What is Recapitalization?
Definition of Recapitalization
Recapitalization is changing an organization’s capital structure like exchanging bonds for stocks.
Explanation of Recapitalization
Organizations often undertake recapitalization to stabilize its capital structure or to increase/boost its stock price. Many organizations use recapitalization as a tactic to avoid becoming hostile takeover, such organizations take a huge amount of debt and pay dividends to its shareholders; it may make the stock riskier but it attracts the shareholders. Also as a reorganization process, organizations which are bankrupt carry out recapitalization.
There are a couple of reasons for which organizations carry out recapitalization. Some of these reasons are:
· For avoiding hostile takeover.
· In state of bankruptcy.
· To avoid or minimize taxes.
· To implement an exit strategy for venture capitalists.
· To diversify debt-to-equity ratio for better/improved liquidity.