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DFI 406: CORPORATE FINANCIAL POLICY

JOSEPH L. BARASA

REORGANISATION AND RECONSTRUCTION

The Restructuring of American Companies During the 1990s

Corporate restructurings in America surged with a vengeance in the early 1990's. As responses to a prolonged recession and a more competitive global economy as well as the end of the Cold War, American companies began to implement aggressive plans to restructure and downsize. Cost-cutting was combined with the adoption of new technology and renewed efforts to focus on core products and market strategies. Many companies shed ill-advised acquisitions made during the 1980's.

A 1994 survey of 4,500 companies by the Wyatt Co. and Fortune magazine indicated that 86% of the companies had downsized during the previous five years and that they expected to do so again.

The results of these massive restructurings, in terms of renewed competitiveness and profitability, at least from a macroeconomic point-of-view, have been nothing short of miraculous. The magnitude of the impact is somewhat reflected in the incredible increase in the Dow Jones Industrial Average (DJIA) during this period. The DJIA took a little over 94 years to reach 3,000 (April 17, 1991). Today, about seven years later, the DJIA stands at greater than 8,000.

Restructuring Overview

Organizations can internally transform themselves by changing their management structure (centralizing or decentralizing for example), by restructuring their operations (i.e., operational restructuring), or by altering the makeup of company assets and liabilities (i.e., financial restructuring).

Organizations can also transform themselves externally by acquiring other companies; by merging with other companies or by spinning-off or divesting undesired divisions and subsidiaries.

Operational restructuring focuses primarily on analysis of the company's income and cash flows statements. Operational changes are designed to improve profitability or to increase cash flows....