Corporate Restructuring and Product Market

Introduction

Incorporate management, restructuring is perceived to mean the reviewing of the structures of a company with the object to reorganize them for the purpose of making the company more profitable. It may entail placing the company in a better position in order to meet its present needs. It may basically take the form of reorganizing the operational, ownership, or legal structure of the company. The restructuring may be necessitated by various reasons: The major ones being changing the ownership or ownership structure of the business (Brown, 2002, P.45). Others may include merger and acquisition, demerger or reaction to crisis like bankruptcy, or changes in the business like repositioning or buy out. The market where the firm is operating may also necessitate restructuring. For example, if the firm is in a mature or cyclical market. A mature market is a market in which product growth has reached its full capacity and has no room for growth. A cyclical market on the other hand is a market where the demand for products is fluctuating.

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Corporate restructuring has advanced to not only include the transfer of corporate assets but besides, it can take the form of rightsizing. Rightsizing can take the form of outsourcing and closures of financial engineering through share buybacks (Sudarsanam, 1995, p.36). The objective of this paper is to explore the extent to which a mature and cyclical product market drives corporate restructuring. The discussion will also be directed towards exploring the role of restructuring in the transformation of markets and financial performance. We shall also study restructuring under Glaxo Wellcome and SmithKline Beecham now GSK.

Mature product markets and how they drive corporate restructuring.

According to Scherer and Ross (1990), a mature market is a market in which product growth has reached its full capacity. There is no more room for growth. These are products that have been in the market for a long time and people are no longer willing to buy them. The product is at its peak. A company operating in a mature market will also lack prospects to grow. It is most likely going to decline in performance because its products are no longer selling or growing (Meeks, 1977, P.23). The company has therefore to look for means of surviving in a mature market. The product needs to be revamped to add more value to the people so that they can buy it. This is what is termed restructuring and it provides opportunities for growth. A mature market drives corporate restructuring in the following ways:

In a mature market, products need to be rebranded in order to increase their value and the taste to the customers. This is called product restructuring and it is aimed at revamping the taste of the product to make it attractive in the market (Brown, 2002, P.43).

The other opportunity for growth is via restructuring the value chain. A company can restructure its products’ value chain by increasing the product value via a value-adding strategy. Here the value of the product is increased by adding functionality and more features to the product (Scherer & Ross, 1990, p.23).

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A firm can also apply forward and backward and backward integration as a form of restructuring (Harrison &Bluestone 1990, p.38). This is basically applicable where the firm has subsidiaries that produce inputs to be used in making the firm’s products. For instance, the automobile companies which own tire companies, glass companies. Etc. proper control of these subsidiaries will ensure that the firm gets high-quality inputs to produce quality products. Forward integration involves a firm controlling its distribution and retail centers where its products are sold to ensure efficiency and low cost of handling goods.

The most popular opportunity for growth in a mature market is through acquisition. This could be a suitable strategy for the US coatings market. Its maturity and overcapacity stand in good stead for this strategy. This strategy can be very risky but with well-manned integration and collect valuation, it can be a very attractive means of growth in a mature market. All these factors are the ones that drive corporate restructuring.

A cyclical market and how they drive corporate restructuring

A cyclical market on the other hand experiences fluctuating demand for the product due to factors without the product. In this case, there are no prospects because the movement of the product is not consistent. During the low seasons, companies are likely to perform poorly due to low sales. This calls for restructuring the firm and its products.

Cyclical markets have seasonal goods and services that are popular at a certain time of the year. For instance, the demand for toys is high during gift-giving holidays and that of ice cream is high during the summer months and low during winter months. Companies in cyclical markets face the challenge of staying in business consistently despite the fluctuating demand for products. These markets also call for corporate restructuring to enable the businesses to improve their profitability.

The stock market is a good example of a cyclical market. The price of stocks fluctuates inconsistently and causes many companies operating in these companies to collapse. There is a need for restructuring the companies in this market in order for them to survive the low seasons. For instance, many companies in the stock market collapsed during the global economic crisis because of the poor performance of stocks. To mitigate such mass collapse culminating from unpredictable economic downturns, companies need to rethink their strategies (Scherer & Ross, 1990, p.56). A company is at stake if it specializes in cyclical products because it can collapse any time bad situations occur. Their corporate management needs to exercise caution.

Another form of restructuring necessary in a cyclical market is diversification of portfolio especially for companies in the stock markets. They should not specialize in a single product offered in these markets. They should diversify their investments portfolio. Investing in a wide range of products will enable the firm to consistently remain in business because when one product is not performing, the other is performing.

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The other restructuring strategy would be merger and acquisition. A company can merge with another for purposes of portfolio diversification or broadening the capital base. This is meant to enable the company to venture into different markets. There is very high potential for growth during both the down market and upmarket. The responsibility of firms is to restructure their market strategies to manage the risk involved in both situations. Analysts have argued that it is possible for companies to build great financial strength during the down market and maintain it until the condition rebounds (Brown, 2002, P.46). The firm may restructure its prime objectives and focus on profit maximization during the market downturn.

Restructuring in GSK and the value realized

GSK is a pharmaceutical company based in the UK. It has applied and succeeded in restructuring. For instance, the company strengthened its product portfolio to diversify the products it deals in. According to the company report of 2008, the company had a strategy of launching new products.

The company in its strategic priorities is undertaking to invest in growing markets like emerging markets. This is done to ensure that the company capitalizes on the growing areas in order to reap the benefits of growth. The identified areas are the consumer health care business, the vaccines, and some areas like Japan.

The other form of restructuring strategy undertaken by the company is improving the value of the product. The commitment is to deliver more products of value. This has worked in this company and in 2009, the sales value increased by 3%. The company has also simplified its operating model in order to reduce costs and improve efficiency. This restructuring program enabled the company to record Return on Capital (ROI) of 1billion pounds in the year 2009.

The sales data for 1998, 1999, and 1999 also indicated an increment in the sale of pharmaceuticals. The table below indicates how the sales improved. This was due to the introduction of new products and improvement in quality.

Sales by therapeutic area (#)            2000               1999                  1998

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Central nervous system disorders             3,279              2,720                 2,400

Respiratory                                                     2,789              2,382                2,096

Anti-bacterial                                                 2,472               2,383                2,278

Anti-viral                                                         1,899               1,610                 1,347

Metabolic and gastro-intestinal                  1,232                886                   908

Vaccines                                                             842                  776                   726

Oncology and emesis                                       710                  613                   549

GSK introduced these new pharmaceuticals in 2007. In 2009, these pharmaceuticals were estimate to have yielded 1.3 billion pounds. This is another benefit of restructuring through introduction of new product. By 2000, the total sales for pharmaceuticals went up by 10%. The new products introduced Avandia and seretide yielded nearly 1 billion pounds contributing 60% of the total growth.

The merger between Glaxo Wellcome and Smithkline to form GlaxoSmithKline (GSK) yielded the following shareholders’ returns between 1999 and 2000.

Shareholder return                                                                                                 2000                  1999

Dividends per GlaxoSmithKline share:

  • Former Glaxo Wellcome shareholder                                                                 38.0p                  37.0p
  • SmithKline Beecham shareholder                                                                       29.7p                  26.7p

Share price (London Stock Exchange):

  • GlaxoSmithKline share at 31st December 2000                                                £18.90                    –
  • Glaxo Wellcome share at 26th December 2000/31st December 1999         £18.42                 £17.50
  • SmithKline Beecham share at 26th December 2000/31st December 1999  £8.33                   £7.90

The table shows an increment in share performance after the merger. The Glaxo Wellcome share price increased from 17.50 pounds in 1999 to 18.42 pounds in 2000. SmithKline improved from 7.90 pounds to 8.33 pounds within the same period. The overall share performance for GlaxoSmithKline after the merger was 18.90 pounds. This was an improvement considering the performance of individual companies before the merger.

The role of restructuring on the transformation of markets and financial performance

Restructuring as defined earlier involves reorganizing company structures to make the company more profitable. This contributes greatly to the transformation of markets and financial performance. For instance, restructuring enhances management and generation of cash in the events of crisis (Harrison & Bluestone, 1990, p.12). This is because it enables the companies to be well-positioned to overcome the challenges of the crisis. The company manages its finances well because it is well prepared long before the crisis occurs.

Restructuring improves efficiency within the organization. For instance, a company outsourcing some operations to a third party like payroll improves efficiency. This is because the payrolls will be prepared by the expertise that specializes in that. This relieves the company of some work and it, therefore, improves efficiency in execution of other duties by the company (Scherer & Ross, 1990, p.23). The risks of errors and fraud will also be mitigated. This is because the third party has no interest in the payroll but only the amount he is paid for the service. Errors are mitigated because the payroll is prepared by the expertise that specializes in that area. The financial performance of the company has therefore improved no loss of money through frauds and errors.

The renegotiation of labor contracts aimed at reducing labor overheads also improves the financial performance of the company. The net profit of the firm is increased with a decrease in labor overheads (Sudarsanam, 1995, p.29). With increased profit, the firm is able to expand its operations and generate more profits.

The performance of markets is improved by the restructuring of marketing, sales, and distribution. Restructuring of the market may mean the company has diversified the products it deals with or has intensified its marketing strategies. Restructuring of sales also enables the company to make huge sales. For instance, GSK’s strategy of increasing sales is through providing more products of value. This is ensuring that products of good quality and value are produced. Also, the company ventured into emerging markets and increased overall sales. According to a 2009 report, the sales from emerging markets pharmaceuticals increased by 3%. The distribution channel can be shortened through the elimination of middlemen. This makes the company increase its sales volume because, without the middlemen, the price of the commodities is lowered (Scherer & Ross 1990, p.54). A middleman adds to the price of the commodity and not to the value. Lying off middlemen can improve the value of the commodity because it will not go through many hands before it reaches the consumer.

As argued earlier, restructuring aims at increasing the shareholder’s wealth. When the shareholder earn a lot of money, the financial performance of the company because it encourages them to invest more to the company and run the company more efficiently.

Conclusion

It is apparent that GSK has benefited a lot through restructuring. It has been able to venture into new markets and has increased its sales. The merger between Glaxo Wellcome and SmithKline greatly improved the company’s performance between 1999 and 2000. Also, the introduction of new products like Avandia and Seretide yielded about 60% of the total sales volume. Restructuring, therefore, improved the performance of GSK to a great extent.

Reference

Brown, M. 2002. Achieving growth in a mature market and defining barriers to entry. US. The ChemQuest Group, incl.

Harrison, B. & Bluestone, B. 1990. The great U-turn: corporate restricting and the Polarizing of America. New York.Basic books

Meeks, G. 1977. Disappointing marriage: a study of the gains from merger. Cambridge. Cambridge university press.

Scherer, F. & Ross, D.1990. Industrial market structure and economic performance. Boston, Houghton Mifflin.

Sudarsanam, p. 1995. The essence of merger and acquisition. London: prentice Hall.

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