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Loewen Bankruptcy

Autor:   •  February 22, 2014  •  Essay  •  1,164 Words (5 Pages)  •  896 Views

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In today's highly competitive markets, corporate managers find themselves with ever increasing pressures to outperform and deliver superior returns and value for their shareholders. Loewen Group, Inc.(TLGI) was no exception and with an ever increasing competitive environment, and in a highly fragmented business, their managers sought aggressive ways in which to produce increasing returns for the company's investors. If Loewen Group, Inc. did not initially, and progressively, adapt to the changing markets it faced losing its independence or ultimately ceasing to exist.

Loewen Group, Inc. was a rapidly growing funeral home consolidator based out of Canada, but conducting most of its business in the United States. TLGI borrowed heavily to defend itself against unsolicited competition, and ultimately takeover bids by its main competitor, SCI. SCI had even offered to pay Loewen Group, Inc. shareholders a 48.9% premium on their shares during 1996. SCI offered to pay them a premium price per share because they understood, as well as TLGI, that consolidation of the industry is important especially with the ever increasing tightening of margins. The two rivals were constantly engaged in bidding wars driving up the value of properties they were both in search of acquiring. According to Bloomberg, SCI wanted to eliminate a competitor that was driving up acquisition prices or force it into a costly share buyback or recapitalization.The company spurred its growth plans by accumulating unprecedented amounts of leverage in acquiring competition helping the company in its expansion efforts. In these acquisition efforts, the shareholders realized the benefits of overleveraging without diluting any shares (maintaining the same degree of ownership) while retaining the full claims of any future earnings, the initial investors still were in control of the firm. They realized tax deductions and ultimately lower interest rate because of the tax shield. Some other advantages of using debt that the company should have realized was the optimum utilization of their resources. Evidence has shown that when a company overleverages, up to the point where the tax shield benefits equals the distressed cost (plus agency cost and other associated cost), management fully utilizes the company's resources because it is in the managers' best interest to payback the creditors with the interest.

In the mid 1990's, the company was hit with a decrease in "death" business, a major legal judgement adversely affecting its share price, and the ultimate downturn in its market that it soon realized that its interest expense was growing at a much faster rate than its income was. During this time, Loewen Group, Inc. performed way under than analyst anticipated pushing its stock price even further. In 1996, Loewen Group total revenue increased by 9.5 percent during the year. Its established funeral home business performed 3.2 percent fewer

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