Corporate Restructuring

Corporate Restructuring

This paper is based on the topic of corporate restructuring. The organization selected for this paper is called Northern Rock Bank of United Kingdom. During the past two decades the downfall and failure of Northern Rock Bank, forced the organisational pundits to do a rethink over corporate restructuring of the bank, therefore, it provides a good case study for this particular paper.

Background

In August 2007 the United Kingdom experienced its first bank run in over 140 years. Although Northern Rock was not a particularly large bank (it was at the time ranked 7th in terms of assets) it was nevertheless a significant retail bank and a substantial mortgage lender (Daley, Mehrotra, Sivakumar, 2007). In fact, ten years earlier it had converted from a mutual building society whose activities were limited by regulation largely to retail deposits and mortgages.

There was always a fear that this could spark a systemic run on bank deposits. After failed attempts to secure a buyer in the private sector, the government nationalised the bank and, for the first time, in effect socialised the credit risk of the bank. It is now a fully state-owned bank. Since then, another British bank (Bradford and Bingley - which was also a converted building society) has also been nationalised. Furthermore, the government has since taken substantial equity stakes in several other British banks as part of a general re-capitalisation programme (Clubb, Stouraitis, 2006).

Discussion

Empirical evidence shows that many LBOs, like other types of buyouts, have resulted in significant improvements in firms' performance (using a range of indicators from cash flow to return on investment), which can be explained by a combination of factors including tax benefits, strengthened management, internal reorganization, and change in corporate culture. On the other hand, LBOs, because of the leverage aspect, are controversial because they may cause disruptions and economic hardship in the company purchased:

Its assets serve as collateral for the borrowed money, the purchasing company (often a holding whose only purpose is corporate ownership and control) intending to repay the loan by using the future profits and cash flows from the purchased company or, failing that, by selling its assets (i.e., dismantling the company). Besides, LBOs have represented a moral hazard: In the context of the savings and loan debacle of the 1980s, their investors' gains (through junk bonds) were eventually paid by taxpayers. LBOs also raise further issues of ethics, notably about conflicts of interest between managers or acquirers and shareholders, insider trading, stockholders' welfare, excessive fees to intermediaries, and squeeze-outs of minority shareholders (who may well receive a good price for their shares, an average of 30% to 40% more than the market price, but do not eventually benefit from the massive financial rewards of shrewd postbuyout strategies).

Two particular problems emerged during the summer months of 2007: a generalised lack of confidence in a particular asset class (mortgage bank securities) associated in large part with developments in the sub-prime mortgage market in the United Sates, and doubts emerged about the viability of the ...