Leverage Buyout - Coursework Example

Strategic Management University’s Name: Submitted By Name Tutor: Institutional affiliation: Leverage Buyout Restructuring is the latest buzzword in the business arena companies strive to attain a competitive advantage to maximize their profits in saturated market (Tetřevová, 2007). The rapidly changing local and global business environment is also driving companies to resort to restructuring in order to change the way business is run. Restructuring, therefore, involves new and unique ways of running a business by shunning the old method. It calls for organizations to transform their organizational structure and system, organizational culture, organizational design, and leadership styles. As a result, successful restructuring requires strategic management to optimize the benefits of restructuring and to have a competitive edge in the market. Leverage buyout is some of the common type of corporate restructuring that is common in the modern world. It is a type of restructuring where investors and company management buy a company through the use of equity and debts (Eckbo and Thorburn, 2008). The most common type of leverage buyout is known as management buyout where business management or top executive agrees to buy a significant part of the company from the existing shareholders. Once the management or investors have acquired the company, the acquired firm goes private to enable its restructuring to increase its profitability. Therefore, the main reason for leverage buyout is to restructure the company to increase its performance and profitability, which will lead to profit optimization (Tripathi, 2012). The main aim of a business is to maximize the profit, which makes it the primary reason why a company can be restructured through leverage buyout. Secondly, restructuring is done to enhance the competency of a firm by establishing effective and proactive leadership and empower employees to improve their performance. In addition, leverage buyout is done by companies to reduce the cost of running an enterprise through downsizing the number of employees both at the work and managerial level (Tripathi, 2012). Cost reduction is common when a company is facing financial challenges and cannot afford to pay the existing workforce. Leverage buyout is also conducted to enhance the quality of goods or services. Besides, another reason why a firm may opt for leverage buyout is to minimize the risks by putting it effective and efficient management. Therefore, the overall reason for leverage buyout is to attain high rate of return. Leverage buyout, like any type of corporate of restructuring, has many benefits. One of the benefits of leverage buyout is that it transforms the management, as poorly managed business undergoes reformation when it is changed to private firm (Kaplan and Strömberg, 2008). Many companies take corporate structures through the modification or replacement of the management, executive, and the staff. Companies also do away with unnecessary departments or sectors that are not beneficial and may add cost of operations. Business structure can also be changed by eliminating excessive expenditures, especially those that do not add value to the firm. The transformation of the management after restructuring helps in promoting the interest of investors and the interest of the company. Therefore, a company must engage in strategic management if it wants to achieve high return after restructuring. Leverage buyout alone is not enough, but a company must evaluate its resources and internal and external business environment to come up with effective strategies that can significantly transform the business towards achieving its objectives (Kaplan and Strömberg, 2008). Leverage buyout is also beneficial because it requires relatively small amount of capital due to high debt-to-equity ratio. Investors and management can easily acquire companies with little capital, especially when the assets and returns of acquired company are more than the cost debt financing (Kaplan and Strömberg, 2008). Little capital requirement can lead to high financial returns, which is beneficial to stockholders. In addition, small amount of capital that is required assist in enhancing the value of a company. As a result, leverage buyout benefits investors and it helps in transforming a company to achieve high returns or to achieve the objectives. In addition, leverage buyout reduces the chances of acquiring a company by external investors. As a result, it allows people who already understand the company’s structure, culture, and climate to run it (Tetřevová, 2007). Therefore, new investors find it easy to transform the company because they use employees who already know the business environment in which a business operates. Also, it takes less time to restructure a company, as already employees may have knowledge steps that should be taken to enhance performance and return. Therefore, management buyout is beneficial because it prevents a business from being acquired by outsiders who make knowledge on environment in which a business operates. Although leverage buyout has benefits, it also has pitfalls that should be considered. One of the disadvantages of leverage buyout is its negative impact on employees. In many cases, leverage buyout involve downsizing, which leads to retrenchment and unemployment (Tetřevová, 2007). Sometimes the nature of buyout is not friendly, which may be against the wishes of acquired company’s management and staff. Consequently, hostile leverage affects the moral of employees, which can end up affecting their performance. For instance, hostile leverage was witnessed when Pepsi acquired Quaker Oats in 2001. Quaker Oats’ managers were not happy with the hostile acquisition and they claimed that it was unlawful and it went against the interest of the public. Even though the acquisition led to the creation of one of the largest consumer good company in the whole world, it took time to settle the conflict between Pepsi and Quaker Oats’ management. The conflict of interest between the management of acquiring company and the acquired company can derail the leverage buyout, which may lead to unsuccessful restructuring. Therefore leverage buyout should be done in a way that does not affect the morale of retained employees. In addition, the acquiring company or investors should consider the image and reputation, including public interest during and after restructuring. The acquiring company also runs the risk of getting bankrupt, especially when the acquired company’s returns are less than the debt of debt financing (Kaplan and Strömberg, 2008). In addition, the acquiring company may suffer from high interest rate, which is likely to occur when the cash-flow and assets of acquired company is no sufficient. Therefore, the acquiring company or investors face the risk of bankruptcy during leverage buyout. A good example of unsuccessful leverage buyout was the case of Federated Department Stores that had large number of stores. However, when it was acquired by Canadian financier, the company could not continue financing burdens of high interest rate, which led to its bankruptcy. Therefore, Canadian financier was forced to file the bankruptcy of the 258 stores. The success of leverage buyout can also be affected by economic uncertainties. Economic crisis may make it hard to acquire money to finance debts and interest rates. The leverage buyout can also be affected by economic factors like fluctuations of interest rates, foreign exchange and inflation that may increase the cost of repaying the debt. The economic uncertainties can also affects the financial stability of acquiring company. Therefore, successful leverage buyout requires strategic management. Acquiring company needs strategic management in its financial reorganization in order to achieve balanced operative results. It needs to come up with strategies of balancing debts and equity funds, which is essential in reducing finance charges, prevent loss of capital (Srivastava and Mushtaq, 2011). Effective financial reorganization is also important in ensuring that the acquiring company enhances its shares of market value. However, beneficial financial reorganization is only possible if the acquiring company clearly understands the environment in which it operates and the resources available. Strategic management is also required in leverage buyout to ensure that the company does not experience bankruptcy after acquisition (Tetřevová, 2007). The acquiring company should analyze the risk, economic uncertainties, and the trends in the market to reduce the chances of insolvency. In addition, it must ensure that it has no conflict with staff from the acquired company to reduce internal conflict that can affect its performance. Therefore, it is important for the acquiring company to conduct thorough business analysis to reduce the chances of bankruptcy. Restructuring is also important in address the challenge of stiff competition in the modern business environment, as it is able to give a company a competitive advantage. Leverage buyout helps in addressing the problem of poor performance that greatly affects the competitive edge of a company (Zock, 2012). It ensures that there is efficiency and effectiveness in the management and high productivity of staff. As a result, a business is able to produce quality goods or services that give it competitive advantage in the market. Besides, leverage buyout gives a company an opportunity to pursue and find new opportunities that it can use to have a competitive advantage over competitors (Tetřevová, 2007). Restructuring helps companies to react quickly and effectively to both opportunities and risks, which is important in re-establishing competitive advantage in the market. In addition, leverage buyout helps in improving efficiencies in areas like wages and salaries, marketing activities, and operation expenses affect the competitiveness of a business. Therefore, restructuring is important in improving the competitive advantage of any business. References List Eckbo, B.E. and Thorburn, K.S., 2008. Corporate restructuring: breakups and LBOs. Elsevier/North-Holland Handbook of Finance Series. Kaplan, S.N. and Strömberg, P., 2008. Leveraged buyouts and private equity (No. w14207). National Bureau of Economic Research. Srivastava, V. and Mushtaq, M.G., 2011. Corporate restructuring-a financial strategy. Asian Journal of Technology & Management Research [ISSN: 2249–0892], 1(01). Tetřevová, L., 2007. Concept of corporate reststructuring and reengineering. Scientific papers of the University of Pardubice. Series D, Faculty of Economics and Administration. 11 (2007). Tripathi, P., 2012. Leveraged buyout analysis. Journal of Law and Conflict Resolution, 4(6), pp.85-93. Zock, F., 2012. Performance Implications of Strategic Restructuring through Knowledge Acquisition: Longitudinal Analysis of German Biotechnology Firms (Doctoral dissertation, Universitätsbibliothek Mannheim). Read More