Professional Documents
Culture Documents
Composition of liability
(a) Synergetic
(b)Competitive
(c) Successful
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MEANING & NEED FOR CORPORATE RESTRUCTURING
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the company and leave behind a shell of the original structure, there is still
usually a hope, what remains can function well enough for a new buyer to
purchase the diminished corporation and return it to profitability.
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Purpose of Corporate Restructuring -
1. Portfolio of businesses,
2. Capital mix,
3. Ownership &
4. Asset arrangements to find opportunities to increase the
share holder’s value.
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10. A major public relations campaign to reposition the co., with
consumers.
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11. Category of corporate restructuring
Corporate Restructuring entails a range of activities including financial
restructuring and organization restructuring.
FINANCIAL RESTRUCTURING
For example, the restructuring effort may find that two divisions or
departments of the company perform related functions and in some cases
duplicate efforts. Rather than continue to use financial resources to fund the
operation of both departments, their efforts are combined. This helps to
reduce costs without impairing the ability of the company to still achieve the
same ends in a timely manner
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production facilities that are obsolete or currently produce goods that are
not selling well and are scheduled to be phased out.
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ORGANIZATIONAL RESTRUCTURING
Morale is deteriorating.
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Some of the most common features of organizational restructures are:
Regrouping of business
This involves the firms regrouping their existing business into fewer
business units. The management then handles theses lesser number of
compact and strategic business units in an easier and better way that
ensures the business to earn profit.
Downsizing
Decentralization
Outsourcing
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faster and better way. The advancement of the information technology
enhances the planning of a business.
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Business Process Engineering
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Corporate Restructuring
Activities
Expansion
Tender offers
Joint venture
SELL-OFFs
Spin-off
Split-off
Equity carve-out
Corporate control
Corporate
Restructuring Premium buy-back
A
Activities Standstill Agreements
Anti-take over
Proxy contests
Change in
ownership
Exchange offer
Share repurchase
Going private
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CORPORATE RESTRUCTURING- Leveraged Buyout, Hostile
Takeover & Merger
HOSTILE TAKEOVER
Companies are bought and sold on a daily basis. There are two types of sale
agreements. In the first, a merger, two companies come together, blending
their assets, staff, facilities, and so forth. After a merger, the original
companies cease to exist, and a new company arises instead. In a takeover,
a company is purchased by another company. The purchasing company
owns all of the target company's assets including company patents,
trademarks, and so forth. The original company may be entirely swallowed
up, or may operate semi-independently under the umbrella of the acquiring
company.
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An acquiring firm takes a risk by attempting a hostile takeover. Because the
target firm is not cooperating, the acquiring firm may unwittingly take on
debts or serious problems, since it does not have access to all of the
information about the company. Many firms also have trouble getting
financing for hostile takeovers, since some banks are reluctant to lend in
these situations.
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MERGER
The entire merger process is usually kept secret from the general public, and
often from the majority of the employees at the involved companies. Since
the majority of merger attempts do not succeed, and most are kept secret, it
is difficult to estimate how many potential mergers occur in a given year. It
is likely that the number is very high, however, given the amount of
successful mergers and the desirability of mergers for many companies.
Another type of popular merger brings together two companies that make
different, but complementary, products. This may also involve purchasing a
company which controls an asset your company utilizes somewhere in its
supply chain. Major manufacturers buying out a warehousing chain in order
to save on warehousing costs, as well as making a profit directly from the
purchased business, is a good example of this. PayPal's merger with eBay is
another good example, as it allowed eBay to avoid fees they had been
paying, while tying two complementary products together.
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Mergers and acquisitions are means by which corporations combine with
each other. Mergers occur when two or more corporations become one. To
protect shareholders, state law provides procedures for the merger. A vote
of the board of directors and then a vote of the shareholders of both
corporations is usually required. Following a merger, the two corporations
cease to exist as separate entities. In the classic merger, the assets and
liabilities of one corporation are automatically transferred to the other.
Shareholders of the disappearing company become shareholders in the
surviving company or receive compensation for their shares.
The term "acquisition" is typically used when one company takes control of
another. This can occur through a merger or a number of other methods,
such as purchasing the majority of a company's stock or all of its assets. In a
purchase of assets, the transaction is one that must be negotiated with the
management of the target company. Compared to a merger, an acquisition
is treated differently for tax purposes, and the acquiring company does not
necessarily assume the liabilities of the target company.
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Another common merger variation is the "triangular" merger, in which a
subsidiary of the surviving company is created and then merged with the
target. This protects the surviving company from the liabilities of the target
by keeping them within the subsidiary rather than the parent. A "reverse
triangular merger" has the acquiring company create a subsidiary, which is
then merged into the target company. This form preserves the target
company as an ongoing legal entity, though its control has passed into the
hands of the acquirer.
When a small business owner chooses to merge with or sell out to another
company, it is sometimes called "harvesting" the small business. In this
situation, the transaction is intended to release the value locked up in the
small business for the benefit of its owners and investors. The impetus for a
small business owner to pursue a sale or merger may involve estate
planning, a need to diversify his or her investments, an inability to finance
growth independently, or a simple need for change. In addition, some small
businesses find that the best way to grow and compete against larger firms
is to merge with or acquire other small businesses.
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Benefits of Mergers and Acquisitions
Bird’s Eye View of the Benefits Accruing from Mergers and Acquisitions
The principal benefits from mergers and acquisitions can be listed as
increased value generation, increase in cost efficiency and increase in
market share.
Mergers and acquisitions often lead to an increased value generation for the
company. It is expected that the shareholder value of a firm after mergers or
acquisitions would be greater than the sum of the shareholder values of the
parent companies.
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DEMERGER
A spinoff or a split-up.
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Methods of Corporate Restructuring
Joint ventures
Divestitures
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Joint Venture -
Joint ventures are new enterprises owned by two or more participants. They
are typically formed for special purposes for a limited duration. It is a
combination of subsets of assets contributed by two (or more) business
entities for a specific business purpose and a limited duration. Each of the
venture partners continues to exist as a separate firm, and the joint venture
represents a new business enterprise. It is a contract to work together for a
period of time each participant expects to gain from the activity but also
must make a contribution.
For Example:
DCM group and Daewoo motors entered in to JV to form DCM DAEWOO Ltd.
to manufacture automobiles in India.
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Access to innovative managerial practices
To diversify risk
Example -
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SPIN OFF -
Spinoffs are a way to get rid of underperforming or non-core business
divisions that can drag down profits.
2. The parent company files the necessary paperwork with the Securities
and Exchange Board of India (SEBI).
3. The spinoff becomes a company of its own and must also file
paperwork with the SEBI.
Notice that the spinoff shares are distributed to the parent company
shareholders. There are two reasons why this creates value:
Simple supply and demand logic tells us that such large number of shares on
the market will naturally decrease the price, even if it is not fundamentally
justified. It is this temporary mispricing that gives the enterprising investor
an opportunity for profit.
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SPLIT – OFF & SPLIT-UP-
Split-off:-
Features
Split-up:-
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SELL OFF –
Selling a part or all of the firm by any one of means: sale, liquidation, spin-off
& so on. or General term for divestiture of part/all of a firm by any one of a
no. of means: sale, liquidation, spin-off and so on.
PARTIAL SELL-OFF
For example:
Raising capital
Curtailment of losses
Strategic realignment
Efficiency gain.
Strategic Rationale -
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Institutional sponsorship – Promote equity research coverage and
ownership by sophisticated institutional investors, either of which tend
to validate SpinCo as a standalone business.
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DIVESTITURES -
Divesture is a transaction through which a firm sells a portion of its assets or
a division to another company. It involves selling some of the assets or
division for cash or securities to a third party which is an outsider.
Among the various methods of divestiture, the most important ones are
partial sell-off, demerger (spin-off & split off) and equity carve out. Some
scholars define divestiture rather narrowly as partial sell off and some
scholars define divestiture more broadly to include partial sell offs,
demergers and so on.
Antitrust
Need cash
Good price.
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EQUITY CARVE-OUT –
A transaction in which a parent firm offers some of a subsidiaries common
stock to the general public, to bring in a cash infusion to the parent without
loss of control.
In other words equity carve outs are those in which some of a subsidiaries
shares are offered for a sale to the general public, bringing an infusion of
cash to the parent firm without loss of control.
Equity carve out is also a means of reducing their exposure to a riskier line
of business and to boost shareholders value.
The equity holders in the new entity need not be the same as the
equity holders in the original seller.
In equity carve out; stock of subsidiary is sold to the public for cash which
is received by parent company
2. In a spin off, parent firm no longer has control over subsidiary assets.
In equity carve out, parent sells only a minority interest in subsidiary and
retains control.
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LEVERAGED BUYOUT
A buyout is a transaction in which a person, group of people, or organization
buys a company or a controlling share in the stock of a company. Buyouts
great and small occur all over the world on a daily basis.
Buyouts can also be negotiated with people or companies on the outside. For
example, a large candy company might buy out smaller candy companies
with the goal of cornering the market more effectively and purchasing new
brands which it can use to increase its customer base. Likewise, a company
which makes widgets might decide to buy a company which makes
thingamabobs in order to expand its operations, using an establishing
company as a base rather than trying to start from scratch.
The buyers in the buyout gain control of the company's assets, and also
have the right to use trademarks, service marks, and other registered
copyrights of the company. They can use the company's name and
reputation, and may opt to retain several key employees who can make the
transition as smooth as possible. However, people in senior management
may find that they are not able to keep their jobs because the purchasing
company does not want redundant personnel, and it wants to get its
personnel into key positions to manage the company in accordance with
their business practices.
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What does it imply? Debt has a bracing effect on management, whereas
equity tends to have a soporific influence. Debt spurs management to
perform whereas equity lulls management to relax and take things easy.
Risks and Rewards, The sponsors of a leveraged buyout are lured by the
prospect of wholly (or largely) owning a company or a division thereof, with
the help of substantial debt finance. They assume considerable risks in the
hope of reaping handsome rewards. The success of the entire operation
depends on their ability to improve the performance of the unit, contain its
business risks, exercise cost controls, and liquidate disposable assets. If they
fail to do so, the high fixed financial costs can jeopardize the venture.
The use of debt increases the financial return to the private equity
sponsor.
Example –
Kohlberg Kravis Roberts, the New York private equity firm, has agreed
to pay about $900 million to acquire 85 percent of the Indian software
maker Flextronics Software Systems is the largest leveraged buyout in
India.
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Management buyout –
In this case, management of the company buys the company, and they may
be joined by employees in the venture. This practice is sometimes
questioned because management can have unfair advantages in
negotiations, and could potentially manipulate the value of the company in
order to bring down the purchase price for themselves. On the other hand,
for employees and management, the possibility of being able to buy out
their employers in the future may serve as an incentive to make the
company strong.
To save their jobs, either if the business has been scheduled for
closure or if an outside purchaser would bring in its own management
team.
To maximize the financial benefits they receive from the success they
bring to the company by taking the profits for themselves.
Benefits of MBO
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Master Limited Partnership –
MLPs generally operate in the natural resource (petroleum and natural gas
extraction and transportation), financial services, and real estate industries.
1. The limited partner is the person or group that provides the capital to
the MLP and receives periodic income distributions from the Master Limited
Partnership's cash flow
2. The general partner is the party responsible for managing the Master
Limited Partnership's affairs and receives compensation that is linked to the
performance of the venture.
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Employees Stock Option Plan (ESOP) -
An Employee Stock Option is a type of defined contribution benefit plan that
buys and holds stock. ESOP is a qualified, defined contribution, employee
benefit plan designed to invest primarily in the stock of the sponsoring
employer.
Employee Stock Option’s are “qualified” in the sense that the ESOP’s
sponsoring company, the selling shareholder and participants receive
various tax benefits.
FEATURES
Employers have the benefit to use the ESOP’s as a tool to fetch loans
from a financial institute.
The benefits for the company: increased cash flow, tax savings, and
increased productivity from highly motivated workers.
The benefit for the employees: is the ability to share in the company's
success.
HOW IT WORKS?
An employee is eligible for the ESOP’s only after he/she has completed
1000 hours within a year of service.
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After completing 10 years of service in an organization or reaching the
age of 55, an employee should be given the opportunity to diversify
his/her share up to 25% of the total value of ESOP’s.
Case overview:-
The case 'The Leveraged Buyout Deal of Tata & Tetley' provides insights into
the concept of Leveraged Buyout (LBO) and its use as a financial tool in
acquisitions, with specific reference to Tata Tea's takeover of global tea
major Tetley. This deal which was the biggest ever cross-border acquisition,
was also the first-ever successful leveraged buy-out by any Indian company.
The case examines the Tata Tea-Tetley deal in detail, explaining the process
and the structure of the deal. The case helps them to understand the
mechanism of LBO. Through the Tata-Tetley deal the case attempts to give
students an understanding of the practical application of the concept.
In the summer of 2000, the Indian corporate fraternity was witness to a path
breaking achievement, never heard of or seen before in the history of
corporate India.
The acquisition of Tetley pitch forked Tata Tea into a position where it could
rub shoulders with global behemoths like Unilever and Lawrie. The
acquisition of Tetley made Tata Tea the second biggest tea company in the
world. (The first being Unilever, owner of Brooke Bond and Lipton).
Ratan Tata, Chairman, Tata group said, "It is a great signal for global
industry by Indian Industry. It is a momentous occasion as an Indian
company has been able to acquire a brand and an overseas company." Apart
from the size of the deal, what made it particularly special was the fact that
it was the first ever leveraged buy-out (LBO)2 by any Indian company. This
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method of financing had never been successfully attempted before by any
Indian company. Tetley's price tag of 271 million pounds (US $450 m) was
more than four times the net worth of Tata tea which stood at US $ 114 m.
This David & Goliath aspect was what made the entire transaction so
unusual. What made it possible was the financing mechanism of LBO. This
mechanism allowed the acquirer (Tata Tea) to minimize its cash outlay in
making the purchase.
Tata Tea was incorporated in 1962 as Tata Finlay Limited, and commenced
business in 1963. The company, in collaboration with Tata Finlay &
Company, Glasgow, UK, initially set up an instant tea factory at Munnar
(Kerala) and a blending/packaging unit in Bangalore.
Over the years, the company expanded its operations and also acquired tea
plantations. In 1976, the company acquired Sterling Tea companies from
James Finlay & Company for Rs 115 million, using Rs 19.8 million of equity
and Rs. 95.2 million of unsecured loans at 5% per annum interest. In 1982,
Tata Industries Limited bought out the entire stake of James Finlay &
Company in the joint venture, Tata Finlay Ltd. In 1983, the company was
renamed Tata Tea Limited. In the mid 1980s, to offset the erratic
fluctuations in commodity prices, Tata Tea felt it necessary to enter the
branded tea market. In May 1984, the company revolutionized the value-
added tea market in India by launching Kanan Devan tea3 in poly pack.
De-Mystifying LBO
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The Tata-Tetley deal was rather unusual, in that it had no precedence in
India. Traditionally, Indian market had preferred cash deals, be it the
Rs.10.08 billion takeover of Indal by Hindalco or the Rs. 4.99 billion
acquisition of Indiaworld by Satyam.
What set the deal apart was the LBO mechanism which financed the
acquisition. (See Box item to know about the basics of LBOs). The LBO
seemed to have inherent advantages over cash transactions. In an LBO, the
acquiring company could float a Special Purpose vehicle (SPV) which was a
100% subsidiary of the acquirer with a minimum equity capital.
The SPV leveraged this equity to gear up significantly higher debt to buyout
the target company. This debt was paid off by the SPV through the target
company's own cash flows. The target company's assets were pledged with
the lending institution and once the debt was redeemed, the acquiring
company had the option to merge with the SPV
Tata Tea created a Special Purpose Vehicle (SPV)-christened Tata Tea (Great
Britain) to acquire all the properties of Tetley. The SPV was capitalized at 70
million pounds, of which Tata tea contributed 60 million pounds; this
included 45 million pounds raised through a GDR issue. The US subsidiary of
the company, Tata Tea Inc. had contributed the balance 10 million pounds.
The SPV leveraged the 70 million pounds equity 3.36 times to raise a debt of
235 million pounds, to finance the deal. The entire debt amount of 235
million pounds comprised 4 tranches (A, B, C and D) whose tenure varied
from 7 years to 9.5 years, with a coupon rate of around 11% which was 424
basis points above LIBOR.
The Way to Go
Some analysts felt that Tata Tea's decision to acquire Tetley through a LBO
was not all that beneficial for shareholders. They pointed out that though
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there would be an immediate dilution of equity (after the GDR issue), Tata
Tea would not earn revenues on account of this investment in the near
future (as an immediate merger is not planned). This would lead to a dilution
in earnings and also a reduction in the return on equity. The shareholders
would, thus have to bear the burden of the investment without any
immediate benefits in terms of enhanced revenues and profits. From the
lenders point of view too there seemed to be some drawbacks.
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CORPORATE RESTRUCTURING AT ARVIND MILLS
Case Overview
The case provides an overview of the Arvind Mills' expansion strategy, which
resulted in the company's poor financial health in the late 1990s. In the mid
1990s, Arvind Mills' undertook a massive expansion of its denim capacity in
spite of the fact that other cotton fabrics were slowly replacing the demand
for denim. The expansion plan was funded by loans from both Indian and
overseas financial institutions. With the demand for denim slowing down,
Arvind Mills found it difficult to repay the loans, and thus the interest burden
on the loans shot up. In the late 1990s, Arvind Mills ran into deep financial
problems because of its debt burden. As a result, it incurred huge losses in
the late 1990s. The case also discusses in detail the Arvind Mills debt-
restructuring plan for the long-term debts being taken up in February 2001.
Issues:
Introduction
In the early 1990s, Arvind Mills1 initiated massive expansion of its denim
capacity
By the late 1990s, Arvind Mills was the third largest manufacturer of denim
in the world, with a capacity of 120 million metres.
As the denim business continued to decline in the late 1990s and early 2000,
Arvind Mills defaulted on interest payments on every loan, debt burden kept
on increasing.
In 2000, the company had a total debt of Rs 27 billion, of which 9.29 billion
was owed to overseas lenders.
In 2000, Arvind Mills, once the darling of the bourses was in deep trouble. Its
share price was hovering between a 52 week high of Rs 20 and low of Rs 9
(in the mid 1990s, the share price was closer to Rs 150). Leading financial
analysts no longer tracked the Arvind Mills scrip.
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The company's credit rating had also come down. CRISIL downgraded it to
"default" in October 2000 from "highest safety" in 1997. In early 2001,
Arvind Mills announced a restructuring proposal to improve its financial
health and reduce its debt burden. The proposal was born out of several
meetings and negotiations between the company and a steering committee
of lenders.
A high wage structure, low productivity and surplus labor in the textile mills
rendered its businesses unviable in most the products categories in which it
competed. The emergence of power looms in the 1970s further aggravated
the problems of Arvind Mills.
The government's indirect tax system at that time also reduced the
profitability of its product lines. In the mid-80s, to survive the onslaught of
the small-scale power loom sector, the composite mills,4 with their higher
overheads had to change their strategies. It became imperative for them to
switch to areas in which the power loom sector could not compete, viz, value
added products.
Until 1987, like any other textile company, Arvind Mills had a presence only
in conventional products like sarees, suitings and low value shirting, and
dress materials. Realizing the bleak growth prospects for textiles in general,
Arvind Mills identified denim as a niche area and set up India's first denim
manufacturing unit in 1986 at Naroda Road, Ahmedabad.
To deal with competition from the power loom sector, which rolled out vast
quantities of inexpensive fabrics, and to cope with the rising cost of raw
materials, Arvind Mills diversified into indigo-dyed blue denim; high quality,
cotton-rich, two-ply5 shirting, and Swiss voiles
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By the late 1990s, Arvind Mills was in deep financial trouble (Refer Table III)
because of its increasing debt and interest burden.
Its total long-term debt was estimated at Rs 27 billion, out of which the total
overseas debt was Rs 9.29 billion and debt to Indian institutional lenders was
Rs 17.71 billion.
However, much of the debt to Indian financial institutions was secured was
not known. Arvind Mills had defaulted on interest payments on every loan.
ICICI was the largest Indian institutional lender, with a loan of over Rs 5
billion to Arvind Mills. (Refer Table IV for a list of lenders to whom Arvind
Mills was indebted). In 2000, the company reported a net loss of Rs 3.16
billion against a profit of Rs .14 billion in 1999.
In February 2001, Arvind Mills announced a debt restructuring plan for its
long term debt (Refer Box). While the company set itself a minimum debt
buyback target of Rs 5.5 billion, the management was hopeful of a larger
amount, possibly Rs 7.5 billion.
In mid-2001, Arvind Mills got the approval of a majority of the lenders for its
debt restructuring scheme. Forty-three out of fifty-four lenders approved the
plan. As part of the restructuring, lenders offered over Rs 7.5 billion under
the company's various debt buyback schemes.
Some of the banks agreed to the buyback at a 55% discount on the principal
amount, while some agreed to a five year rollover for which they would be
entitled to interest plus the principal. Some banks also agreed to a ten year
rollover for which they would be paid a higher rate of interest plus principal.
The debt revamp was expected to reduce Arvind Mills' interest burden by
50%.
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Many firms have begun organizational restructuring exercises in recent
years to cope with heightened competition. The common elements of most
organizational restructuring and performance enhancement programmers
are: regrouping of business, decentralization, downsizing, outsourcing,
business process engineering, enterprise resource planning, and total quality
management.
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The case discusses the 'Organization 2005' program; a six-year long
organizational restructuring exercise conducted by the US based Procter &
Gamble (P&G), global leader in the fast moving consumer goods industry.
The case examines in detail, the important elements of the restructuring
program including changing the organizational structure, standardizing the
work processes and revamping the corporate culture. The case elaborates
on the mistakes committed by Durk Jager, the erstwhile CEO of P&G and
examines the reasons as to why Organization 2005 program did not deliver
the desired results. Finally, the case discusses how Alan George Lafley, the
new CEO, accelerated the initiatives under the Organization 2005 program
and revived P&G's financial performance.
Issues:
Gain insight into the common causes that contribute to steady decline over a
period of time in the performance of a large multi-product multi-national
company of high repute.
Introduction
The US based Procter and Gamble (P&G), one of the largest fast moving
consumer goods (FMCG) companies in the world, was in deep trouble in the
first half of 2000. The company, in March 2000, announced that its earnings
growth for the financial year 1999-2000 would be 7% instead of 14% as
announced earlier. The news led P&G's stock to lose $27 in one day, wiping
out $40 billion in its market capitalization.
To add to this, in April 2000, P&G announced an 18% decline in its net profit
for January - March 2000 quarter. For the first time in the past eight years
P&G was showing a decline in profits. In the late 1990s, P&G faced the
problem of stagnant revenues and profitability (Refer Exhibit I). In order to
accelerate growth, the erstwhile P&G's President and CEO, Durk Jager (Jager)
officially launched the Organization 2005 program in July 1999. Organization
2005 was a six-year long organizational restructuring exercise which
included the standardization of work processes to expedite growth,
revamping the organizational culture in order to embrace change, reduction
in hierarchies to enable faster decision-making, and retrenchment of
employees to cut costs.
With the implementation of the program, P&G aimed to increase its global
revenues from $38 billion to $70 billion by 2005. According to analysts,
though Organization 2005 program was well planned, the execution of the
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plan was a failure. Analysts believed that Jager concentrated more on
developing new products rather than on P&G's well-established brands.
Analysts felt, and Jager himself admitted, that he did too many things in too
short a time. This resulted in the decline of the company's revenues and
profitability. After a brief stint of 17 months, Jager had to quit his post. In
June 2000, Alan George Lafley (Lafley) took over as the new President & CEO
of P&G. Under Lafley, P&G seemed to be on the right path. He was able to
turn the company around through his excellent planning, execution and
focus. With Lafley at the helm, P&G's financial performance improved
significantly (Refer Exhibit II). The company's share price shot up by 58% to
$92 by July 2003, as against a fall of 32% in S&P's 500 stock index. A former
P&G executive, Gary Stibel said, "If anybody had any doubts about AG, they
don't anymore. This is about as dramatic a turnaround as you will see."
Background Note
In 1973, P&G began manufacturing and selling its products in Japan through
the acquisition of Nippon Sunhome Company. The new company was named
"Procter & Gamble Sunhome Co. Ltd." In 1985, P&G announced several
major organizational changes relating to category management,3
purchasing, manufacturing, engineering and distribution.
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In 1988, the company started manufacturing products in China. P&G became
one of the largest cosmetics companies in the US when it acquired Noxell
(1989) and Max Factor (1991). After witnessing a period of significant
organic and inorganic growth, P&G began to face several problems during
the 1990s. In the early 1990s, a survey conducted by the consulting firm,
Kurt Salmon Associates,4 had revealed that almost a quarter of P&G's
products in a typical supermarket sold less than one unit a month and just
7.6% of the products accounted for 84.5% of sales. The remaining products
went almost unnoticed by consumers. Complicated product lines and pricing
were also causing problems to retailers who had to struggle with rebates and
discounts...
EXCERPTS
In January 1999, Jager, a P&G veteran became the new CEO taking charge at
a time when P&G was in the midst of a corporate restructuring exercise that
started in September 1998.
Till 1998, P&G had been organized along geographic lines with more than
100 profit centers. Under Organization 2005 program, P&G sought to
reorganize its organizational structure (Refer Exhibit III and IV) from four
geographically-based business units to five product-based global business
units - Baby, Feminine & Family Care, Beauty Care, Fabric & Home Care,
Food & Beverages, and Health Care.
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The restructuring exercise aimed at boosting P&G's growth (in terms of sales
and profits), speed and innovation and expedition of management decision-
making for the company's global-marketing initiatives.
The Organization 2005 program faced several problems soon after its launch.
Analysts were quick to comment that Jager committed a few mistakes which
proved costly for P&G. For instance, Jager had made efforts in January 2000
to acquire Warner-Lambert and American Home Products. Contrary to P&G's
cautious approach towards acquisitions in the 1990s, this dual acquisition
would have been the largest ever in P&G's history, worth $140 billion.
However, the stock market greeted the news of the merger negotiations by
selling P&G's shares, which prompted Jager to exit the deal.
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In June 2000, Alan George Lafley (Lafley), a 23-year P&G veteran popularly
known as 'AG,' took over as the new President and CEO of P&G. The major
difference between Lafley and Jager was their 'style of functioning.' Soon
after becoming CEO, Lafley rebuilt the management team and made efforts
to improve P&G's operations and profitability. Lafley transferred more than
half of P&G's 30 senior most officers, an unprecedented move in P&G's
history. He assigned senior positions and higher roles to women.
In 2003, Lafley continued his efforts to make P&G more adaptable to the
dynamic changes in business environment. He challenged P&G's traditional
perspective that all its products should be produced in-house. In April 2003,
Lafley started outsourcing the manufacturing of bar soaps (including P&G's
longest existing brand, Ivory) to a Canadian manufacturer. In May 2003, IT
operations were outsourced from HP. Since Lafley became CEO, P&G's
outsourcing contract went up from 10% to 20%. Lafley continued to review
P&G's businesses and new investments with the aim of achieving sharper
focus on its core businesses, cost competitiveness and improved
productivity.
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Books
Web sites
• www.valueadder.com
• www.wisegeek.com
• www.equitymaster.com
• www.investopedia.com
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