Financial Distress and Corporate Turnaround

Financial Distress and Corporate Turnaround

Martin Schmuck Financial Distress and Corporate Turnaround An Empirical Analysis of the Automotive Supplier Industry

Martin Schmuck TU München München, Germany Dissertation Technische Universität München, 2012 ISBN 978-3-658-01907-5 DOI 10.1007/978-3-658-01908-2 ISBN 978-3-658-01908-2 (ebook) The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de. Library of Congress Control Number: 2013935439 Springer Gabler Springer Fachmedien Wiesbaden 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer Gabler is a brand of Springer DE. Springer DE is part of Springer Science+Business Media. www.springer-gabler.de

V FOREWORD Since its early days, business research has paid special attention to companies in distress situations. Its main focus has always been on the question of how distressed companies can successfully turn around. This issue is of major importance to academics as well as practitioners, but has only been partially answered so far. The reasons for the sparse and inconclusive research results are manifold. On the one hand, results are frequently hampered by the lack of exhaustive data and inappropriate research designs. On the other hand, the research samples under examination are often very heterogeneous, making it impossible to draw valid conclusions. In his dissertation, Martin Schmuck analyzes the effectiveness of restructuring measures of companies in financial distress. In order to overcome the limitations of prior studies, he focuses on a sample of automotive suppliers; a distinctive, but nevertheless highly important industry segment. The international sample also makes it possible to accommodate regional differences. One of the main contributions of this doctoral thesis is that it includes a set of healthy companies in the research sample and, thereby makes it possible to identify how individual restructuring measures contribute to the corporate success of distressed and nondistressed companies. This dissertation is underpinned by an excellent review of existing research efforts, a carefully constructed framework of hypotheses, and an extensive data set. The empirical analysis, conducted specifically for the purpose of this thesis, is based on advanced econometric methods, as well as an extremely well-structured approach. Both the research design and research results are a valuable and innovative contribution to national and international research on corporate turnaround. Martin Schmuck s dissertation on financial distress and corporate turnaround provides important new insights into this field, and future research workers as well as corporate decision-makers in the automotive industry will be able to significantly benefit from his work. Munich, February 2013 Gunther Friedl

VII PREFACE This book is the product of more than three years of my intensive research as an external doctoral student at the Department of Business Administration Controlling at Technische Universität München. This dissertation is a result of my passion for business management, my scientific curiosity and, last but not least, my preference for working to a flexible time schedule. However, it would never have been written without the support and advice of numerous people, who provided both academic guidance and moral support, and thus played a substantial role in the completion of my dissertation. First of all, I am extremely grateful to my academic advisor Prof. Dr. Gunther Friedl for his encouragement and trust during the past years. While he granted me a remarkable degree of freedom in defining and pursuing my research, my work would not have been possible without his invaluable advice and guidance. I would also like to thank the entire team of Prof. Dr. Gunther Friedl s chair for welcoming me to their team as an external doctoral candidate. Furthermore, I would like to thank the two other members of my dissertation committee, Prof. Dr. Dr. Ann-Kristin Achleitner for kindly agreeing to provide a second opinion, and Prof. Dr. Kaserer for chairing the examination board. I am very thankful for their efforts and the time they spent serving on my committee. Special thanks go to my employer Oliver Wyman for generously supporting my Ph.D. leave. In particular, I would like to thank my advisor Dr. Tobias Eichner, who laid the academic foundation for my work, and also Dr. Lutz Jaede, who had already sponsored my diploma thesis. I am especially indebted to my former colleague Peter Bosch, who supported my move from consulting into academia early on, and without whom I would still be looking for the right moment to start this venture. I would also like to thank my fellow doctoral student Marcel Naujoks for his thoughtful feedback and our ongoing discussions. I am thankful to Doug Boyle, Patrick Rohrmeier, and Tobias Wiesner for reading my thesis and for their helpful feedback. I would also like to thank all my friends who shared distractions from academia with me during the last three years. Finally and most importantly, my deepest gratitude goes to my family. I would like to thank my parents Maria and Hajo Schmuck for unconditionally supporting my education at all times, as well as my brother Stefan, whom I could always rely on. I would also like to express my utmost gratitude to my fiancée Sonja for her unreserved faith and support from day one of the dissertation project. I wish to dedicate this thesis to my parents. Munich, February 2013 Martin Schmuck

IX SYNOPSIS SYNOPSIS... V TABLE OF CONTENTS... XI LIST OF FIGURES... XIII LIST OF TABLES... XIV LIST OF ABBREVIATIONS... XV 1. INTRODUCTION AND PROBLEM STATEMENT... 1 1.1 Research objectives... 2 1.2 Motivation and significance of the topic... 6 1.3 Research design... 12 1.4 Study outline... 15 2. LITERATURE REVIEW: EARLIER RESEARCH AND STATUS OF THE AREA... 17 2.1 Research on corporate crisis... 18 2.2 Empirical research on corporate turnaround... 23 3. RESEARCH FOUNDATIONS: THEORETICAL FRAMEWORK AND HYPOTHESIS... 27 3.1 Definitions... 28 3.2 Research framework... 35 3.3 Summary of research hypotheses... 58 4. SAMPLE SELECTION AND ANALYTICAL METHODS... 61 4.1 Sample selection process... 62 4.2 Variables and measures... 65 4.3 Statistical methods... 71 5. EMPIRICAL RESULTS: DISCUSSION AND ANALYSIS... 83 5.1 Sample descriptives... 84 5.2 Effectiveness of restructuring activities... 88 5.3 Strategies of distressed and non-distressed companies... 110 5.4 Turnaround archetypes... 117 6. CONCLUSION... 125 6.1 Course of study and main findings... 126 6.2 Limitations and directions for future research... 130 APPENDIX... 133 REFERENCES... 154

XI TABLE OF CONTENTS SYNOPSIS... V TABLE OF CONTENTS... XI LIST OF FIGURES... XIII LIST OF TABLES... XIV LIST OF ABBREVIATIONS... XV 1. INTRODUCTION AND PROBLEM STATEMENT... 1 1.1 Research objectives... 2 1.1.1 Research problem... 2 1.1.2 Research target and questions... 3 1.1.3 Intended contribution and originality... 4 1.2 Motivation and significance of the topic... 6 1.2.1 Research object Automotive supplier industry... 6 1.2.2 Success factor research on corporate turnaround... 9 1.3 Research design... 12 1.4 Study outline... 15 2. LITERATURE REVIEW: EARLIER RESEARCH AND STATUS OF THE AREA... 17 2.1 Research on corporate crisis... 18 2.2 Empirical research on corporate turnaround... 23 3. RESEARCH FOUNDATIONS: THEORETICAL FRAMEWORK AND HYPOTHESIS... 27 3.1 Definitions... 28 3.1.1 Financial distress... 28 3.1.2 Corporate turnaround... 32 3.1.3 Corporate restructuring... 34 3.2 Research framework... 35 3.2.1 Preliminaries... 35 3.2.2 Process... 36 3.2.3 Content... 38 3.2.3.1 Overview... 38 3.2.3.2 Managerial restructuring... 39 3.2.3.3 Operational restructuring... 42 3.2.3.4 Financial restructuring... 45 3.2.3.5 Asset restructuring... 49 3.2.4 Context... 52 3.2.5 Turnaround archetypes... 56 3.3 Summary of research hypotheses... 58 4. SAMPLE SELECTION AND ANALYTICAL METHODS... 61 4.1 Sample selection process... 62 4.2 Variables and measures... 65 4.3 Statistical methods... 71 4.3.1 Preliminaries... 71 4.3.2 Logistic regression... 72 4.3.3 Analysis of covariance... 78 4.3.4 Cluster analysis... 80

XII 5. EMPIRICAL RESULTS: DISCUSSION AND ANALYSIS... 83 5.1 Sample descriptives... 84 5.2 Effectiveness of restructuring activities... 88 5.2.1 Preliminaries... 88 5.2.2 Univariate analysis... 89 5.2.3 Multivariate logistic regression analysis... 97 5.3 Strategies of distressed and non-distressed companies... 110 5.3.1 Preliminaries and MANCOVA... 110 5.3.2 Univariate ANCOVA... 112 5.4 Turnaround archetypes... 117 5.4.1 Preliminaries... 117 5.4.2 Cluster analysis... 118 6. CONCLUSION... 125 6.1 Course of study and main findings... 126 6.2 Limitations and directions for future research... 130 APPENDIX... 133 REFERENCES... 154

XIII LIST OF FIGURES Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Figure 16: Figure 17: Figure 18: Global light vehicle production by region 1999-2008.... 7 Research streams on corporate crisis.... 18 Empirical large-sample studies on corporate turnaround.... 25 Stages of corporate distress.... 28 Corporate restructuring categories.... 34 Overview research framework.... 36 Restructuring process.... 38 Restructuring content.... 39 Restructuring context.... 52 Turnaround archetypes.... 56 Overview research hypotheses.... 59 Sample selection process.... 62 Predictive-validity framework.... 66 Variable definitions.... 70 Overview statistical methods.... 71 Matched sample - Profitability development.... 87 Model 2 Sensitivity analysis.... 103 Cluster analysis Elbow chart.... 118

XIV LIST OF TABLES Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Matched sample Firm characteristics.... 84 Matched sample Pre-distress firm size.... 85 Matched sample Pre-distress profitability.... 86 Distressed sample Descriptives and test of differences.... 90 Multivariate logistic regression Models 1 and 2.... 99 Multivariate logistic regression Model 2-A and 2-B.... 107 Multivariate logistic regression Model 2 Sensitivity analysis.... 109 ANCOVA Descriptives.... 112 ANCOVA Univariate analysis.... 113 Cluster analysis Context variables.... 119 Cluster analysis Restructuring actions.... 120

XV LIST OF ABBREVIATIONS Adj.... Adjusted AG... Aktiengesellschaft AM... Americas ANCOVA... Analysis of covariance ANOVA... Analysis of variance AP... Asia-Pacific AR... Asset restructuring CAGR... Compounded annual growth rate CAP/CAPEX... Capital expenditures CD... Cook s distance measure CEO... Chief executive officer Cont.... continued Corp.... Corporation CTX... Context DBT... Total debt CE... Common equity df.... Degrees of freedom DIV... Common dividends DS... Distress severity DY... Distress year EA... Europe and Africa EBITDA... Earnings before interest, taxes, depreciation, and amortization EQU... Equity issue ER... Early restructuring EXP... Total operating expenses FAS... Fixed assets FC... Financial capacity FR... Financial restructuring FS... Financial slack FTSE... Financial Times Stock Exchange Index H-L... Hosmer-Lemeshow ICB... Industry Classification Benchmark IN... Industry subsector Inc.... Incorporated INT... Interest expense on debt LL... Log-likelihood function LN... Natural logarithm

XVI LRT... Likelihood-Ratio-Test Ltd.... Limited MANCOVA... Multivariate analysis of covariance Manuf.... Manufacturing MR... Managerial restructuring MRA... Top executive change All MRN... Top executive change Non-routine ND... Non-distressed No.... Number NT... Non-turnaround OEM... Original equipment manufacturer OLS... Ordinary least squares OR... Operational restructuring p./pp.... page/pages PIMS... Profit Impact of Marketing Strategies PLC... Public limited company PP... Prior profitability R&D... Research and development REV... Net revenue RG... Region ROA... Return-on-assets ROE... Return-on-equity ROI... Return-on-investment s.d.... standard deviation s.e.... standard error SA... Société anonyme Sig..... significance level TA... Turnaround TAS... Total assets UK... United Kingdom US... United States USD... United States Dollar VIF... Variance Inflation Factor Vol.... Volume WC... Working Capital Y... Year