Case Report – Session 3
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.
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.
Q1. 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 “A” to “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,...