These are precautionary measures against the takeover of public limited companies.

Refusal to Register the Transfer of shares:

In order to defuse situation of hostile takeover attempts, companies have been given power to refuse to register the transfer of shares. If this is done, a company must inform the transferee and the transferor within 60 days. A refusal to register transfer is permitted if:

• A legal requirement relating to the transfer of shares have not be complied with; or

• The transfer is in contravention of the law; or

• The transfer is prohibited by a court; or

• The transfer is not in the interest of the company and the public.

Protection of Minority Shareholders’ interests:

In a takeover bid, the interest of all shareholders should be protected without a prejudice to genuine takeovers. It would be unfair if the same high price were not offered to all the shareholders of prospective acquired company. The large shareholders may get most of the benefits because of their accessibility to the brokers and the takeover dealmakers. Before the small shareholders know about the proposal, it may be too late for them. The companies act provides that a purchaser can force the minority shareholder to sell their shares if;

• The offer has been made to the shareholders of the company;

• The offer has been approved by at least 90 percent of the shareholders of the company whose transfer is involved, within 4 months of making the offer, and

• The minority shareholders have been intimated within 2 months from the expiry of 4 months referred above. If the purchaser is already in possession of more than 90 percent of the aggregate value of all the shares of the company, the transfer of the shares of minority shareholders is possible if;

• The purchaser offers the same terms to all shareholders and

• The tenders who approve the transfer, besides holding at least 90 percent of the value of shares, should also form at least 75 percent of the total holders of shares.

Guidelines for takeovers:

SEBI has provided guidelines for takeovers. The guidelines have been strengthened recently to protect the interests of the shareholders from takeovers. The salient features of the guidelines are;

• Notification of takeover: If an individual or a company acquires 5 percent or more of the voting capital of a company. The target company and the stock exchange shall be notified immediately.

• Limit to share acquisition. An individual or a company can continue acquiring the shares of another company without making any offer to other shareholders until the individual or the company acquires 10 percent of the voting capital.

• Public offer. If the holding of the acquiring company exceeds 10 percent, a public offer to purchase a minimum of 20 percent of the shares shall be made to the remaining shareholders through a public announcement.

• Offer price: Once the offer is made to the remaining shareholders, the minimum offer price shall not be less than the average of weekly high and low of the closing prices during the last six months preceding the date of announcement.

• Disclosure. The offer should disclose the detailed terms of the offer, identity of the offer, details of the offer’s existing holdings in the offeree company etc, and the information should be made available to all the shareholders at the same time and in the same manner.

• Offer document. The offer document should contain the offer’s financial information, its intention to continue the offeree company’s business and to make major change and long-term commercial justification for the offer.

FINANCIAL RESTRUCTURING

Financial restructuring involves a significant change in the financial structure of the firm and/ or the pattern of ownership and control. Financial restructuring occurs in numerous ways. We will discuss two broad types of financial restructuring, one aimed at bringing relief from the burden of debt and the other aimed at concentrating equity in few hands with the help of debt.

Relief from Debt Burden

Financially troubled firms seek to mitigate the burden of debt in some way or the other.

. Convert debt into equity.

. Write off a portion or whole of accumulated interest

. Provide moratorium for loan repayment

. Reduce interest rate

. Make accumulated interest payable in installment without interest

Leveraged Buyout:

A leveraged buyout involves a transfer of ownership consummated mainly with debt. Generally, a leveraged buyout involves an acquisition of a division or unit of a company; occasionally it entails the purchase of an entire company.

To illustrate the essence of a leveraged buyout transaction, a simplified example may be given. Trilok Limited has three divisions, namely the plastics division, the textiles division, and the garments division. Trilok is interested in divesting the plastics division. While the assets of this division have a replacement cost of Rs 140 million, they will fetch only Rs 90 million if liquidated. Trilok is willing to sell the division if it gets Rs 100 million. Four key executives of the plastics division are keen on acquiring it through

a leveraged buyout operation. They are willing to invest Rs 8 million. They approach Financial Engineering Limited (FEL), a merchant-banking firm, for assistance. FEL prepares projections for the plastics division on the assumption that it will be run as an independent, company by the four key executives. FEL figures out that the cash- flows of this operation would support a debt of Rs 100 million. FEL finds a finance company, which is willing to provide debt finance to the extent of Rs 85 million for the project. FEL also locates a private investor who is prepared to invest Rs 7 million in the equity of this project. The plastics division of Trilok is acquired by an independent company, run by the four key executives, which is financed through debt to the tune of Rs 85 million and through equity participation to the extent of Rs 15 million.

What Does Debt Do?

A leveraged buyout entails considerable dependence on debt. What does it imply? Debt has a bracing effect on management, whereas equity tends to have a soporific influence. Debt spurs management to perform whereas equity lulls management to relax and take things easy. As G. Bennett Stewart III and David M. Glassman put it: "Debt is 'just-in-time' financial system. The precise obligation to repay it is another mechanism to squeeze operating inefficiencies. Leaving no margin the consequences of making a mistake ensures that fewer mistakes are made.

In a similar vein they say: Equity is soft, debt hard. Equity is forgiving, debt insistent. Equity is a pillow debt a sword. Equity and debt are the yin and yang of corporate finance.

Risks and Rewards

The sponsors of a leveraged buyout are lured by the prospect of wholly (or largely) owning a company or a division thereof with the help of substantial debt finance. They assume considerable risks in the hope of reaping handsome rewards. The success of the entire operation depends on their ability to improve the performance of the unit, contain its business risks, exercise cost controls, and liquidate disposable assets. If they fail to do so, the high fixed financial costs can jeopardize the venture.

KKR"s Success Formula:

Kohlberg Kravis Robert & Co (KKR, hereafter) is a holding company which has acquired majority equity stakes in a number of companies including giants like RJR, the tobacco major, Safeway, a large grocery chain, Owen - Illinois, the largest manufacturer of glass in the U.S., and Duracell, the well known battery company.

Though its record is not without blemishes, KKR has been remarkably successful in creating value from wholly unrelated acquisitions despite paying substantial premiums.

What factors have contributed to the success-of KKR? Three factors seem to stand out: a highly decentralized structure; an aggressive use of debt; a dynamic, not static, use of debt.

Highly decentralized structure KKR is an almost totally decentralized structure with a very small staff. It has to be that way. As Bennett Stewart says: "It does not have a corporate bureaucracy, does not have corporate meetings, does not have corporate goals. There is no allocation of corporate overhead. Without a corporate bureaucracy to keep close tab on its units, KKR manages by motivation, not by mandate; by empowerment, not by punishment”.

Aggressive use of debt KKR borrows aggressively. However, its borrowings are decentralized, not centralized. It does not borrow at the parent level. Instead it borrows at the subsidiary level, so that the debts of individual LBO units are independent. As Bennett Stewart says: "Much like a boat whose hull is divided into separate chambers, compartmentalizing debt and equity: ensures that a leak in anyone unit cannot sink the equity in any of the other units.

Dynamic, not static use of debt KKR does not try to maintain a fairly stable capital structure as many companies do. Instead, it strives to repay its LBO debt as soon as possible. However, once a KKR company retires its debt it is likely to try the risky LBO strategy once again. At KKR, LBOs are a way of life, not one-shot transactions. As Bennett Stewart says: "'Thus the dynamic use of debt itself becomes dynamic-not one cycle of debt and debt repayment, but a series of such cycles that each time wrings out inefficiencies, breathes in value, and bootstraps the managers into the ranks of owners”.

ORGANISATIONAL RESTRUCTURING

Many firms have begun organizational restructuring exercises in recent years to cope with heightened competition. The common elements in most organizational restructuring and performance enhancement programmes are described below briefly:

1. Regrouping of business Firms are regrouping the existing businesses into a few compact strategic business units which is often referred to as profit centers. For example, Larsen and Toubro have been advised by Mckinsey Consultants to regroup its twelve businesses into five compact divisions.

2. Decentralization To promote a quicker organizational response to dynamic environmental developments, companies are resorting to decentralization, and delegation aimed at empowering people down the line. For example, Hindustan Lever Limited has embarked on an initiative to reduce the number of management layers from 9 to 5.

3. Downsizing Referred to euphemistically as rightsizing, companies are retrenching surplus manpower. Retrenchment through Voluntary Retirement Scheme (VRS) seems to be the most popular tool for downsizing the workforce. Tata Iron and Steel Company initiated a massive downsizing exercise in the late 1905.

4. Outsourcing Companies are adopting measures like outsourcing non-value adding activities and sub-contracting. These measures seek to reduce manpower and convert fixed costs into variable costs. Tata Engineering and Locomotives Company has relied heavily on outsourcing and sub-contracting for its Indica car. Nearly 75 per cent of the parts and components are outsourced.

5. Business process engineering Joe Peppard and Philip Rowland define Business Process Reengineering (BRP) as follows: "BRP is an improvement philosophy. It aims to achieve improvements in performance by redesigning the processes through which an organization operates, maximizing their value-added content and minimizing everything else. This approaches can be applied to an individual process level or to the whole organization". One of the most widely cited example of business process reengineering is the re-engineering of Ford Motor Company's accounts payable department that led to a 75 per cent reduction in manpower.

6. Enterprise resource planning: The traditional management information systems tended to be fragmented. Enterprise resource planning is a computer-based, enterprise- wide, integrated management information system. It enables managen1ent to quickly grasp the system-wide ramifications of changes in any function. A ware of the power of information technology to improve planning and control functions, many firn1s have started work on enterprise resource planning. Mahindra and Mahindra, for example" has introduced a comprehensive enterprise resource planning system.

7. Total quality management Many firms have realized that quality improvement is essential to reduce cost and improve customer service. Hence initiatives like seeking ISO 9000 registration or getting some other external quality certification are becoming popular. Companies do find that external registration and or certification provide an incentive to improve quality on a continuing basis. WIPRO, for example, has launched a very ambitious Six Sigma total quality management drive.

Here are some examples, which illustrate what goes on when large, complex entities resort to organization restructuring:

Percy Barrievik initiated a major restructuring exercise at Asea Brown Boveri, a firm that came into being as a sequel to the n1erger of two sleepy European engineering companies, viz., Sweden's Asea and Switzerland's Brown Boveri. He reorganized Asea Brown Boveri into 5,000 profits centers, shrunk corporate size from 4000 to 200, cut the number of management layers from 7 to 4, and shortened production cycle times' up to 50 per cent.

Based on the study by McKinsey" State Bank of India is engaged in an organizational restructuring exercise that seeks to (i) commit the bank to significantly higher standards of financial performance, customer service, and organizational productivity, (ii) create four focused business groups (corporate, national banking, international, and associates and subsidiaries), (iii) set up three new corporate center positions (Chief Finance Officer, Chief Credit Officer and Chief Development Officer) and (iv) redesign circles around two different centers (Commercial and Retail) headed by General Managers.

DYNAMICS OF RESTRUCTURING

In an incisive study on corporate restructuring covering a number of companies over an extended period of time, Gordon Donaldson examined the dynamics of corporate restructuring. He tried to look at issues like why corporate restructuring occurs periodically, what conditions or circumstances induce corporate restructuring, and how should corporate governance be reformed to make it more responsive 'to the needs of restructuring.

The key insights of this study are described below:

1. Even though the environmental change, which warrants corporate restructuring" is a gradual process, corporate restructuring is often an episodic and convulsive exercise. Why? Typically, an organization can tolerate only one vision of the future, articulated by its chief executive, and it takes time to communicate that vision and mobilize collective commitment. Once the strategy and structure that reflect that vision are in place, they acquire a life of their own. A constituency develops, with a vested interest in that strategy and structure, which resists change unless it becomes inescapable. As Gordon Donaldson says: "'Hence resistance to change often preserves the status quo well beyond its period of relevance so that when change comes, the pent up forces, like an earthquake, capture in one violent moment, a decade of gradual change.

2. The conditions or circumstances which seem to enhance the probability of voluntary corporate restructuring, but not necessarily guarantee the same, are: (i) Persuasive evidence that the strategy and structure in place have substantially eroded the benefits accruing to one or more principal corporate constituencies. (ii) A shift in the balance of power in favor of the disadvantaged constituency. (iii) Availability of options to improve performance.

(iv) Presence of leadership, which is capable of and willing to act.

3. Corporate restructuring occurs periodically due to an ongoing tension between the organizational need for stability and continuity on one hand and the economic compulsion to adapt to changes on the other. As Gordon Donaldson says: "'The 'wrongs' that develop during one period of stable strategy and structure are never permanently 'righted' because each new restructuring becomes the platform-on which the next era of stability and continuity is constructed.