What is a Reorganization?

A reorganization involves the reordering of a firm's activities to more tightly focus on its core capabilities. All other activities are eliminated, spun off, or outsourced. The remaining operations may be reshuffled into a different organizational structure, with revised employee job descriptions. Accompanying these changes is a revamping of the firm's capital structure, which may include the restructuring of debt agreements or the conversion of debt into equity. Creditors may also be contacted to discuss delayed payment terms. Reorganizations are closely associated with a Chapter 11 bankruptcy filing, though they may also be initiated when management wants to focus on improved profitability. If a reorganization is associated with a Chapter 11 filing, then the holdings of current shareholders will likely be wiped out. Ultimately, the main point behind a reorganization is to return a struggling business to long-term financial viability. It is commonly associated with the replacement of some or all members of the management team.

Results of a Reorganization

There are multiple outcomes resulting from a corporate reorganization, which include the following:

Lower breakeven point. Fixed costs have been reduced sufficiently to bring down the sales level at which the business can break even. This makes it easier to survive in a difficult economic environment.
Fewer products. The least profitable products have been eliminated, resulting in a narrower focus on the most important products.
Reduced headcount. Many of the positions not directly linked to the core mission of the business have been eliminated.
More streamlined processes. The proportion of non-value-added tasks within the organization’s processes has declined.