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.