To What Extent does Restructuring Transform Corporate Market and Financial Performance - Assignment Example

To What Extent does Restructuring Transform Corporate Market and Financial Performance? In business, reorganizing and rearranging a company in order to make it more gainful is called ‘restructuring of the company’. Restructuring is a term used in corporate management. It generally involves rearranging or reducing the operations of the company, selling out shares of the company to investors, selling out some portions of the company to investors and financing debts. Restructuring is often done when a firm takeover any other firm or as an element of bankruptcy. It works on the basis of a theory known as the “zero sum game theory”. It reduces financial losses; at the same time it reduces the stress between equity and debt holders which assist them to come up with quick solutions in troubled situations. Restructuring transformed corporate market and financial performance to some extent, but the question arises that to what extent does it transform? In order to find the answer of this question let us consider the example of a Worldwide Australian entertainment company “THE NEWS CORPORATION”. According to Gordon Donaldson, “We have become so familiar with the phrase financial restructuring in the past decade that we often fail to ask why financial structure became such a battleground for contending agents of change.” (Donaldson 1994, pg 6) The News Corporation was originated in 1923 as a local newspaper. The founder and chief executive officer of News Corporation is Rupert Murdoch. It purchased the UK-based News of the World Organization in 1968. In 1973 it also purchased the San Antonio Express publishing Company of the United States. From 1970 to 1980 the growth and development of TNC expanded with great boost and its interest expanded into book publishing, film making, record production, television broadcasting, transport and farming. And due to this their debt increased. However, in 1984 TNC aimed to transform into vertically integrated global media group because of the US based major geographical and product shift. It transformed in all parts of the media industry from magazine and newspaper to film and Television. It also acquired “Twentieth Century Fox” a film company in 1984. These acquisitions created opportunities for TNC to enlarge and expand its businesses to a multinational company by providing the company with access to a distribution platform, film library, and to studios for making television programmes and films. After some time when some acquisitions were made by it, TNC became restructured into three principal operating groups: • Fox Television Stations (1986) • Fox Broadcasting Company (1986) • Twentieth Century Fox Film (1986) In 1990’s the economic condition of the whole world dramatically slowed down and worldwide banks experienced liquidity crisis. The “Ansett Airlines” and “Twentieth Century Fox” of the News Corporation experienced bad performance. TNC also faced a financial gap because of the investment of new printing equipment for the UK. Its borrowings rose while the market value of TNC decreased. In order to resolve these hurdles, TNC arrived on a point of restructuring to repay their all loans, to strengthen the company’s balance sheet and to advance and expand their existing businesses. After paying all the debt due in 1992, raising cash through asset sales and announcing plans for flotation business directions became the most important issue for TNC. Soon after the restructuring of TNC, it has continuously expanded its business throughout the world with great success. TNC acquired “STAR TV” just after its restructuring, which was a Hong Kong-based satellite TV Company in Asia, which broadcasts free-to-air in around 53 countries. These markets of TNC were covering almost two third of the world’s population which were seen as the major strength of TNC in long run. According to Stuart C. Gilson, “In a bankruptcy restructuring, for example, one obvious objective is to reduce the firm’s overall debt load, however, cancellation of debt creates equivalent taxable income for the firm.” (Gilson 2001, pg 9) In 1995 TNC covered Latin America by joining with three more groups of television, distribution and programming to create a satellite service. This helped the company to get much improved in long run and beneficial for the parties and customers involved. TNC restructured its US media interests into a new unit that is Fox entertainment Group Inc. in 1998. This group created a great opportunity for investors to invest in the US entertainment industry and for that they do not have to go through the complexities of TNC. After a couple of years in June, 2000 TNC owned 83 percent of Fox Entertainment Group which was in service to five main segments. These five main segments are filmed entertainment, television broadcast network, television stations, other television businesses and cable network programming. The turnover at FEG reached to US $8 billion and operating profit reached over US $650 million from the time of restructuring to the year 2000. TNC again restructured all its satellite interests into a new unit named “Sky Global” in 2000. TNC restructuring enabled the management team to build on the successes of “BSkyB” and transfer those to Sky Global satellite platforms. In 2000 “Sky Global” of TNC merged with Direct TV. The four channels namely Sky movies, Sky sports, Sky news and Sky channel was initially broadcast by the company. After some time the new four-channel Sky service was launched by the company which was transmitted through a new satellite system known as “Astra”. According to Stuart C. Gilson, “corporate restructuring is no longer a rare or episodic event that happens to someone else. It has become a common and significant event in the professional lives of many managers.” (Gilson 2001, pg 3) The analogue transmissions were stopped by “BSkyB” in 2001. It offered a free digital package to its existing and new subscribers in order to satisfy them. Given the fact that the investment will be much costly, they suspended the payments of dividends in 1999. If we talk about the parenting of TNC, it was the creation of one man “Rupert Murdoch”. He has been the chief executive officer since 1953. Mostly major decisions are made by him. The total parenting of The News Corporation is done by Rupert Murdoch itself. He is the main strategic leader of TNC. An Australian financial analyst said about him that he is an expansion minded person, he always wanted to buy assets, he always wanted to take over other firms, to move around the world. But he always retained control. TNC has done a lot of acquisitions. These acquisitions enabled TNC to establish rapid growth in the market. Restructuring and diversification are the most significant change of the company, which enabled the company to expand from Newspapers and Magazines to Television stations and movie companies. TNC is the fifth company in market capitalization in a row out of seven companies. The share price of TNC in comparison with its competitors is very low and it faces the biggest change per year with more or less 75 percent. TNC nowadays enjoys the most respectable and significant status in Global media world, which owns magazines, newspapers, Television Stations and movie companies like STAR TV, Fox television stations, Twentieth Century Fox Film etc. According to Gregory G. Dess, G. T. Lumpkin, Marilyn L. Taylor, “We define Strategic Management as consisting of the analysis, decisions and actions an organization undertakes in order to create and sustain competitive advantages.” (Taylor, 2003 pg 7) In order to make some acquisitions, TNC mainly rely on banks to have loans. Therefore the power of the bank is quite high. Whenever TNC wants to have loans, it negotiates with banks in order to get the required quantity of capital. Looking towards the financial performance of The News Corporation, it purchased a lot of publishing companies till 1980s. One of the major reasons of TNC’s expansion and development was it takes over the weak companies which had difficulties to continue and survive in the market. To face any problem and difficulty TNC restructured and changed itself into more successful one. TNC not only acquired the publishing companies during eighties, but it also acquired broadcasting companies and film companies. These large numbers of acquisitions of TNC increased its debts level. To decrease the debts level, TNC negotiated with the banks. In order to overcome this problem, TNC developed a restructuring plan which helped TNC to stabilize and improve its financial status at the beginning of the 1990s. In 1992, the Chief Executive Officer of TNC, Rupert Murdoch arrived at the point to refinance all the borrowings which decreased the short term debts from 80 percent to less than 10 percent. The most important source of profits, the printed media’s profit was till halfway the 1990s. From that point up till now The News Corporation’s largest profit providers are the movie and especially the television division of TNC. According to Wayne F. Cascio, “Many firms are restructuring by downsizing their workforces. Those most likely to take that approach see employees as costs to be cut rather than assets to be developed.” (Cascio, 2002, pg 1) Equity and loans can finance the variety of acquisitions. But which option is most profitable if we compare the current situation with TNC’s history? The history of TNC shows that the short term loans and the percentage of interest had been very high. TNC used both the loans and equity to finance its activities for expansion in the past but for the long term the financing must be done in a profitable way to reassure the financial basis of TNC in order to establish growth and expansion. The News Corporation is a very large corporation. It is a corporation which has very high revenue and costs. But it is a profitable company with shareholders. In order to receive dividend these shareholders invested capital in TNC. Therefore TNC follows a funding strategy to fulfil the expectations of the stakeholders. Managing for value is very essential for an organization. According to Johnson and Scholes, “we can differentiate between three main issues, which are funds from operations, investment in (or disposal of) assets and financing costs.” Funds from operations are major contributors to value creation.” (Johnson, 2007 pg 502-503) From 1985 to 2000 the TNC’s sales revenue turnover has increased from $2,447 million to $22,443 million. This increment is more than about 800 percent. And TNC’s total profits have increased from $147 million to $1,921 million from 1985. This increment is more than about 1200 percent. These total profits of TNC are attributable to shareholders. The News Corporation has changed all the time by using different new technologies and ideas. TNC had always concentrated on the production and distribution of films, satellite and cable broadcasting, programming and publishing and television. The News Corporation developed throughout the years and in its development we can see key stages of strategic development. These key stages are considered as the turning points for the development of TNC in a competitive market nowadays. TNC is an innovative company. And its innovations can be seen in its business in which new products and new services are always brought into the market. After Time Warner and Disney, The News Corporation is the third largest media business in the world because of its Global reach. TNC faced many difficulties in its career but it still managed its status in the market because of restructuring. Restructuring enabled TNC to develop its business and expand it through out the world, it also supported the financial status of TNC. And now TNC is a worldwide Australian entertainment company and its operating income is about US $5.381 billion according to June 30, 2008. The above stated example of The News Corporation makes it clear that restructuring transform corporate market and financial performance to a very high extent. When The News Corporation was facing difficulties and hurdles in its business during the recession of the worldwide economy the company chooses to go with restructuring to fill its financial gap. And soon after it’s restructuring the company started moving towards success and expanded worldwide. The degree of transformation of corporate market and financial performance through restructuring is crystal clear in the above example. References Donaldson, Gordon., Corporate Restructuring: Managing the Change Process from Within. Boston, MA: Harvard Business School Press. 1994 Gilson, Stuart. C. Creating Value through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups. John Wiley & Sons, 2001 Taylor, Marilyn; Gregory G. Dess; G. T. Lumpkin., Strategic Management: Text and Cases. Irwin Professional Pub, 2003 Cascio, Wayne F., Responsible restructuring: Creative and profitable alternatives to layoffs. San Francisco: Berrett-Koehler Publishers, Inc. 2002 Johnson, Gerry; Kevan Scholes., Exploring corporate strategy. Pearson Education Limited. 2007 Read More