Cooperative Bank A Case of Corporate Restructuring - Essay Example

Cooperative Bank – A Case of Corporate Restructuring Inserts His/Her Inserts Inserts Name Date: Introduction Troubles that may threaten the very existence of an organization can affect all types of organizations, irrespective of size, brand name or type of industry. Some companies that experience extreme difficulties usually seek to apply for insolvency. A larger percentage of companies in the world at the moment are facing strategic issues, liquidity issues and outcome issues (Blatz, Kraus & Haghani, 2006). Before an organization applies for insolvency, it usually passes through the three crisis stages. The first is the strategy crisis in which the company is unable to meet its strategic goals or attain long-term success potential (Johnson, 2001). The second stage is the decline of the company’s market share in its respective index. Finally, if the company fails to implement the required corrective actions, its profitability goals will not be met and the company sinks into an earning crisis (Harrison & John, 1999). In an impending disaster is identified in a timely manner, corrective actions can be undertaken to ensure the company stays afloat (Donaldson, 1994). Corporate restructuring is the process of reorganizing the ownership, operational and legal structures of a given company so that it is more strategically organized to meet its objectives and ensuring better profitability (Gilson, 2001). Corporate restricting can also take place due to a change in the ownership structure, demerger or a reaction to company troubles or major business changes such as a buyout (Pamphilis, 2001). The main purpose of restructuring management is to ensure that a given company under crisis survives in the short term and to reclaim the company’s competitiveness. Corporate restructuring, mainly relies on the zero-sum game. The process of restructuring decreases financial losses and in the process lowering tensions between debt and equity holders in order to jump start a fast resolution of a troubled situation (Mcafee, 2002). Through restructuring, a company is able to reassess its operations and seek the best changes that can bring about a desired change. Restructuring may arise due to changes in ownership or due to extreme financial difficulties that may lead to a given company being bankrupt. Various countries have different bankruptcy laws and refinancing schemes. The success of any given plan should always consider these laws as well as any accounting information about a given industry or market. Cooperative Bank (UK) The global financial crisis experienced during the 2011/2012 period resulted in a weak corporate sector in the United Kingdom as well as many other countries. The weak corporate sector was due to weaker consumer demand as well as a tightening of credit. Since the first economic crisis of 2008/2009, the cooperative bank has had difficulties in maintaining profitability (Cooperative Bank). Over the years, the bank has been slowly having an increasing in losses and has been sinking in debt. In 2012, a restructuring initiative was announced by the bank and several steps have been taken so as to ensure the bank reclaims peak performance and profitability. History The Cooperative Bank (UK) is a public limited company and is both a commercial and retail bank and whose headquarters is in Manchester, U.K. The bank was created in 1872, but was not a registered company until 1971. The company began as a branch of the Cooperative Wholesale Society but in 1876, it was later reformed and became the CWS bank (Wilkinson & Balmer, 1996). In 1974, the bank was the first bank to offer free banking to consumers who stayed in credit (Graham 2013). The parent company of the bank, the Cooperative Group Limited, combined the bank and the Cooperative Insurance Society into one holding society that was called the Cooperative Financial Services. In 2009, the United Kingdom’s government acquired 43.4% of Lloyds Banking Group, which allowed the Cooperative Bank to enter into talks with the banking Group to buy over 600 of its branches (Goff, 2013). The deal however fell through due to poor economic conditions witnessed in 2012 as well as the beginning of troubles in the bank. In 2012, the bank witnessed massive losses at the end of the financial year. During that year, the bank announced a £1.5 billion capital shortfall (Wilson, 2012). Financial problems for the bank increased, leading to the bank being taken over by the Bank of England under the Banking Act 2009. After this, several restructuring initiatives were put in place to ensure a smooth transition and a return to profitability. Reorganization The board of directors for the company announced that it intended to fast-tract the restructuring process and to emerge from bankruptcy by mid-2014. While carrying outs its operation under the protection of the court, the company planned to undertake several financial and operating restructuring initiatives that include: eradication of unprofitable stores, improvement of operations in the stores, inventory management, and a complete restructuring of its balance sheet via a debt to equity conversion (Park, 2003). The Initiatives implemented also include: a. Debtor-in-possession b. Senior management changes c. Branch closings d. Renewed relationships The restructuring plan instituted to help the bank improve its market, productivity and financial performance. Through analysing the various restructuring initiatives implemented, we can see how Cooperative Bank was able to improve its key performance sectors. Market Performance Cooperative Bank was in trouble before restructuring was implemented. Due to the financial crisis, the company experienced large losses and was unable to compete with other bank and financial companies (Young, 2013). In order to become profitable, the company had to improve its market position. The first important initiative undertaken to improve the company’s market performance is closing of non-performing branches that the company held (Neate & Treanor, 2013). During its expansion efforts, the company had acquired many branches and which were mostly a drain on the company’s resources. Due to poor market conditions, most of these stores were a drain on the company’s resource as they did not bring the profit expected. The company sets out to close several stores located in several states in the country. The management team of the company had to select stores, according to the historical and expected operating results, the surrounding industrial environment, and capital expenditure requirements (Hotchkiss & Mooradin, 1997). The next important initiative that helped the company’s market performance is increasing its marketing and advertising efforts. In its restructuring plan, the company sought to penetrate multicultural markets as well entice local with a consumer-based advertising campaign (Treanor & Farrell, 2013). This helped increase consumer confidence that the company is still able to provide service as well as reduce fear among businesses and individual consumers as a result of the 2011/2012 financial crisis. According to Vance (2009), many companies choose to slash marketing budgets when facing a crisis. He remarks that is a bad idea as advertising offers several advantages, including: educating people about products being manufactured, educate consumers about changes in the company and location of its various stores as well as give people an idea of what products are offered and their cost. Advertising costs can only be justified if one tracks the outcomes. Thus advertisement designed with measurements being considered are the most effective (Charles, Roberts & Pomerleano, 2000). When we look at the Cooperative Bank, we see that the management developed a marketing strategy thats not only reached different consumers with different cultures; it also kept track of changes and took into account what the consumers thought about the chain. Productive Performance During the period prior to bankruptcy, the company had several performance problems that included a rapidly deteriorating portfolio of real estate loans and imprudent mortgages. The company was also involved wrong insurance payments and huge write-offs for the integration of IT systems in 2011. First, the company instituted several changes to its senior management. During the 2011/2012 period, most of the company’s senior management staff was replaced. The board of directors elected Richard Pym as the chairman of the bank and Niall Booker as the Chief Executive Officer (Cooperative bank, 2013). The two head executives were charged with solving the various problems affecting the back and to facilitate a smooth restructuring process. According to Marshak (2005), in determining management change, one must consider the four major factors: a. Strategies, levels and goals b. Systems of measurement c. Sequence of steps to consider when implementing the change d. Implementation and impact on the organizational structure. e. The company chose individuals who were able to bring about the required changes i.e. profitability and market success. Apart from this, it is important to bring in people who are innovative, have new ideas and techniques of carrying out task and have a proven record of success (Norley, Swanson, & Marshall, 2010). The Bank chose a group of people who are well educated, have ample experience in instituting change and who could bring the company to the direction required The bank also divided its activities into two different areas: core and non-core. Through this, the company developed two business areas: The core bank and the Cooperative Asset Management. The core banking section is intended to continue serving small business consumers and retail banking. On the other hand the Cooperative Asset Management branch will deal with activities and assets that are not consistent with the recovery strategy developed. By separating core performance activities and non-core, a company can concentrate on those aspects of the business that can bring in profits at a faster rate thus dictating how resources can be used optimally (Levine & Demirgüç-Kunt, 2001). This helped keep the company operational when other measures were put in place for long-term sustainability. Financial Performance The bank was in dire financial problems before the restructuring process with a capital deficit of £1.5bn. In order to solve this problem, the company engaged in a massive streamlining of its operations and improving its balance sheet through debt-to-equity conversion. The company also worked with several creditors to develop a system that best suits the restructured company. When the company went under restructuring, it was working very many creditors and financing companies throughout the country. During restructuring, the company’s short term goals were to convince its financiers to continue supplying services for its business activities (Gaughan, 2002). The bank renegotiated several critical contracts that would push the company in the right direction. By having a steady supply of services and funding during a crisis, a company can be able to operate at a given level that would instil confidence in consumers about the survival capability of the company. During restructuring, those contracts that are crucial should always be renewed while those that are not cost effective should also be released unless circumstances prevent it (Lehavy, 2002). This will ensure that the company reduces cost in its operations. The company also sought to improve its debt-to-equity ratio. The debt to equity ratio is that amount of debt and shareholder equity used to finance the company’s assets (Peterson, 1999). The company developed the Exchange Offer geared for investors of the banks. The offer is meant to ensure that investors and the Cooperative Group make a joint commitment to the recapitalization of the bank and its eventual transformation. The company also instituted the ball-in a scheme where junior bondholders were given the opportunity to convert all or some of their assets from debt items into ownership shares (debt-to-equity conversion) (Stanton, 2014). This helped the bank to raise some of the capital it had failed to achieve in the previous financial years. This initiative is also advantageous as it develops a sense of belonging and ensures that the bank has a quick source of finances to fund its restructuring scheme (Pomerleano, & Shaw, 2007. Conclusion Corporate restructuring is the process of reorganizing the ownership, operational and legal structures of a given company so that it is more strategically organized to meets its objectives and ensuring better profitability. Initiatives for corporate restructuring have profound impacts on the financial, operative and market performance of the company. By reducing costs and other expenses and by increasing income and employee performance, a company on the brink of failure can be able to rise up and become profitable (Bartol & Martin, 1998). A good restructuring process is that that considers all aspects of the business operations and takes into account both the current and the future industrial environment into account. References Bartol, K., & Martin, D., 1998. Management. 3rd ed. Boston: McGraw-Hill Blatz, M., Kraus, K., & Haghani, S., 2006. Corporate restructuring: Finance in Times of Crisis. Berlin: Springer-Verlag Charles, A., Roberts. L., & Pomerleano, M., 2000. Managing Financial and Corporate Distress: Lessons from Asia. Washington, D.C.: Brookings Institution Cooperative Bank. Financial Statements 2012. The Cooperative Bank. 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