Corporate restructuring on the rise in Asia-Pacific

The need to restructure is set to rise in the Asia-Pacific region, according to 93% of respondents to a recent AlixPartners survey. The reasons are related predominantly to the slowdown in China, geo-political uncertainty around Russia, as well as debt issues, regulations and increased competition. Many organisations are still waiting until they are stressed before pushing through change, even though many see this as a less than ideal moment to make the requisite changes.

The survey, titled ‘Opportunity Knocks:  Success in Restructuring’ was created as a collaboration between AlixPartners and Remark, the publishing division of Mergermarket. The survey involved 150 respondents across a range of industries, including law firms, investment banks, corporate and commercial banks, private-equity funds, hedge funds, sovereign wealth funds, and government bodies. The respondents stemmed from a wide geographical distribution in the Asia-Pacific region, with 26% in the Greater China region, 24% in Southeast Asia, 20% from Japan, and 10% from India.

Projected restructuring
The results from the survey make clear that corporate restructuring is on the agenda for many of the firms involved in the study. The vast majority (93%) of respondents indicate that they expect an increase in the number of corporate restructurings and turnaround situations. Which shows a significant deterioration of stability from the 2013, when 66% of respondents expected more corporate restructuring, followed by 70% in 2014. Of the 93%, 36% expect a significant increase, while 57% expect a slight increase.

The reasons for the change in outlook are multivariate. The respondents cite two broad trends that they see as affecting the market generally. The biggest issue (26%) comes from macroeconomic uncertainty, with particularly the slowdown in the Greater China region, and the effects of falling oil prices, Russia’s involvement in Ukraine, and continued economic volatility in the Eurozone. The second largest concern (21%) for respondents is the level of debt held by many organisations in the region, followed by issues relating to regulatory or political developments (19%), and competitive pressures (15%).

Commencing restructuring
The success and failure of the turnaround process through restructuring can be as simple as starting on time or too late. Starting a restructuring early will lead to a significant (62%) or at least to some (37%) increase in the success of the transformation. Thus, avoiding liquidation then may sometimes need to take place before the company finds itself in a stress position. The survey respondents however, made clear that many do not take a proactive stance toward restructuring. The majority (69%) waits until the first signs of stress (such as negative cash flows or declining revenues) before moving to restructuring, while 13% waits for signs of serious distress.

Transforming stress
If a company finds itself in dire straits, or even before it does, a number of moves may be orchestrated through which the organisation is able to transform itself in such a way that it overcomes the issue it faces. According to the survey, there are broadly three ways in which reorganisations can seek to create the environment for the business to flourish again: financial, operational, and leadership.

In terms of the kinds of issues that companies may face, respondents place financial and operational restructure on an equal footing at 37%, followed by leadership challenges at 20%. However, 39% of respondents suggest that companies will likely face a three pronged requirement to change, with a holistic approach to restructuring required for the business to again find itself on top. The survey also finds that the largest group expected to be responsible for setting an origination on the path to change are the board of directors at 44%, followed by the CEO or C-suite executives.

Change strategies
According to the consulting firm, there are a number of strategies which businesses that do find themselves in trouble, or expect to find themselves in the near future, are able to enact. These include:

• Mergers and acquisitions (M&A) to drive the corporate growth agenda and expand operations;
• Overhead optimisation to alleviate cost redundancies across various internal corporate functions in order to reduce the outflow of cash;
• Cash management to ensure a company’s financial stability and solvency;
• Revenue enhancement to explore and develop new products and services that would maximise profits.

The kinds of tools to be deployed by organisations vary across the categories, however, for the next 12 months, making an acquisition (90% of respondents) stands out as the anticipated restructuring tool of choice, followed by employee layoffs (76%), cash flow forecasting (70%), and exploring new markets (70%).

The authors conclude: “Whether focusing on one of those strategies or managing a cross-strategy turnaround, respondents say that those options hold the keys to improving a company’s financial condition and turning around a business that may not be operating to its maximum potential. Each approach provides options to alter the current course, reclaim lost market share, and, potentially, create value.”