The Overview
Ihr Platz GmbH is one of the leading drug stores in Germany. Founded in 1895, the company has 689 company- owned stores, 150 franchisee-owned stores, two distribution centers or warehouses and employs over 8800 people. Today (2004) the company is in great crises struggling with declining sales, mounting losses, and seemingly ineffective management. The situation seems to be moving out of hand and hope of the giant company’s survival appears faint. In fact, the company is being faced with insolvency and liquidation is very likely. In this paper therefore, we review the case on Ihr Platz and the predicaments that befalls it before the unlikely savior comes in and engineers a restructuring to take Ihr Platz back to healthy; a move that brings lots of hope to the German industry
Possible causes of Ihr Platz insolvency crises
From the case study several reasons could have led to the company’s insolvency. First, current management of Ihr Platz seemed to have been incompetent leading to ineffective management of the company. As a result, this had led to shrinking of the company’s sales by 40 percent in 2004. Also, the company is reported to have been operating at a loss since the year 2000 thus putting the company at the edge of collapse. It is reported in the case that successive management of the company since then were unable to reverse the track and return the company to profitability definitely put their competence in question. Furthermore, inflexibility and failure by management to make strategic decisions to salvage the company from the looming crisis contributed greatly to the unfavorable crises. This is evidenced by continued holding of stores and branches with the full knowledge of them running at a loss, what they could have slacked right away. In addition, poor debt management had seen the company incur more debts than the company could service. As a result, the company’s sales were declining at an alarming rate, losses had mounted, debts had soared beyond recoverable heights and the company was virtually insolvent.
When a company is faced with insolvency, it is assumed to be in a very awkward position and its chances of survival seem impossible. When Ihr Platz was faced with insolvency a number of barriers and challenges could have been anticipated which made its salvaging look like a very difficult endeavor. First, the law governing insolvency in Germany was expected to be a major challenge for the Ihr Platz. In most cases, a company which has been declared insolvent is expected to be put under court management, put via receivership and ultimately become liquidated. Honestly, I and most of you would have expected the same to happen to Ihr Platz. In addition, how to deal with creditors presented a big huddle for the company during this hard financial period. I could have anticipated creditors filing cases against the company in order to put it under receivership in an attempt to recover their debts.
At insolvency, creditors and suppliers were expected to abscond from giving Ihr Platz more credit and supplies and this could have seen the company sink further in to the crises and ultimate collapse. Both the reputation of the company and its rating in the capital markets is expected to go down at the declaration of insolvency. I could also have predicted a drop in the customer loyalty towards the company and its products. Furthermore, massive loss of employment was expected to result from Ihr Platz insolvency. Managing the anxious workers during this time was not expected to be in any way easy. A great percentage of job loss could be predicted.
Actual barriers and challenges that Ihr Platz faced due to its insolvency status are clearly cut in this case. First, the current management was not in a position to enact a turn around plan. Efforts by the same management to consult had borne no fruits despite declaring having spent a lot of money in such consultation. The Germany industry also lacked turnaround experts with experience in complex bankruptcy as the one Ihr Platz was being faced with hence a barrier to the company to get itself out of the blues. The huge debts the company had and the way of managing the creditors also presented a huge challenge to the company at insolvency. How to offset some of these debts is indeed a major challenge here. Managing the employees at insolvency is also a major challenge for the company. In fact, it is difficult for Ihr Platz to manage through insolvency without its employees losing jobs. Maintaining the loyalty of employees as well as overcoming skepticism is important but challenging for Ihr Platz. The law governing insolvency is also a major barrier. This is because according to the law of the land, a company that has been declared bankrupt or rather insolvency may not be given a second chance to revive itself as the likelihood of it being put under receivership or/and ultimate liquidation is very high.
The mounting challenges made the Ihr Platz recovery look impossible. In fact, the coming of the US based restructuring expert Goldman Sachs and the way he helped come up a restructuring of Ihr Platz looks magical. The marvelous plan and its workability is simply amazing. In January 2005, Goldman purchased a whole $144 million, took over management as both the Chief executive officer and the chief finance officer of the company, replacing the ineffective management. In addition Goldman partnered with Alvarez and Marsal (A&M) in order to plan and implement a turn around plan. Together and making use of the German insolvency law modified in 1999 but not yet applied in any one case, allowed for self administrative insolvency. This allowed Ihr Platz to work out its debts, rather than liquidate. Alvarez and Marsal then identified and closed all the loss-making operations, and streamlined all the inefficient process. The law also allowed the states cover employees in the three months interim period and this allowed for Ihr Platz to channel available cash to the critical creditors. They then filed for insolvency in May 2005 which was bound to be very resourceful for the restructuring process. Instead of seeing insolvency as a stigma like it is the case in Germany, Goldman used it as a mean to achieve the turn around plan with ease. Three months later i.e. on august one 2005, Ihr Platz signs a streamlining agreement with the workers union representatives. This was a major step towards achieving the turn around while achieving the objective of saving 8100 out of the 8900 employees of the company.
Three months later, on 17th November 2005, Goldman presented the restructuring plan to the creditors which was supported by almost 100% of the voting creditors supported, thus winning back their support. By January 19th 2006 (less than 6 months after filling of insolvency by Goldman’s team), the company was already back on its feet, had a sound financial standing and could now start paying creditors in quotas which was not a mean achievement by the turn around team. On April the 6th 2006, the Goldman’s team having fully and successfully concluded the restructuring process appointed a permanent management for Ihr Platz. The company was back and could now embark on a growth agenda as well as retuning to full profitability.
The way the Goldman Sachs team huddled the barriers and challenges faced by Ihr Platz is indeed remarkably effective. As a result, they were able to lift the company out of insolvency in less that six months, something that had earlier seemed impossible. It actually turns the light on for the Germany based companies that insolvency is not the end of the company but a well managed turn around plan can do marvelous no matter how critical the situation is.
Vital lessons learnt from Platz turnaround case
- Insolvency can be used as a tool for recovery instead of a possible cause of liquidation. i.e. insolvency has its positive side
- Problem of insolvency can easily be solved if reported well in time.
- In management it is suicidal to be pessimistic as every problem has a workable solution.
- Employees’ support and trust is crucial for business success.
- Businesses are coexistent; managers can look for and expect assistance from across the business circle.
Reference
Ihr Platz GmbH: The Case for Alvarez & Marsal (A&M)