This lesson will look at the various ways in which companies expand or break up, and what may cause them to do this. We'll also explore why a company may want to buy other companies or change its production.
Making a Change
Imagine that you own a large, powerful, and successful company. However, business has been stagnant lately, so you want to make a change. How would you go about doing that? Would you expand into different areas or restructure your company? There are many different ways you can expand or restructure your company to make it more successful. Let's take a look at the options.
Restructuring a company can take place for many different reasons. Most commonly, restructuring is the act of reorganizing a company's legal, ownership, operational, or other major structural aspects to make it more profitable. It can also be done to make the company better organized and meet the present needs of its environment.
A restructuring can also take place with a change in ownership, or a response to an internal or external crisis that may have major impacts on the company. Any type of restructuring always involves the board of directors and top executives from the company, or both companies if more than one is involved. It will also always involve a bank that handles the assets, stocks, and valuation of the company.
Mergers and Acquisitions
Mergers and acquisitions is the process in which a company will transfer, sell, or combine operating units or an entire company to another company. Specifically, a merger is when two companies combine together to make one company. An example would be the merger of Disney and Pixar.
An acquisition is when one company takes ownership of another company and all of their assets, in effect creating a larger company. Buying out one of your competitors can help you corner the market in your industry. An example of an acquisition would be the recent acquisition of Time Warner by Charter Communications.
The opposite of a merger is a demerger. A demerger takes place when a company segregates its business operations into one or more components or companies. A demerger can also take place if a company decides to sell one of its components to another company. An example of a demerger is when the U.S. government forced Standard Oil to break up into smaller companies to destroy its monopoly on the oil industry.
Corporate Spin-Off & Capital Reduction
A corporate spin-off, or starburst, is when a company takes a section of its current operations and creates a separate business. The new company is independent of the old company and has its own assets, employees, operations, and property. An example of this is when the internet auction site eBay spun-off Paypal into its own company.
A spin-off can happen if an aspect of your business is doing really well and it could be a good standalone company. However, the same could be said if there was a bad aspect of your business and you wanted to get rid of it.
A reduction of capital is when a company reduces the stock of the company. In some cases, the company will return a portion of the stock to the shareholders, or put it back into the company itself. Companies do this to raise money for certain projects or expansions.
Joint Venture & Divestments
A joint venture is a business entity that is created by two or more parties or companies to minimize the risk of going into a new business. A joint venture is done to minimize the financial risk of the companies involved. The reasons why companies would pursue a joint venture include:
trying to access new markets in different nations
combining assets and operations to gain greater efficiency
minimizing risk on investments and projects
accessing new skills and capabilities that one of the companies may not have, but the other one does
An example of a joint venture is the creation of the video streaming site Hulu, which is a joint venture between Comcast, 21st Century Fox, and The Walt Disney Company. A joint venture can be a great option for a new project because it spreads the risk around.
A divestment or divestiture is something that a company does to grow financially. This generally happens when a company sells off one of its business units in order to focus its attention and resources on a more profitable market. In some cases, a corporate divestiture is mandated by the government, like when the U.S. broke Bell System into AT&T and smaller Bell companies.
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Another form of restructuring is corporate repositioning. A corporate repositioning is when it becomes necessary or urgent for a company to change its entire way of business and switch what it does entirely. This is risky to do because it must be marketed correctly, and must have the confidence of the management, employees, and especially the investors. If your company is stagnating, then going into a different market or re-branding your business can revitalize it. An example of this is when Goldman Sachs and Morgan Stanley switched from being investment banks to commercial banks.
Recapitalization is when a company does a reorganization that involves a major change in the company's capital structure. A company's capital structure is how the company finances its assets. One method of recapitalization is leveraged recapitalization, which is when a company issues bonds or buys back its own shares to raise money. Another method is nationalization. Through this process, a country will make a large investment in a company to save it from leaving or going out of business. An example of this is when the U.S. government bailed out the banks and auto companies.
Some of the methods of restructuring include mergers and acquisitions, which are either two companies becoming one or one company buying another. A demerger is when a company divides into two or more separate companies. A spin-off is when one company takes an aspect of its company and creates a new entity from it. Another form of restructuring is the reduction of capital, which is when a company reduces the number of stocks that it has issued.
Other forms include joint ventures, which is two or more companies going into a new business venture together. A divestment is similar to a demerger in that a company reduces its operations in favor of growing another aspect of the business. Corporate repositioning is when a company changes what it is doing as a business. Lastly, a recapitalization is when a company buys its own stock back to raise money for its operations.
None of these methods of restructuring are better than any of the other ones. Each one has its own advantages, and their use largely depends upon the need and position of the company that is using them.
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