The Loewen Group, Inc. (Abridged) Harvard Case Solution & Analysis

The Loewen Group, Inc. (Abridged) Case Solution

Loewen’s early advantage using debt financing

Loewen was one of the most successful companies in the field of funeral and cemetery; it provided various products to service the deaths and pre-death assumptions. However, from the results, the company had grown sharply and aggressively in the early 90’s due to the lack of competition within a selected industry. Due to the pre-sales assumptions that company followed in the years, it showed that the advance payments of insurance were invested in the stocks in order to earn profits and increase the cash flow activities. With the huge reserves and equity involved in the business, the company used heavy amount of debt in order to take advantage of acquiring small funerals in different areas. This activity helped the company in evolving into the most dominating organization because of high liquidity involved in the business. The advantage of using debt was increasing the acquisition activity and to compete with the already established companies who were also involved in the same process. Therefore, by using the investment bankers and high credit ratings due to the ability to pay the debt at the specified period, the company took an aggressive approach to stand at the top of the industry.

Operational and financial performance

With the use of high amount of debt in the past couple of years, Loewen increased its market share as well as had a strong operational as well as financial performance. This shows that the industry was not as competitive as others were since only few players dominated the market and so there was no chance for the new entrant to survive in the market. The company had only one rival in the past, SCI, which has a strong past history than Loewen and so in order to compete with it and stand equally, the company used high level of debt in order to cover majority of funeral homes to thus beat the ratio of the counter party and improve the performance. However, the current situation was not favorable for the company because it already had taken huge amount of debt, which caused the decline of the certain amount of equity shares and caused a decline in the market share as well. Therefore, this shows that the company would go bankrupt if it would not control or restructure its debt according to the demand of investment bankers.

Cost of Financial distress

This also shows that with huge amount of liquidity involved in Loewen, it has been determined that the company would be bankrupted if it would not control the debt level over the use of the acquisition activity. However, the cost of distress includes a huge amount of reserves held in the company’s operations as well as the cost incurred through the sale of the assets in order to pay the certain amount of debt to creditors over the passage of time. The company had already lost its market share because it holds less amount of equity as compared to long-term debt. To rebalance the figure as compared to the past performance, the company would be required to reorganize its debt activity by hiring investment bankers, who would have made a pre-determined opinion of how to arrange the activity and eliminate the risk of loss. It is concluded that under the financial distress, the company would bear a cost of re organizational activity as well as bear the loss of sale of asset in order to cover the debt payments to a particular creditor and other financial institutions.....................

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