Corporate Expansion & Restructuring: Types & Impacts

Instructor: Lee Davis

Lee has a BA in Political Science; and my MA is in Political Science with a concentration in International Relations.

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.

Corporate Restructuring

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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