Restructuring the Siemens Company - Term Paper Example

Restructuring the Siemens Company: Introduction: This paper investigates the extent to which restructuring helps improve financial performance and share holder value, the paper discusses restructuring in the Siemens Company over the years and the impact of these changes to the company's profit, share prices, market capitalisation and dividends, The siemens company was founded in 1889 in Germany and over the years it has grown to become one of the largest company's in the world employing over 200,000 people worldwide. In the 1980 the company enjoyed constant prices because some of its consumers were public institution. However privatisation of these companies led to a decline in prices and stiff competition made the company to venture abroad. According to Yahoo finance (2009) market capitalisation stands at $51.5 billion, gross profit for the year ended 2008 amounted to $30.41 billion and the current return on equity ratio is 6.195%. Restructuring: There are a number of definitions of corporate restructuring ranging. Froud (2000) defines restructuring as the collective activities that involve the introduction of financial instruments, dissolution, increasing equity ownership and reduction of corporate assets. Usui (1996) defines restructuring as activities that a corporate engages in when under pressure, Bowman (1999) on the hand states that restructuring involves the reorganisation of division, streamlining of operations and spun offs with the aim of improving performance and restructuring is the utilisation of assets in a more productive way in order to improve share holder returns. Bowman (1999) states that there are three modes of restructuring which include portfolio restructuring, financial restructuring and organisational restructuring. Portfolio restructuring include those actions aimed at changing the asset mix owned by a firm and they include spin offs and sale of assets. Financial restructuring on the other hand are those actions aimed at changing the capital structure of a company and they include leveraged buyout and debt equity swap. Finally organisational restructuring involve changes in the organisation structure of the firm and they include redesigning and employee downsizing. Restructuring has both negative and positive impacts. Positive impacts include enhanced productivity, reduced production costs and increased shareholders' wealth and Negative impacts include lay offs. Bowman (1999) states that performance is determined by market performance and accounting performance. Market performance relates to change in the share prices of a company after restructuring while accounting performance relates to changes in profit, return on investment and equity. Restructuring in the Siemens Company: Restructuring of the company started in 1966 whereby the company the company organised its production into division and there was decentralisation of control, this was aimed at improving the response to consumer requirements, the division included data system, power engineering, electrical installation, medical engineering, components and electrical installations which all worked independently, Siemens (2009) states that sales during these years ranged at DM 10 billion a year and employment was approximately 270,000 employees. Further restructuring efforts were evident in the year 1969 when the company made it possible for employees to purchase shares at discounted prices. In 1990 further changes were implemented, the seven units were further divided into 15 units, (Siemens (2009)) Before 1990 over 60% of Siemens consumers were public institutions, this protected the company from fluctuating prices in the market and product prices remained relatively constant, privatisation of public institutions began in the 1990's and this led to a decline in domestic sales, because the domestic market was already saturated the company opted to expand its market size by investing abroad, in 1985 domestic sales amounted to 53% and only 10% in the US and by the year 2001 domestic sales amounted to 22% and 30% in the US, these figures show that there was a decline in sales in Germany and an increase in sales in the US. In 1992 return on sales for the Company was 2%, for this reason therefore in 1993 Siemens introduced the time optimised process which was denoted as TOP. This strategy was aimed at achieving a 5% return on sales, this was to be achieved through increased productivity and innovation, and it was also aimed at improving the 2% return on sales recorded in the year 1992. The objective to realise a 5% return on sales was never realised due to high competition that reduced market prices of products, however the strategy was successful in that it helped the company to continue operating. The strategy was aimed at increasing productivity and between the year 1992 to 1996 40,000 employees lost their jobs, dismissals also included early retirement and transfers within the company. In 1998 there was a further decline in profits and prices were also falling and the company introduced the ten point program, among the strategies at the time included changes in the capital structure, cost cutting and motivational measure, the crisis on 1998 was a result of stiff competition which resulted into lower prices and the huge losses incurred by some of the companies' division including the semi conductor division. When considering the Siemens Company as our example it is evident that cash flows were used to finance and therefore the company was never affected by the capital market. For this reason therefore we consider the definition that restructuring are those changes that involve utilisation of assets in a more productive way in order to improve performance. Financial restructuring: There are a number of financial restructuring by the Siemens Company some of these changes are evident from the listing of Siemens stock in the NYSE, there was also an introduction of DM5 shares, the aim of these restructuring was attract more investors to invest and also make the company shares more attractive to the investors. The listing of the company shares in NYSE was also aimed at publicising the company because the company was not well known in the US, however there were major mergers and acquisitions and these are evident from the acquisition of Plessey in 1991 and the acquisition of Rolm in 1992.in 2001 also there was acquisition of Atecs Mannesmann and acquisition of VA technologies in 2005, Froud (2000) states that in the 1980 there was an increase in mergers and acquisitions which had different motives, he further states that in the sort term the share holders of the acquired company tend to gain but in the long run they lose. A study by Bowman (1999) showed that the average performance improvement of financial restructuring was greater than the average performance yielded by the other two restructuring modes, for this reasons therefore the company was accrue to these benefits through its financial restructuring actions. Organisational restructuring; In 1998 the economic value added measure was introduced, this involved determining the performance with the cost of internal and external capital, this means that a company's performance was determine by the extent to which it would earn its cost of capital whereby divisions that did not meet this criteria were to be fixed , sold or closed. Most of Siemens competitors followed this concept and were able to record higher profits than Siemens, the medical equipment division recorded losses over the years but the fixing option was preferred by the company. Managers incentives were also introduced whereby top managers income were based on share prices and performance, as a result in 1999 top managers income comprised of a fixed and variable component and over 200 managers had a 40% fixed income and a 60% variable income that depended on performance. According to Bowman (1999) in his study regarding the average performance improvement it was evident that the organisation restructuring mode yielded the least level of performance improvement. Portfolio restructuring: In the year 1999 it is evident that the semi conductor division which had been recording losses over the years was spun off to become Infineon Technologies Company, the decision was reached after the company had spent large amounts on capital in the early 80's and also had incurred over 10 billion in losses over the years. The company options were to fix the problem, sell of close the division, however the company opted for a spun off, it was also evident that if the division was sold over 60,000 jobs would be lost and also over 17 billion sales revenue would be lost. As a result of this a spun off was the best option whereby the Infineon Technologies Company was formed and listed in the stock exchange in the same year. Bowman (1999) study on a number of companies shows that spun off benefits the parent company more whereby on average the parent company gains 5% and this figure was obtained from a sample of 181 companies, while in sell offs the parent company gains an average of 2% based on a sample of 2000 companies, for this reason therefore the decision by siemens' company to prefer a spun off instead of a sell off would have probably yielded higher gains. Measuring performance: In order for a company to improve its performance the company should concentrate on those divisions that are profitable and sell off other units, the company should implement a minimum profit for divisions and shut down those units that do not meet the minimum requirement and information transparency should be observed. From the above discussion it is evident that the impact of the restructuring modes is determined using accounting and market performance measures, for the time period considered it is evident that in 1999 Siemens profit was DM1.8 billion. The economic value added was negative and amounted to 650 million. However in 2000 the profit grew to 3.4 billion and the economic value added value was positive and amounted to 859 million. Therefore it is clear that there was an increase in accounting performance of the company in the year 2000 following the spin off in 1999 of the semi conductor division that had recorded losses over a long period of time. (Borsch (2004) The increase in profit can also be attributed to the introduction of the ten point strategy which was aimed at managers' incentives, top managers income according to the 1999 strategy income comprised of a fixed and variable component, therefore this increase in profit may have been as a result of the organisational restructuring undertaken. Market performance also improved and this is evident from the increase in market capitalisation, in 1998 market capitalisation amounted to DM 28 billion and this increased in 2000 where market capitalisation was DM 85 billion, this shows that there was a significant change in the performance in the period due to restructuring. (Borsch (2004)) According to Ciaran and Shepherd (2005) companies should increase over reliance on debts, from the siemens case it is evident that the company relied heavily on cash flow and did not rely on equity, this is one strength that would have resulted to the success of the company, the study by Borsch (2004) shows that capital cost for siemens was 9% in 1998 and 13 % for GE which was one of the competitors, this means that the company did not have high levels of equity compared to its competitors. Conclusion: In the paper a number of issues have been raised regarding the impacts of restructuring on the company and the various methods of determining improvement on performance, from previous studies it is evident that restructuring leads to an improvement in performance although some restructuring modes yield better results than others, from the paper financial restructuring yields better average improvement than the other modes. The Siemens company case demonstrates the benefits accrue to a company through restructuring, the company involved itself in broad business activities and this led to low profits because some of the division in the company were making losses, further problems increased when there was increased competition in the 1990 and prices went down after the company enjoyed relative constant prices resulting from its customer base who were public institutions. The decline in market share led to the expansion of its operations into other regions where market share grew rapidly. Profits and market capitalisation figures show clearly the impact of restructuring on the company. It is evident that profits doubled in the year 1999 to 2000 and market capitalisation tripled for the period 1998 to 2000. We cannot however conclude that restructuring leads to an improvement in performance and this is because in our case we considered only one company and that other studies also show that restructuring has not provided the expected results. References: Alexander Borsch (2004) Globalisation, Shareholder Value, Restructuring: The Transformation of Siemens, New Political Economy, Vol. 9, No. 3, September 2004 Bowman, E., Singh, H., Useem, M., and Raja Bhadury (1999) When Does Restructuring Improve Economic Performance, California Management Review Vol. 41, No. 2 winter 1999 Ciaran Driver and David Shepherd (2005) Capacity utilisation and corporate restructuring: a comparative study of the US, UK and other EU countries, Cambridge Journal of Economics 2005, 29, 119-140 Froud, J., Haslam, C, Johal, S. and Karel W. (2000) Shareholder value and financialization: consultancy promises, management moves, Economy and Society Volume 29 Number 1 February 2000: 80-110 Froud, J., Haslam, C., Johal, S. and Karel W. (2000) Restructuring for shareholder value and its implications for labour, Cambridge Journal of Economics 2000, 24, 771-797 Siemens Company Website (2009) History of Siemens, viewed 25th, http://w1.siemens.com/investor/en/siemens_share/dividend_information.htm Usui, C. and Colignon, R. (1996) Corporate Restructuring: converging world pattern or societal specific embended, Sociological Quarterly, vol. 37, no. 4, 515 - 578 Yahoo Finance (2009) Siemens AG: Profile and Key statistics, viewed 25th March, http://finance.yahoo.com/ Read More