Change and Crisis Management

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Introduction

Most managers find it difficult to face a decision on whether to recapitalize the capital structure of a company or not. This process involves restructuring the equity and debt ratio in the firm for the capital structure of that company to become more stable. Financial managers may opt to issue bonds to the public in an attempt of raising more funds which they will later use to purchase their own shares. This is a rather important change for the organization, since if it offers bonds to the public it will reduce the number of ordinary shareholders in the company. However, this change is vitally essential as it helps the company reduce the fall of its share prices in the stock market.

Case

I am employed as a financial manager in the private equity investment firm.  Our company has the largest share of clients seeking for equity investments. This organization has been offering investment advice to clients for over 30 years. Thus, it is considered to be a reputable firm in the whole country.

Problem

Recently our firm took over XYZ Limited through leveraged buyout. This company has a large number of loyal shareholders, but its profits in the past 6 years have been declining. Moreover, when I critically examined the financial state of this company, I realized that this company was involved in fraud activities. In addition to this, this company had many debts from short-term and long-term loans that it had acquired from financial institutions. I suggested that we should finance 40 per cent of the money we required to complete the buyout from our operating cash flow, since we had extra funds and the rest we obtained from the debts.

However, due to high interest rates and inflation, our operating expenses increased by about 30 per cent. We did not possess enough funds to finance our operating activities, although these activities were crucial for our company to generate revenues (Pauchant & Minroff 1988). Rumors started spreading that our firm was facing financial difficulties; this fact reduced the number of new clients who were willing to seek investment advice from our company. The other members of the management team lost their trust in me since I made the decision of using funds for operating expenses without consulting them.

Analysis and Proposing Solution

The problem I faced was rather serious since it threatened to reduce the coordination of employees in our organization (Wilkinson & Mellahi 2005). Since our firm had been in the industry for about 30 years and it received strong support from clients, who invested their funds in our firm, I realized the decrease in new clients was a sign that our company would lose its market share. I had to find a solution for this crux before it made our firm incur huge financial losses. The board members of our firm appointed me to look for a solution on how to raise sufficient funds in order to eliminate the financial deficit our company faced. I carried out extensive research and financial analysis on how to obtain money to finance the operating cash deficit.

From my research I discovered that we would raise more money without incurring extra costs, such as interests, if we subjected XYZ to leveraged recapitalization. If we adopted this strategy, our company would issue bonds to raise money and use part of it to buy some of shares XYZ had issued for subscription in its initial public offer. Although this strategy would cause a change the management and capital structure of XYZ, I realized that the money raised from the issue of bonds would be sufficient to fund our firm, since XYZ was part of our investment (Kilduff & Dougherty 2000). To crown it all, since the share prices of this company had been descending, it would have been better if our organization bought some of these stocks in order to reduce their supply to the market, thus increasing the prices of the remaining bonds.

Rationale

I selected this problem since most financial managers often face problems after making a certain decision without involving other organization’s employees (Armenakis & Bedeian 1999). Furthermore, if I had not made a prompt decision of recapitalizing XYZ, we would not have had enough funds to finance operating activities and, therefore, we would have experienced losses. This problem helped me realize the importance of critical thinking during crisis and application of organizational change in order to manage crisis.

Conclusion

In conclusion, this crux was rather significant to me and other people in the corporate world due to several reasons. Having studied this issue, I was able to learn the benefits of brainstorming and employee involvement in important organizational decisions (Kilduff & Dougherty 2000). Furthermore, I came to learn how small crises in a firm might threaten the future of an organization. I also learnt the importance of making strategic decisions during crisis, since my idea of recapitalizing XYZ helped end the crisis, although it forced us make changes in the capital structure of our company. Investigating such cases will undoubtedly help in my development as a leader. Having studied this particular case, I learnt the importance of communication in an organization. As a leader, I will ensure that I communicate all the decisions I make to the other employees who work with me. In addition to this, I will have to delegate some of the activities involved in recapitalization of XYZ and, thus, it will help me learn the importance of a leader delegating activities to junior staff.

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