Reasons for Restructuring

Sometimes mergers do not work out as expected, or the companies fail to get the synergies they had estimated, and they end up undoing the merger or restructuring. The following are some of the common reasons for restructuring:

1. Change in strategic focus: The company’s management may hope to increase profitability by changing their strategy and eliminate divisions or subsidiaries that are not part of their core business.
2. Poor fit: A company will decide that a particular division is a poor fit within the overall company or it does not justify continued investment.
3. Reverse synergy: The market may undervalue some divisions because of poor performance, and the separation of the two will be worth more than when combined.
4. Financial or cash flow needs: During economic downturns, managers may sell a portion of the company to increase their cash flows.

Question

Which one of the following is least likely a reason why companies restructure?

1. Change of strategic focus.
2. Good fit.
3. Financial or cash flow needs.

Solution

The correct answer is B.

If a division is a good fit, there is no need for a company to restructure.

A is incorrect.  A change in strategy can result in a corporate restructuring.

C is incorrect. Financial or cash flow needs may push a company to sell a portion of itself to increase cash flows.

Reading 18: Mergers and Acquisitions

LOS 18 (l) Explain common reasons for restructuring.