| Restructuring Group Subsidiaries – A Tricky Proposition?

Restructuring Group Subsidiaries – A Tricky Proposition?

 

The coronavirus pandemic is bringing to light the precarious situation in which the crisis-stricken automotive industry especially finds itself. Yet this was a situation which applied even before the arrival of the pandemic: “Last year, many companies in the automotive sector already took a very close look at their plants and locations. The coronavirus crisis is now aggravating this problem and causing it to spread to virtually every industry,” says our partner Dr. Jörg Schumacher in an interview with Finance magazine.

This restructuring expert assumes that many corporate groups are currently closely scrutinizing unprofitable locations. However, their status as group companies represents a particular challenge: While these subsidiaries are legally independent, in many cases a group liability structure applies, which means that the parent company is liable for its affiliate. Insolvency, as a common method of restructuring, is thus not available as an option for majority shareholdings, which means that other means must be found in order to return group subsidiaries to profitability.

These include examining typical cost issues such as contracts and product calculations. Moreover, internal processes and purchasing and sourcing strategies are among the “traditional levers” which are applied in turnaround projects.

Tact and Sensitivity Are Essential

At the same time, in many cases locations’ difficulties have by no means only recently emerged. Dr. Schumacher notes that a restructuring process is frequently only initiated after several failed rescue measures. The key point is to establish a functioning relationship with the local management. After all, the parent group can merely provide guidance, but it is up to the local managers to put this into practice. At the same time, it is essential to avoid costly delays.

It is therefore clear that the restructuring of group subsidiaries is a task which requires a process of dialogue. “Local managers have an interest in protecting their organization against severe cuts. What is more, they will rapidly see themselves as lacking autonomy where restructuring projects are implemented from head office,” says Dr. Schumacher. Yet it is up to the top-level management to point up the inevitability of these restructuring measures. In the worst-case scenario, a location may otherwise have to close down or the subsidiary group may have to be sold off.