Harvard Case - Sembcorp Marine: Proposal to Restructure
"Sembcorp Marine: Proposal to Restructure" Harvard business case study is written by Allaudeen Hameed, Ruth S.K. Tan. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Apr 19, 2023
At Fern Fort University, we recommend Sembcorp Marine pursue a strategic restructuring plan focused on a combination of divestment, partnerships, and operational improvements to address its financial challenges and position itself for long-term growth. This plan involves divesting non-core assets, forming strategic partnerships for technology and expertise, and implementing cost-cutting measures to improve operational efficiency. This approach aims to enhance profitability, reduce debt, and create a more resilient business model capable of navigating the volatile shipbuilding industry.
2. Background
Sembcorp Marine, a leading global offshore and marine engineering group, faced significant financial challenges in 2017. The company was burdened by high debt, declining profitability, and a challenging market environment marked by low oil prices and intense competition. The case study focuses on the company's efforts to explore restructuring options to improve its financial position and return to profitability.
The main protagonists in the case are:
- Wong Weng Sun: CEO of Sembcorp Marine, tasked with leading the company through the restructuring process.
- Board of Directors: Responsible for overseeing the company's strategic direction and approving restructuring plans.
- Creditors: Holding significant debt, their interests lie in ensuring the company's financial stability and repayment of their loans.
- Employees: Concerned about job security and the impact of restructuring on their livelihoods.
3. Analysis of the Case Study
We can analyze Sembcorp Marine's situation using a framework that considers both financial and strategic aspects:
Financial Analysis:
- High Debt: The company's high debt levels were a major concern, putting pressure on cash flow and profitability.
- Declining Profitability: The challenging market environment, coupled with operational inefficiencies, led to a decline in profitability.
- Weak Balance Sheet: The company's financial statements revealed a weak balance sheet with high debt and low equity.
Strategic Analysis:
- Industry Dynamics: The shipbuilding industry was facing significant headwinds, including low oil prices, overcapacity, and intense competition.
- Competitive Advantage: Sembcorp Marine's competitive advantage was eroding due to the challenging market environment and the rise of new competitors.
- Growth Strategy: The company's growth strategy needed to be revised to adapt to the changing market dynamics and ensure long-term sustainability.
Key Findings:
- Sembcorp Marine's financial position was unsustainable, requiring immediate action to address the high debt and declining profitability.
- The company needed to adapt its strategic approach to the changing market environment and focus on areas where it could achieve sustainable growth.
- Restructuring was necessary to improve efficiency, reduce debt, and create a more resilient business model.
4. Recommendations
Sembcorp Marine should implement a comprehensive restructuring plan that encompasses the following key elements:
Divestment:
- Non-Core Assets: Sell off non-core assets, such as those in the offshore and marine engineering segments, to generate cash and reduce debt.
- Strategic Partnerships: Explore strategic partnerships with other players in the industry to leverage their expertise and technology.
- Focus on Core Businesses: Concentrate resources on core businesses with growth potential, such as specialized shipbuilding and repair services.
Operational Improvements:
- Cost-Cutting Measures: Implement cost-cutting measures across all operations, including streamlining processes, reducing overhead, and negotiating better terms with suppliers.
- Activity-Based Costing: Implement activity-based costing to identify and eliminate inefficiencies in manufacturing processes.
- Technology and Analytics: Invest in technology and analytics to improve operational efficiency and decision-making.
Financial Strategy:
- Debt Management: Negotiate with creditors to restructure debt, extend repayment terms, and reduce interest payments.
- Equity Financing: Consider raising equity capital through a private placement or an IPO to strengthen the balance sheet and provide additional funding for growth initiatives.
- Financial Risk Management: Implement robust financial risk management practices to mitigate exposure to market volatility and economic downturns.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: The recommendations focus on leveraging Sembcorp Marine's existing core competencies in specialized shipbuilding and repair services.
- External Customers: The recommendations aim to improve customer satisfaction by delivering high-quality products and services at competitive prices.
- Internal Clients: The recommendations are designed to enhance employee morale and engagement by creating a more sustainable and profitable business environment.
- Competitors: The recommendations address the competitive landscape by focusing on areas where Sembcorp Marine can differentiate itself and achieve sustainable growth.
- Attractiveness: The recommendations are expected to improve profitability, reduce debt, and enhance shareholder value.
6. Conclusion
Sembcorp Marine's restructuring plan should be a strategic and comprehensive approach focused on divestment, partnerships, and operational improvements. This plan will address the company's financial challenges, enhance profitability, and position it for long-term growth in a challenging market environment.
7. Discussion
Other Alternatives:
- Liquidation: This option would involve selling off all assets and shutting down the business. This was considered too drastic and would have resulted in significant job losses and financial losses for creditors.
- Bankruptcy: This option would have involved seeking protection from creditors while restructuring the business. However, it would have damaged the company's reputation and could have led to a loss of control.
Risks and Key Assumptions:
- Market Volatility: The shipbuilding industry remains volatile and subject to fluctuations in oil prices and global economic conditions.
- Competition: The company will face ongoing competition from other players in the industry, both domestically and internationally.
- Execution: The success of the restructuring plan will depend on the company's ability to effectively execute the recommended strategies.
8. Next Steps
- Develop a detailed restructuring plan: This plan should include specific actions, timelines, and responsible parties.
- Negotiate with creditors: Sembcorp Marine should engage in discussions with creditors to reach an agreement on debt restructuring.
- Implement cost-cutting measures: The company should immediately implement cost-cutting measures across all operations.
- Explore strategic partnerships: Sembcorp Marine should actively seek out strategic partnerships to leverage technology and expertise.
- Monitor progress and adjust accordingly: The company should regularly monitor the progress of the restructuring plan and make adjustments as needed.
By implementing this comprehensive restructuring plan, Sembcorp Marine can navigate the challenging shipbuilding industry, improve its financial position, and position itself for long-term growth and success.
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Case Description
On June 24, 2021, Keppel Corporation (Keppel) and Sembcorp Marine Limited (Sembmarine) announced that they had signed a non-binding memorandum of understanding to enter into exclusive talks to merge Sembmarine and Keppel Offshore and Marine (Keppel O&M), a division of Keppel. Separately, but on the same day, Sembmarine also announced an intention to raise S$1.5 billion through a three-for-two renounceable rights issue (up to 18.83 billion new shares) at an exercise price of S$0.08 per share, which was a 35.7 per cent discount to the theoretical ex-rights price and a 58.1 per cent discount to the June 23 closing price of S$0.191.
Based on the share price reaction to the announcement of the restructuring, what was the market's perception of the merger? Would it create value? Should Sembmarine raise capital via a rights issue and should shareholders subscribe to the rights issue?
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