Corporate restructuring in UAE entails any fundamental change in a company’s business or financial structure, designed to increase the company’s value to shareholders or creditor. Corporate restructuring is often divided into two parts: financial restructuring and operational/Organizational restructuring.
Financial restructuring relates to improvements in the capital structure of the firm. The operational/Organizational restructuring is the process of increasing the economic viability of the underlying business model.
- Financial Restructuring: Financial Restructuring may take place due to a drastic fall in sales because of the adverse economic conditions. Here, the firm may change the equity pattern, cross-holding pattern, debt-servicing schedule and the equity holdings. All this is done to sustain the profitability of the firm and sustain in the market.
- Organizational Restructuring: The Organizational Restructuring means changing the structure of an organization, such as reducing the hierarchical levels, downsizing the employees, redesigning the job positions and changing the reporting relationships. This is done to cut the cost and pay off the outstanding debt to continue with the business operations in the same manner.
The Importance of Corporate Restructuring in UAE
The need for a corporate restructuring arises because of the change in company’s ownership structure due to a merger or takeover, adverse economic conditions, adverse changes in business such as bankruptcy or buyouts, over-employed personnel, lack of integration between the divisions, etc.
The essence of corporate restructuring lies in achieving the long-run goal of wealth maximization. The following reasons may be attributed to the phenomenon of corporate restructuring:
❖ The globalization of business has compelled companies to open new export houses to meet global competition. The global market concept has necessitated many companies to restructure because the lowest cost producers only can survive in the competitive global markets.
❖ Revolution in information technology has made it necessary for companies to adopt new changes for improving corporate performances.
❖ Improved productivity and cost reduction has necessitated downsizing of the workforce – both at works and at managerial level.
❖ Competitive business necessitated having a sharp focus on core business activities, to gain synergy benefits, to minimize the operating costs, to maximize efficiency in operation and to tap the managerial skill to the best advantage of the firm. Views and management styles and make modern and contemporary initiatives necessary for the development of the company. In order to achieve this, the benefits of counseling on the issue are indisputably important.
❖ By restructuring the enterprise, a sick company can be successfully revived and rehabilitated and can be brought back to profitable lines.
❖ The Corporate restructuring includes financial reorganization which brings the company to achieve the desired balance of debt and equity, thereby reducing the overall cost Capital and financial risks.