To what extent does restructuring transform corporate market and financial performance? Discuss using an extended example.
The intense competition among corporate firms in the last few decades has led firms to initiate intensive changes by restructuring their assets to improve competitive advantages and financial performances. (Surendran and Acar 1993; Gilson 2001).
Scholars have considered the rationality behind corporate restructurings. The initiative has been justified as the goals to maximising shareholder value through the expansion of market value and improvement of corporate financial performance. (Barsky, Hussein and Jablonsky 1999).
The motive to enhance corporate financial portfolios has made corporate structuring a common phrase in the vocabulary of business. Studies have indicated that in the 1980s and 1990s, more than two-thirds of the the Fortune 500 U.S. Corporations restructured their businesses at least once. (Surendran and Acar 1993).
In spite of the advantages considered to be derived from corporate restructuring, there are still controversies among academics and observers as to the extent to which restructuring can improve financial and market values of corporate organisations. While some believe that restructuring is a powerful tool to improve and control the asset management, others assert corporate restructuring damages management morale and decreases the level of productivity. (Jensen 1986).
This paper examines the extent to which restructuring transforms corporate markets and the financial performance of a corporate organisations. The paper demonstrates how restructuring benefits the company International Business Machines (IBM) by enhancing the company’s financial performance and market value. (Barsky, Hussein and Jablonsky 1999).
Definitions and theoretical framework of corporate structuring.
Researchers define restructuring as changes in organisational structures and a firm’s assets. It should be noted that the decision to restructure has implication on a firm’s efficiency and competitive market advantages. (Kulkarniand and Fiet 2007).
Lin, Lee, and Gibbs (2008) define restructuring as a corporate decision on the appropriate workforce, and possible rearrangement in production focus that bring about changes in the way business is conducted. In a practical application, restructuring is a means to provide effective company strategies, organisational functions, and operations. However, Surendran and Acar (1993) consider corporate restructuring synonymous with large-scale, and high-intensity changes of corporate assets.
It could be said that layoff of assets and divestitures are the most two important restructuring alternatives that firms consider when making changes in assets portfolio.
Neo-classical theory recognises the reduction of assets through the reduction of asset prices. However, many have centred criticisms of the neoclassical paradigm based on its inability to acknowledge a behavioural approach. (Kulkarniand and Fiet 2007).
In understanding the motives for restructuring, this paper employs the theory of transaction cost economy (TCE) that provides choices of lay-off of assets. (Williamson, 2000).
TCE provides rationality of sell of assets, impacted by assets of physical specificity and human assets. TCE discusses a firm’s need to restructure its assets in appropriate ways to enhance its transactional costs in order to stay competitive in the global market. Thus, during a time of financial distress, firms embark on a reduction of relatively unproductive assets such as sell offs or layoffs of capital assets and human assets respectively in order to improve financial performance. (Kulkarniand and Fiet 2007).
There is still belief among the business owners that restructuring cannot be considered automatic to revive a firm’s poor financial performance. The next section evaluates the extent restructuring transforms corporate markest and organisational financial performance.
Extent which restructuring transform corporate market and financial performance of organisations.
Studies reveal correlations between the motivation of a firm to restructure its corporate portfolio and enhancement of market performance.
In a competitive world where firms engage in fierce competition to secure a share of global markets, firms realise that the most efficient method to prevail and flourish in a competitive environment is to enhance their competitive advantage. It is argued that the most efficient way to create competitive advantage could be derived from low costs, which enables firms to reduce costs of production, and reduce market price to capture larger percentage of market shares. However, analysts have argued for the creation of a sustainable low cost position to reap large economies of scale where firms source for raw material at the lowest price; firms need to restructure its corporate engagement before achieving these aims. These strategies can build customer loyalty and differentiate a firm’s products from competitors’. (Surendran and Acar 1993).
Jensen (1986) argues that restructuring management changes the operations of capital market, and brings substantial changes to a firm’s financial performance. In any case, restructuring makes firms more productive, and this brings the advantage of being able to tap the opportunities derived from restructuring by reorganising capital structure.
But some scholars belief that restructuring is a tool to manage earning.
Lin, Lee and Gibbs (2008) assert that restructuring is necessary to bring out efficiency, to control costs, cope to with the business environment and to improve a firm’s performance. Although some structuring within organisation brings about success by putting firms in a more efficient competitive position in the global marketplace, some form of restructuring may bring disruption within an organisation, as well as uncertainty and business failure. Management should be able to analyse their position when restructuring their corporate business too.
On the other hand, Morton and Neil (1997) take different perspectives by examining the gains of corporate restructure. According to the authors, there is a general belief among management that there is a correlation between the reduction of market prices and financial gains brought about by restructuring. Evidence of these arguments are revealed from analysis of Dow Jones capital markets where between 1991 and 1994, an average of 80% of industrial firms effectd at least one restructuring that amounted to $41.1 billion. The management’s motives were to consolidate the costs by reorganising in such a way that would eliminate inefficiencies to bring down operational costs. But records have revealed that these firms still lagged behind three years after initiating restructuring to reduce costs. This shows that while restructuring might provide structural advantages to corporate organisations, firms need to be very cautious when initiating corporate restructuring to enhance competitive advantage. (Morton and Neil 1997).
However, for corporate organisation to transform their market potential and improve their company’s financial capability, management must choose strategies to ensure an easy facilitation and implementation so that firms would benefit from restructuring as described in the next section with the IBM restructuring experience. (Surendran and Acar 1993).
Extent of restructuring in transforming corporate market and financial performance: Case of IBM.
International Business Machine (IBM) is one of the biggest and most well-known international computer and service technology companies. Apart from The United States, IBM is established in more than 90 countries. However, in 1992 IBM suffered losses of $5 billion, $8 billion in 1993 and lost equity valued at $25 billion in 1991. The problem led IBM to undergo a transformation with dynamic capabilities that led the company to make changes to seize marketplaces. IBM reconfigured its existing assets with competencies in order to explore new markets and technologies on mainframes, computers, software and hardware products, as well as communications products. (National Research Council 1995; Lin, Lee, and Gibbs 2008; Harreld, O’Reilly, and Tushman 2007).
The problems of IBM occured because of the wastage of a large amount of resources. This is what Chew and Jensen (2006, 6) termed “free cash low”. The results led to the failure of the internal control system that led to thousands of IBM employees being made redundant and these problems led to the management decisions to embark on massive restructuring in the a 1980s and 1990s.
As was discussed in the earlier section in TCE where Williamson (2000) indicates that there is need for the reorganisation of company’s assets, which is a rational decision for firm’s efficiency and competitiveness. (Kulkarniand and Fiet 2007).
Redundancy of IBM human assets was leading to wastage and negative financial performance. In the 1980s, IBM embarked on restructuring to provide gains for the shareholders. (Chew and Jensen 2006).
Thus, IBM realised that it had allocated too much managerial and financial resources on non-core value creating business. Thus, IBM decided to embark on internal restructuring, which involves eliminating the causes of financial loss in order to improve organisational inefficiency. The first internal restructuring that IBM initiated was employee retrenchment. This step taken by the IBM was to bring about internal efficiency by making massive reduction of blue-collar jobs such as clerical officers that led to overstaffing in the IBM organisation. (Surendran and Acar 1993).
For example, in 1985, IBM laid off approximately 405, 000 employees worldwide. When this did not pay off because IBM later suffered $5 billions loss in 1991, IBM again took
a series of restructuring initiatives such as laying off 219, 207 employees to streamline the redundant human resources. (Lin, Lee, and Gibbs 2008).
Apart from human assets, IBM sold some physical assets that were thought to be redundant. For example, it sold its hard drive division and PC division to Hitachi and Lenovo respectively. It should be noted that with more than 100 years in the computer business, IBM used restructuring as an important strategy to move out from financial crisis. (Lin, Lee, and Gibbs 2008; National Research Council 1995).
The massive layoff of workers and sell off the redundant assets made IBM revive and get back some of its financial loss. With massive lay off workers, IBM suffered some financial losses in the early year of 1991 and 1993; however, from 1994 IBM started to regain its financial loss. (See appendix 1 and appendix 3). Between 1994 and 1999, IBM revenue had increased by 60%. (See appendix 3). Moreover, a decade after IBM embarked on restructuring, the company continues to experience a steady increase in the financial growth. For example, between 1991 and 2006 IBM had more than 110% increase in the financial earning, which is seen in IBM net earning. (See Appendix 2).
Additionally, IBM market performance has also increased since the company has embarked on restructuring. Although, there has been decrease in the number of stockholders since 1990, nevertheless, IBM market value has increased considerably.
By 2008, IBM sales had reached US$98.79 billions, while profits had increased to US$10.42billions and assets had also reached US $120.43 billions, and the company market value had reached US$ 157.62 billions.
In 2008, IBM ranked 37 out of 2000 biggest company in the world from the Forbes lists. (Forbes 2008).
This paper presents the extent to which corporate restructuring can transform the market and financial performances of corporate organisations. Corporate restructuring is clearly an important tool that can improve the corporate market and financial performance. Nevertheless, care must be taken when embarking on restructuring in order not to embark on the road to financial loss. This paper reveals that with carefully planning and identification of factors that can lead to underperformance of an organisation, restructuring is an important tools to move an organisation forward. This has been demonstrated in the case of IBM, a company which laid off some of its assets in 1980s and 1990s to become 37th biggest company in the world.
This paper provides guidance for managers and entrepreneurs on the methods of embarking on restructuring for poorly performing organisations. (Lin, Lee, and Gibbs 2008).
BARSKY, N, P, HUSSEIN, M, E, and JABLONSKY,S, F, (1999), Shareholder and stakeholder value in corporate downsizing The case of United Technologies Corporation, Accounting Auditing & Accountability Journal, 12: 5, 583-604.
FORBES (2008), Special Report The Global 2000, Forbes Magazine, USA.
HARRELD, J, B, O’REILLY, C, A, , and TUSHAM, M, L, (2007), Dynamic Capabilities at IBM: Driving Strategy into Action, Harvard Business Publishing, USA.
JENSEN, M,C, (1986), The Takeover Controversy: Analysis and Evidence, Midland Corporate Finance Journal, 4: 2.
CHEW, D, JENSEN, M, C (2006), US Corporate Governance: Lessons from the 1980’s, Social Science Electronic Publishing, USA.
GILSON, S, C, (2001), CREATING VALUE THROUGH CORPORATE RESTRUCTURING: CASE STUDIES IN BANKRUPTCIES, BUYOUTS, AND BREAKUPS, John-Wiley & Sons USA.
International Business Machine (2008), IBM Archives >Exhibits>History of IBM Accessed 23 March 2008, From http://www-03.ibm.com/ibm/history/history/decade_1980.html
KULKARNIAND, S, P, and Fiet, J, O, (2007), A transaction cost analysis of restructuring alternatives, Advances in Competitiveness Research, USA.
LIN, B, LEE, Z and GIBBS, L, G, (2008), Operational restructuring: reviving an ailing business, Management Decision, 46: 4, 539-552.
MORTON, R, M, and NEIL, J, D, (1997), The Relation Between Market Prices and Fundamental Value Surrounding a Corporate Restructuring, Social Science Electronic Publishing, Working Paper Series., USA.
NATIONAL RESEARCH COUNCIL (1995), Research Restructuring and Assessment:
Can We Apply the Corporate Experience to Government Agencies? National Academic Press, USA.
SURENDRAN, S, and ACAR, W (1993),RESTRUCTURING CONGLOMERATES FOR GLOBAL COMPETITION: AN AGENCY-THEORETIC PERSPECTIVE, International Journal of Commerce and Management, 3:1/2, 86-76.
WILLIAMSON, O, E, ( 2000), Why Law, Economics, and Organization? University of California, Berkeley, USA.
Appendix 1: IBM financial performances between 1990 and 1999.
+ 10 %
+ 63 %
– 6.1 %
|$ – 2.82 Billions|
– 146 %
– 0.3 %
|$ – 4.96 B|
+ 73.5 %
– 2.8 %
|$ – 8.10 B|
– 63 %
+ 2 %
+ 143 %
+ 12 %
+ 38 %
+ 6 %
+ 63 %
+ 3 %
+ 12 %
+ 4 %
+ 4 %
|1999||646,702||$83.33 B||$7.7 B|
+ 7 %
Appendix 2: IBM financial performances between 2000 and 2008.
+ 2 %
+ 5 %
– 2 %
– 4.9 %
– 2 %
– 53 %
|2003||671,610|| $89.1 B|
+ 10 %
+ 112 %
+ 8 %
+ 11 %
– 5 %
+ 6 %
+ 4 %
+ 18 %
Appendix 3 : IBM Net earnings between 1990 and 1999 (US$Billions)
1990 1994 1995 1996 1997 1998 1999
Appendix 4 : IBM Net earnings between 1990 and 1999 (US$Billions)
2000 2001 2002 2003 2004 2005 2006