Caterpillar Restructuring

The company was founded in 1925 as a result of a merger with Holt Manufacturing Co.

and it started struggling and established it self because of the lack of competition, they

were the pioneers in manufacturing the construction equipments of that time which were

also used in the world war I and II effectively, the company sooner captured the market

by providing products that were useful for construction which was taking place at its

maximum as that era is highly admired for the construction in US, the company kept on

moving and did manage to have contracts with leading construction companies, the

company was running fine in 50s and 60s and 70s due to wars started by the US and also

the world wars, but after some period when the stagnant construction took place, it was

assured that the products were having a fall from growth towards the maturity, this

An organization which is operating in a mature market means that the product does not

have the scope to grow anymore. The product has reached its peak, with no prospects to

increase, as the product is has become most popular in the market and no one else will be

willing to buy it. A cyclical market is one which has demands changing due to external

factors relating to the product. These factors could be the time of year, month or week or

even the weather. With these products there are no prospects and when there is a low

peak in the cyclical cycle the organization is not doing too well.

In order to increase the demand of both products in the mature and cyclical markets,

organizations will drive into restructuring. By restructuring the organization will hope to

improve performance of the products in the market.

This essay will look at restructuring in terms of the mature and cyclical markets. Firstly it

would be looked at what restructuring is and why restructuring occurs in a mature and

cyclical market. This will be further backed with case studies. The essay will then focus

on what have been the implications of restructuring and has it been successful in order to

improve performance.

Sp we have established that an organization operating in a mature or cyclical market may

want to restructure to result in better performance. Now the following part of the essay

will firstly look at different ways in which organization can restructure.

The traditional forms of restructuring were through merger and acquisition by inter

corporate sell-offs, spin-offs, Management buyouts or management buy-ins and

leveraged buy-outs. These traditional forms of restructuring were aimed to maximize

shareholder wealth.

However other forms of restructuring exist in the form of rightsizing which includes

closures and downsizing or outsourcing. Another is offering management incentive

schemes based on the share options. Finally there is financial engineering through share

buy-backs and substitution to debt for equity.

In terms of value, mergers of companies was popular, in the past 20 years (between 1976

and 1995) the cumulative value spent on buying other firms was £241 billion by

industrial and commercial companies. As a point of comparison companies were

spending £481 million on pants and machinery. In terms of mergers they were spending

50 pence on every pound of fixed capital on take over of other companies, so they were

spending ore on mergers rather than the plant and machinery. On management buyouts

and buy-ins involved selling parts of the individual business, this varied year to year.

During 1989 and 1996 this form of restructuring valued to £37 billion, not as much as the

merger as they were just an extra of the mergers.

The academic view on restructuring varied with a difference of opinion, some whom

think restructuring is good and others its bad. The overall consensus over takeovers was

that they were against them. Meeks (1977) book 'disappointing marriage' showed that

profits of combined companies were often lower and that the main beneficiary was the

shareholders in the acquired company. Traditionally the analyzing was done by

economist whom had a negative verdict overall. But other academics such as Shliefer and

Summers (1988) whom represent a more socially aware economist said that gains were

only obtained due to a breach of trust and implicit contract in terms of employees. And

the gains were not made through organizations being more efficient but by organizations

redistributing.

However from a different perspective, there was a defense for the restructuring from the

corporate finance, with Jensen who was a defender of the newer form of restructuring. He

argued that restructuring new management teams used their assets more productively and

increased the returns to maximize shareholder value. Due to the threat of restructuring

controlled the incumbent managers whom were to invest in unprofitable projects and

maintain organization efficiency. The aspect of debt was seen as a positive development,

this was the reason that made the managers work. The difference between the economists

negative perspective and corporate finances positive perspective was due to the fact that

the corporate finance took a simple view. There are bundle of assets, easy market control.

market was to bid for the asset which were more successful and through restructuring

managers knew what they were doing.

Corporate finance was a stronger argument and had internal coherent than on empirics

and evidence. Restructuring was a solution to the problem of divorce in ownership

between the managers and the owners. Managers were left with too much freedom to

fulfill their own interest which was not streamlined with the shareholders. So in this form

restructuring acted as a reassertion of shareholder control.

So at macro level restructuring is beneficial socially as it relocates assets to better

managers who invest for returns. So the end result is positive as the only losers re the top

mangers who act dysfunctional.

Two different perspectives of restructuring have been suggested, now the essay will look

at a case study of Caterpillar who operate in both the mature and cyclical market and

have restructured.

Caterpillar is old system manufacturing company which downsized in 1980s. The three

main divisions are: machinery- which includes heavy construction equipment; engines

and financial products which includes operating and finance leases and insurances.

Caterpillar products were mature and had cyclical demands this was after the long boom

which caterpillar experienced.

Most the product are mature with competitors whom are willing to accept lower returns

except the Japanese companies whom are not willing to cut the prices. Although CAT is a

dominant manufacture and able to charge premium prices, they are still not able to regain

as the margins are eroding and that is helped by the recession in the US market.

However despite much restructuring and consolidation not much had changed since 1994.

it still has mature and cyclical market. Since 1994 CAT has reinforced its position

through series of acquisitions. the financial division accounts for over 25% of the profit.

Through restructuring cat deployed 38,651 staff from the period of 1979 to 1992,

although there was an economic boom after the 1980s recession. This was due to CAT

taking nearly 20 years to reach the peak in 1978. due to this great decline in the sales this

had lead to factory closure and loses of those employees. Although there was a boom in

the 1980s this was mostly consumer led and the government did not increase the

spending on infrastructure which meant this was not an effect on CAT. Also the factor of

the competition from Komstua which effected sales and was greater helped by the yen

exchange rate. All these factors led to restructuring and to the downsizing of employees.

Although CAT had impressive value added and stock turns this doesn't mean good

results. Due to the low wage entrants as competitors therefore CAT cash and renewal

rates suffered. Although CAT had managed to restructure in a manner that stabilized

labour cost but didn't create CAT with cash machines.

The implications of restructuring are mainly on labour. Labour is the key victim. They

are vulnerable in any process of restructuring. This is due to the fact that labour is the

largest component of cost. Restructuring work directly against employees as it creates

winners and losers. Winners being the employees whom have managed to stay in the

organization and losers whom have lost the jobs. So there are multi factors going on at

different levels. The ratio of winners depends on the context of the individual skills

attribute. Although reducing labour should lead to cost saving, this is not the case always

due to the fact that once the staff has been deployed the job still has to be done and filled.

So the organizations then opt to outsource the work, which does not translate into a

savings. instead all the savings made are being used to pay the outside company to do the

jobs for which the organization deployed staff for.

So in conclusion an organization may look to restructure to improve performance due to

having a no growth market – mature market or seasonal market -cyclical market.

Organization then restructures in different strategies traditionally mergers and acquisition

but more recently rightsizing and financial engineering. Economic academic have given a

negative view on the restructuring where corporate finance gives a positive view. Then

looking at a case study of Caterpillar showed and organization which has matured and

cyclical products have restructured to sustain labour cost. They reduced a lot of the

labour mainly due to external factor of competition. This then led to the implication that

labour is the largest victim in the restructuring which creates winners and losers.

However although companies try to reduce cost be laying off employees they do not

realize that the supposed saving made and put into paying the contractors for the jobs that

still have to fulfilled

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