Transforms market and financial performance

To what extent does a mature and cyclical product market drive corporate restructuring? Use an extended example to discuss whether restructuring transforms market and financial performance.

An organization which is operating in a mature market means that the product does not have the scope to grow anymore. The product has reached its peak, with no prospects to increase, as the product is has become most popular in the market and no one else will be willing to buy it. A cyclical market is one which has demands changing due to external factors relating to the product. These factors could be the time of year, month or week or even the weather. With these products there are no prospects and when there is a low peak in the cyclical cycle the organization is not doing too well.

In order to increase the demand of both products in the mature and cyclical markets, organizations will drive into restructuring. By restructuring the organization will hope to improve performance of the products in the market.

This essay will look at restructuring in terms of the mature and cyclical markets. Firstly it would be looked at what restructuring is and why restructuring occurs in a mature and cyclical market. This will be further backed with case studies. The essay will then focus on what have been the implications of restructuring and has it been successful in order to improve performance.

Sp we have established that an organization operating in a mature or cyclical market may want to restructure to result in better performance. Now the following part of the essay will firstly look at different ways in which organization can restructure.

The traditional forms of restructuring were through merger and acquisition by inter corporate sell-offs, spin-offs, Management buyouts or management buy-ins and leveraged buy-outs. These traditional forms of restructuring were aimed to maximize shareholder wealth.

However other forms of restructuring exist in the form of rightsizing which includes closures and downsizing or outsourcing. Another is offering management incentive schemes based on the share options. Finally there is financial engineering through share buy-backs and substitution to debt for equity.

In terms of value, mergers of companies was popular, in the past 20 years (between 1976 and 1995) the cumulative value spent on buying other firms was £241 billion by industrial and commercial companies. As a point of comparison companies were spending £481 million on pants and machinery. In terms of mergers they were spending 50 pence on every pound of fixed capital on take over of other companies, so they were spending ore on mergers rather than the plant and machinery. On management buyouts and buy-ins involved selling parts of the individual business, this varied year to year. During 1989 and 1996 this form of restructuring valued to £37 billion, not as much as the merger as they were just an extra of the mergers.

The academic view on restructuring varied with a difference of opinion, some whom think restructuring is good and others its bad. The overall consensus over takeovers was that they were against them. Meeks (1977) book 'disappointing marriage' showed that profits of combined companies were often lower and that the main beneficiary was the shareholders in the acquired company. Traditionally the analyzing was done by economist whom had a negative verdict overall. But other academics such as Shliefer and Summers (1988) whom represent a more socially aware economist said that gains were only obtained due to a breach of trust and implicit contract in terms of employees. And the gains were not made through organizations being more efficient but by organizations redistributing.

However from a different perspective, there was a defense for the restructuring from the corporate finance, with Jensen who was a defender of the newer form of restructuring. He argued that restructuring new management teams used their assets more productively and increased the returns to maximize shareholder value. Due to the threat of restructuring controlled the incumbent managers whom were to invest in unprofitable projects and maintain organization efficiency. The aspect of debt was seen as a positive development, this was the reason that made the managers work. The difference between the economists negative perspective and corporate finances positive perspective was due to the fact that the corporate finance took a simple view. There are bundle of assets, easy market control. market was to bid for the asset which were more successful and through restructuring managers knew what they were doing.

Corporate finance was a stronger argument and had internal coherent than on empirics and evidence. Restructuring was a solution to the problem of divorce in ownership between the managers and the owners. Managers were left with too much freedom to fulfill their own interest which was not streamlined with the shareholders. So in this form restructuring acted as a reassertion of shareholder control.

So at macro level restructuring is beneficial socially as it relocates assets to better managers who invest for returns. So the end result is positive as the only losers re the top mangers who act dysfunctional.

Two different perspectives of restructuring have been suggested, now the essay will look at a case study of Caterpillar who operate in both the mature and cyclical market and have restructured.

Caterpillar is old system manufacturing company which downsized in 1980s. The three main divisions are: machinery- which includes heavy construction equipment; engines and financial products which includes operating and finance leases and insurances.

Caterpillar products were mature and had cyclical demands this was after the long boom which caterpillar experienced.

Most the product are mature with competitors whom are willing to accept lower returns except the Japanese companies whom are not willing to cut the prices. Although CAT is a dominant manufacture and able to charge premium prices, they are still not able to regain as the margins are eroding and that is helped by the recession in the US market.

However despite much restructuring and consolidation not much had changed since 1994. it still has mature and cyclical market. Since 1994 CAT has reinforced its position through series of acquisitions. the financial division accounts for over 25% of the profit.

Through restructuring cat deployed 38,651 staff from the period of 1979 to 1992, although there was an economic boom after the 1980s recession. This was due to CAT taking nearly 20 years to reach the peak in 1978. due to this great decline in the sales this had lead to factory closure and loses of those employees. Although there was a boom in the 1980s this was mostly consumer led and the government did not increase the spending on infrastructure which meant this was not an effect on CAT. Also the factor of the competition from Komstua which effected sales and was greater helped by the yen exchange rate. All these factors led to restructuring and to the downsizing of employees.

Although CAT had impressive value added and stock turns this doesn't mean good results. Due to the low wage entrants as competitors therefore CAT cash and renewal rates suffered. Although CAT had managed to restructure in a manner that stabilized labour cost but didn't create CAT with cash machines.

The implications of restructuring are mainly on labour. Labour is the key victim. They are vulnerable in any process of restructuring. This is due to the fact that labour is the largest component of cost. Restructuring work directly against employees as it creates winners and losers. Winners being the employees whom have managed to stay in the organization and losers whom have lost the jobs. So there are multi factors going on at different levels. The ratio of winners depends on the context of the individual skills attribute. Although reducing labour should lead to cost saving, this is not the case always due to the fact that once the staff has been deployed the job still has to be done and filled. So the organizations then opt to outsource the work, which does not translate into a savings. instead all the savings made are being used to pay the outside company to do the jobs for which the organization deployed staff for.

So in conclusion an organization may look to restructure to improve performance due to having a no growth market - mature market or seasonal market -cyclical market. Organization then restructures in different strategies traditionally mergers and acquisition but more recently rightsizing and financial engineering. Economic academic have given a negative view on the restructuring where corporate finance gives a positive view. Then looking at a case study of Caterpillar showed and organization which has matured and cyclical products have restructured to sustain labour cost. They reduced a lot of the labour mainly due to external factor of competition. This then led to the implication that labour is the largest victim in the restructuring which creates winners and losers. However although companies try to reduce cost be laying off employees they do not realize that the supposed saving made and put into paying the contractors for the jobs that still have to fulfilled.

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