Saturday, December 1, 2012

Company Failure & Renewal [05/10 - 01/12]

This is my final module of the MBA course. Since 2 years ago, my friend has been telling me to sign up for this module as it covers many interesting aspects of what a MBA graduate should know about companies. Coincidentally, I was able to accommodate the Company Failure & Renewal module towards the end of the year.

I missed the Friday evening of the first intensive as I was away for a retreat. But luckily I have not missed much and managed to catch up through some friends help. There were 13 students in all in the class. Being a small class, it was a discussion based learning instead of formal lectures. The lecturer for the class is Dr Georges Baume. I read that he has been nominated for teaching awards in the past thanks to his good facilitation methods.

As the name of the subject goes, Company Failure and Renewal. This course talks about why company fails and how they recover.

Why Companies Fail
During the first Friday night, the factors contributing to company failure were touched on. When a company went bankrupt and goes into liquidation, who will be the creditors? We actually categorize them into senior debtors and junior debtors. In the US, there is Chapter 11 which allows companies to sort things out and take a life line out of bankruptcy. Of course, we have to consider chronically sick industry and what is the industry financial strength.

Checking Companies Profitability
The next day, we went into accounting profitability and revised through the formulas which we used in our Accounting module in evaluating whether a firm is liquid and profitable. I have already forgotten most of that I learn in Accounting, which is 2.5 years back.

Case Studies
Most part of this course is centered on case studies and we actually went through 6 case studies covering The Swissair Saga, Continental Airlines of 1992, Scott Paper Company, UAL Corporation, Loewen Group and finally FAG Kugelfischer. We studied what lead to the failure of these companies and if they attempted to turnaround, how did they do it. It is actually quite intensive to go through these cases thoroughly.

Below is a photo of us having discussion on one of the cases.(Notice everyone is in deep thoughts)

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Firm Valuation and Free Cash Flows
Next, we went through some formulas which were covered in our Managerial Finance course. By this stage, we were pretty much shocked by the amount of numbers and formulas we have to crunched. But Dr George assured us this is not a formula-intensive course. But we will know how these formulas are applied in evaluating a firm valuation and free cash flows. 


Textbook and Readings
The textbook we used is 'Ruthless Execution' which talks about the 3 main steps in turning around a company. First we have Leadership which looks at Strategic Recalibration and Business Philosophy. The legend Jack Welch of GE and John Chambers of Cisco were studied. Next is on Governance where accountability, performance management system and discipline are looked into. In this segment, we studied Lou Gerstner of IBM and Harry Kraemer of Baxter. Finally is developing the Critical Capabilities of productivity management, talent management and focused corporate transactions. This textbook provides a sampler of the great CEOs that turn around companies that have lost their edge. 

The readings has many good articles from the Harvard Business Review of why companies fail and why CEO fail. After a while, you will realize that the reasons leading to failure are about the same. But the method of turnaround are split into 2 main schools, either the hard or soft approach.

Leverage Buy-Outs (LBO) and Barbarian at the Gates
We were encouraged by Dr George to read Barbarian at the Gates. I guess most of us have not read it. I borrowed from the library the 500-page book but gave up after reading through a few pages. It is way too thick and sort of a suspense-written book. Thereafter I just search through YouTube and watched the movie. But it is quite a bored as the movie was made in the 90s.

Essentially LBO means borrowing money to buy your own company. The debt is repaid by using the profit generated to repay. You own the company but this will mean the company is heavily in debt.

Group Assignment
We split into 3 groups where each of the groups researched into the following companies: General Motors, Carrefour and Kodak. My group looks into General Motors. 

Exams
The case study we have for our exams is on Peregrine. It talks about Asia leading investment bank and its dramatic rise and fall during the Asian Financial Crisis. Just 2 days before the exams, we gather together and have a discussion over it.

In all, this has been quite a fascinating module looking why company fail and how they are able to renew and turn around. It is quite a coincidence as I can use the things learn from this module to my work environment and observe what are the factors leading to its failure and observe how top management is able to turn it around. I studied the leading consumer electronics company of this period, Samsung, and learn that the CEO got his inspiration from Jack Welch, the legend of GE. As a follow-up from this module, I decide to read up more about Jack Welch and evaluate whether is his philosophy applicable 2 decades after he did the turn around.

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