This document discusses various types of financial reconstruction and business reorganization. It describes organizational reconstruction, which involves changing how a company's operations are organized, and portfolio reconstruction, which involves changing the portfolio of business operations through divestments, demergers, and acquisitions. Reasons for business reorganizations include financial needs like raising cash, and strategic needs like protecting parts of the business. Specific reorganization methods discussed include divestment, management buyouts (MBOs), and management buyins (MBIs). Advantages and disadvantages of MBOs and MBIs are also summarized.

1. CORPORATE
FINANCE
FINANCIAL RECONSTRUCTION & BUSINESS
REORGANISATION
Dayana Mastura Baharudin

3. Types of
Financial
Reconstruction
Financial Reconstruction
to prevent business
failure
Financial Reconstruction
for value creation

5. Financial Restructuring

6. Legal
Framework
In insolvency proceedings the
proceeds from selling the
assets are shared out to
repay creditors and investors
in a predetermined rank as
follows;
Creditors with a fixed charge
on a specific assets
Creditors with a floating
charge on the company’s
assets in general or a class of
assets
Unsecured creditors
Preference shareholders Ordinary shareholders

7. Business
Reorganisation
To improve the performance (and
therefore the value) of a business,
management may consider one of the
two forms of business reorganization:
Organisational reconstruction
Portfolio reconstruction

8. Organisational
Restructuring
Involves changing
the way a
company’s current
operations are
organized
Changing its
corporate
governance
Altering the degree
of centralization
within an
organization
Amending the terms
of licensing or joint
venture agreements

9. Posrtfolio
Restructuring
The possibility of improving value by restructuring
the organization’s portfolio using divestments,
demergers, spin-offs, Management Buy-Outs and
Management Buy-Ins
The acquisition of companies and including the
potential acquisitions that could add value
Involves improving value by changing the portfolio
of business operations being managed by a company

10. Reasons for
Business
Reorganisations:
Financial
Selling off a division may allow cash
to be raised to:
Ease the group’s liquidity problems
Reduce the group’s gearing
Reinvest elsewhere in the business
to earn a higher return

11. Reasons for Business Reorganisations:
Strategic
There may be divisions
within a business where
the current
organizational structure
is not adding value
A division may be
neglected because it is
not seen as being core to
the group’s strategy
To protect the rest of the
business from takeover,
it may choose to split off
a part of the business
which is particularly
attractive to a buyer

12. Divestment
(sell-off)
Sale of a division within a company to
a third party (ie another company)
A buyer may be prepared to pay an
amount that is greater than the
present value of the cash flows of the
division
because under their ownership, the
division will be worth more due to
synergies with the buyer’s other
business operations

13. Management
buy-out
(MBO)
When employees decide to buy
the business they are working
for it is known as management
buyout.
Management buyouts are not
restricted to managers and can
involve employees at all levels in
the organisation.
This could be employees who
want to share in the success of
the business or others who feel
that they could manage the
business better than the present
owners.

14. MBO reasons
There are many reasons why the
management team may decide to buy
the business they are working for
including:
The management team are unhappy
with the decisions made by the
owners, CEO or board of executives
The business is in trouble/undergoing
administration proceedings and
employees feel that they can buy the
business at a good price and make a
success of it.
The owners of the business decide to
sell it and ask employees if they want
to buy the business. For example the
owners of a family run business want
to retire or a group of companies
decide that the business is no longer
a key part of their current/future
business strategy
The management team do not want
the business to be bought by
someone else especially if this will
involve the new buyers bringing their
own employees or management team
in.

15. MBO process

16. MBO -
Advantages
Increased motivation from employees that own the business as the
success of the business personally affects them
New owners can make decisions based on their experiences as
employees
Decentralisation - If the business was part of a larger group of
companies, separation from that group should increase efficiency
as there is no longer the need to discuss decisions with the group
or head office.
If the business was part of a larger group of companies, there
could be a decrease in costs as there is no longer a need to
contribute towards group costs.
The business will also have greater control over their own budgets
and can choose suppliers that suit the business rather than a
corporate group of companies.

17. MBO -
Disadvantages
If the company was sold because it
was struggling there could be a lot
of work involved in turning it into a
successful business.
The management team may not
have the money to buy the
company and it may be difficult to
secure a loan to buy the business
especially if the business is
struggling.
To secure loans to buy the company
the management team may have to
provide personal guarantees or
remortgage their own
properties/homes.
The success of the buyout is
dependant on the strength, skills
and vision of the management team
buying it. If the business was
struggling due to the competence
of the current management team is
unlikely to improve if the current
management team continue to lead
it after the management buy out.
If the business was doing well due
to the current owners after the
management buy out the new
owners will need to devise a
strategy to deal with any loss in
valuable skills and experience
created by the departure of the
current owners.

18. Management
buy-in (MBI)
Management buy-in is corporate activity. In which when an
outside organization or management buy a possession stake of
the main organization.
This outside organization replaces the existing management
team. Since the procured firm supposedly is failing to meet
expectations.
Ineffectively managed or requiring the progression of an aging
administration team.
This is generally happening where the outside investors trust
the organization’s product.
Capable to produce more noteworthy than current yields with
the change in technique or potentially implantation of capital.
With this interest, they invest in other organizations to make
the profit.

19. MBI -
Advantages
The buyers, in many cases, get undervalued
companies in MBI. The value of which can be
unlocked and sold at much higher prices later.
If the current owners of a company are not
able to manage the company, MBI is a win-win
situation for both buyers as well as the sellers.
The new management team might have better
knowledge, contacts, experience, etc. It might
actually help the company grow and maximize
the shareholder’s wealth.
Current employees may get motivated because
of new changes in the management.

20. MBI -
Disadvantages
The new management team may also
fail to bring the required growth in
the company.
There are chances that even after
changing the management,
companies may not be successful.
The existing employees of the
company may feel demotivated.
The buyer may end up paying way
more than required if they estimate
the value of the company incorrectly.