Recapitalisation involves a change to the company’s capital structure and it may involve the exchange of shares for bonds or vice versa. Recapitalisation is often done by companies who are in the midst of bankruptcy proceedings. Since the procedure has an immediate effect on the earnings per share, shareholders are interested in the recapitalisation strategy.
Recapitalisation is also undertaken when a company is trying to defend a hostile takeover. A hostile takeover is a situation where one company tries to acquire another company by offering to purchase shares at a much higher market value. If the target company opposes the deal, the acquirer may go directly to the stockholders to show them their offer. If a certain number of stockholders approve the offer, the stocks will be sold. To protect themselves from hostile takeovers and minimise taxes, some companies choose to go through the process of recapitalisation.
Venture capitalists also use recapitalisation as a business strategy while others use it to create funds for future growth.
Types of Recapitalisations
There are 3 different types of recapitalisation; namely leveraged recapitalisations, leveraged buyout and nationalisation. The leveraged recapitalisation is done to control tumbling prices of the company’s shares. In this scenario, the company buys back its shares and issues bonds in order to get shareholders to drop their investment in the company. A leveraged buyout is similar to the leveraged recapitalisation, but in this case, the shares of the company are bought by another company through a hostile takeover.
Nationalisation occurs when a large number of shares of the company are bought by the government. This happens when the government tries to protect a firm from bankruptcy or display its financial strength to other players in the market.
Shifting Ownership between Business Partners
As long as the business owner still has a share of ownership, financial partners can be brought on board for the future success of the company. This will involve the process of recapitalisation and a shift of ownership between partners. Sometimes, capital structure is shuffled around to improve cash flow and avoid bankruptcy. Steady cash flow can be used to implement strategies for further growth.
If you want to recapitalise your company, it’s important to hire professionals to get the job done smoothly. You will have to employ the services of a lawyer, an investment banker, an accountant and a business valuation professional.
If you need help with the recapitalisation process, speak to the professional accountants and advisors at Revive Financial. We have helped many companies with their recapitalisation needs in Australia. So if your company debt has mounted and you need financial advice, get in touch with us and we’ll offer you the best solutions.
For more information on business turnaround and restructuring options for business debt, check out our information page here.