Loewen Group free essay sample

This report provides a qualitative analysis of the Loewen case study, starting from the excessive debt policy used in its expansion and ending with huge debt ratios and bankruptcy. The analysis includes the effect of the company’s policy and the financial distress it caused and results of such a financial condition. Method of Analysis: For the analysis we have used the historical financial data of the company, the history of the company and its financing policy, and the financial data of its competitors. The important finding that were gathered are listed below * Debt financing is considered the fastest and cheapest method in financing the growth of a company * Excessive debt financing for explosive growth is not well recommended * Financial distress factors are direct and indirect, and they vary in importance and effect on the overall future of the company * Filing Chapter 11 bankruptcy protects the company from its debtors by allowing it to reorganize their debt structure, which might seem the best option in this case. Options/Recommendations: We found out 2 options that Loewen could undertake. Option 1: selling assets to increase cash position and decrease debts Option 2: file chapter 11 bankruptcy to give the company another chance in Legal time to reorganize its debt structure. Recommendation: filing bankruptcy seems to be the best option that Loewen has at this time, as it will allow it to startup its operations again and try to fix debt problems it faced by restructuring. How was Loewen group able to grow explosively for the first half of the 1990s? What were the advantages of debt financing enjoyed by the company in this phase? The Loewen group started as a family business in the 1950s, and had grown explosively in the late 1980s and early 90s mainly by acquiring small independent funeral homes and cemeteries in densely populated urban markets, and acquired several large established funeral chains. What they did that differentiated them from other big players in the market is that they acquired the bigger share of small cemeteries and funeral homes but retained some of their managers if possible because they thought they would know better about the community they lived in, and they are already known in their areas, which would provide a smoother transition of the business from a family one to a corporate level one. They also financed those businesses for capital improvement and merchandise. Besides acquiring small businesses, a lot of factors helped Loewen grow in such a manner. Anchoring on the factor that death rates are almost constant throughout the years, trying to get a bigger market share was a priority target through these acquisitions. What helped more is the higher entry barriers to this business, due to high fixed costs and high capital requirements during the startup, and lack of social attachment to the society they live in due to lack of history in the local community surrounding them, which is considered a big factor driving the choice of families to do business with one funeral services company rather than another. Moreover, considered as one of the biggest funeral services firms in the United States, Loewen had the power to exert pressure on its suppliers for better reduced prices, in addition to taking advantage of being the first to be called when death happens; they are the first to be contacted, and they can supply everything regarding funerals from â€Å"A† to â€Å"Z† which gives them the power to bargain for higher prices, and at the same time, families will not be in a condition to negotiate due to the condition they are passing through, Loewen would give funeral services to low income or high income families accordingly. Another factor that helped is weak substitutes. Small family owned businesses could not compete with what Loewen offered regarding services, quality and price. Another thing that helped Loewen was its ability to create the â€Å"at need† and the â€Å"pre need† services. The â€Å"pre need† services acted as an advantage, for people who would pay money today for their funeral services in the future. And since the funeral services have almost fixed expenses between today and the future, whatever money Loewen got from this option would be invested in securities and in insurance contracts, thus creating more value, or used as additional cash for day to day operations and investment in the company. Debt financing is considered the fastest and cheapest method of financing growth of a company, however using debt to finance accelerated and explosive growth can have his drawbacks. This shows us that Loewen was too aggressive in its acquistion strategy and in its zeal to compete, it ended up paying far too high a price for these two acquisitions. This is also evident from the fact that after these two acquisitions, Loewen’s debt/equity ratio reached 1. 4:1. At this point SCI realized that Loewen was overvalued and dropped its bid for acquisition. Mississippi lawsuit: Loewen’s downfall can be attributed, in part, to the unfavourable jury verdict in Mississippi in 1995. By reneging on an agreement to purchase properties worth around $10 M, the company was held liable to damages amounting to $500 M at the time of the verdict. The stock price dropped by 15%, and the company posted an interest expense of $165 M for that year. Continued Acquisitions in 1998: Despite clear indications of a crisis, the management at Loewen continued their acquisitions, albeit at a slower pace. They paid $278 M in 1998 to acquire 89 funeral homes and 65 cemeteries. The disadvantage of filing for Chapter 11 bankruptcy is that it would trigger a domino effect and force them to file in Canada as well. This would be detrimental since Canadian laws were more strict than US laws and this would lead to potential conflicts. Recommendation: File for Chapter 11 bankruptcy This is the only feasible option available to Loewen group in its present condition. Chapter 11 would protect the company from its debtors by allowing them to reorganize their debt structure. Shareholders would lose everything, as creditors have first right over the company, post chapter 11. The company is worth more under operation, than by individually selling off its assets. This also allows more jobs to saved, than by selling off individual assets. This option allows for a new corporate structure which could be successful in turning around the company, and making it profitable once again. Debtors would have the possibility of recovering more in this manner than they would through a chapter 7 liquidation of Loewen’s assets.