Restructuring in SMEs: Ireland

Transcription

1 Restructurig i SMEs: Irelad Click for cotets Wyattville Road, Loughlistow, Dubli 18, Irelad. - Tel: (+353 1) Fax: / iformatio@eurofoud.europa.eu - website:

2 Cotets Itroductio Relevace of differet types of restructurig for SMEs Drivers of restructurig Distictive characteristics of restructurig i SMEs Mai challeges ad costraits facig SMEs i restructurig Busiess support Outcome of restructurig evets Coclusios ad policy issues Bibliography

3 Itroductio This report presets the fidigs of a review of the literature o restructurig i small ad medium-sized eterprises (SMEs) i Irelad. The mai forms of restructurig examied i this report are: relocatio; outsourcig; offshorig/delocalisatio; bakruptcy/closure; merger/acquisitio; iteral restructurig; busiess expasio. The review foud that there are limited studies o some types of SME restructurig while for others, there are o data available. This gap i data relates ot oly to the actios of SME ower/maagers durig the restructurig, but also to the impact o employees. Eve where data are available o eterprise restructurig i Irelad, the data relatig specifically to SMEs may ot be disaggregated. I other cases, such as reports published by private sector compaies o eterprise restructurig, there may be limited iformatio o the survey results or how the data were collected. Reports o the restructurig of larger compaies i Irelad are somewhat more pletiful; the study by Aritake-Wild o restructurig i Irelad as part of the Joit Study o Restructurig i the EU15 (part of the Joit Europea-Level Social Parters Work-programme ) featured case studies o the restructurig of two large compaies, Cadbury Irelad ad Aer Ligus. This chapter sets out the curret ecoomic ad political cotext i Irelad ad also provides a outlie of Irish busiess demographics. Curret ecoomic ad political cotext Irelad has bee oe of the hardest hit of all EU Member States by issues arisig from the fiacial crisis. A aalysis of Irelad s SME demographic treds must be viewed i the cotext of the extremely difficult ecoomic, fiacial ad fiscal climate. The Cetral Statistics Office (CSO), Irelad s atioal statistics agecy, has idicated that there has bee sharp declie i ecoomic activity i Irelad as measured by Gross Domestic Product (GDP)/Gross Natioal Product (GNP) ad sigificat icreases i uemploymet. The Irish ecoomy cotracted for the fourth cosecutive year i 2011, leavig real GDP ad GNP aroud 12% ad 15%, respectively, below 2007 levels. 1 The declie i both GNP ad GDP levelled off durig 2010, largely o the back of strog export growth. 1 Gross Natioal Product (GNP) is regarded as a better idicator of Irish ecoomic performace; i Irelad, GNP is lower tha GDP because of icome flows to o-residets, especially profits ad divideds of foreig direct ivestmet eterprises. Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

4 Restructurig i SMEs: Irelad Figure 1: GNP ad GDP at costat prices i Irelad, ( m) 200, , , , , ,000 80,000 60,000 40,000 20,000 0 GDP GNP Source: Cetral Statistics Office, 2012 CSO data show that employmet i Irelad grew strogly durig the period but that the tred has sice reversed. Employmet fell from the peak of 2.1m i 2007 to 1.8m i 2011, with over 320,000 job losses. Figure 2: Employmet i Irelad, (000s) 2,200 2,000 1,800 Total i employmet 1,600 1,400 1,200 1, Uemployed Apr-Ju 2005 Apr-Ju 2006 Apr-Ju 2007 Apr-Ju 2008 Apr-Ju 2009 Apr-Ju 2010 Apr-Ju 2011 Source: Cetral Statistics Office, 2012 The seasoally adjusted uemploymet rate has climbed more tha threefold to over 14%, with aroud half of this total ow accouted for by log-term uemploymet. 2 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

5 Restructurig i SMEs: Irelad The rate of icrease i uemploymet almost doubled durig but levelled off durig the period Figure 3: Seasoally adjusted stadardised uemploymet rates i Irelad, % 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Cetral Statistics Office, 2012 Persoal cosumptio fell by 21.4% from a peak i 2007 to 2011, with Gross Domestic Fixed Capital Formatio fallig by 74% over the same period. The outstadig stock of credit 2 to the o-fiacial, o-property related private sector has also falle dramatically. The Natioal Competitiveess Coucil i its Irelad s Competitiveess Challege 2011 publicatio oted that the total amout of credit outstadig to Irish private sector eterprises was 40.4 billio i Jue 2011, dow from 59.6 billio at its peak i December A recet CSO survey o access to fiace idicates that eterprises that applied for bak fiace had a success rate of 95% i 2007, compared with 55% i The dowtur i the Irish ecoomy was caused by a umber of ecoomic, fiacial, fiscal ad political factors. A leadig Irish ecoomist 3 has poited out that: the Irish crisis was predomiatly the result of a iteractig property ad credit bubble. Risig property prices fuelled credit iflows, which i tur fuelled the property bubble. What made the Irish property bubble ultimately so damagig was the fact that it was both a property price ad costructio bubble. Whe the bubble burst it led to both a massive wealth shock ad a massive structural shock to the ecoomy give the resources that had bee misallocated by the bubble to costructio. This i tur led to a series of adverse feedback loops: bakig, growth ad fiscal. The policy challege has bee so severe because policies to try to stabilise oe elemet of the crisis e.g. debt stabilisatio teds to make aother worse e.g. growth. 2 3 Icludes credit advaced by all credit istitutios. Joh McHale writig o The Irish Ecoomy web site ( April 30, Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

6 Restructurig i SMEs: Irelad The bakig crisis hit the busiess sector particularly hard as the Irish baks scrambled to deal with: the fall out of their disastrous ledig to the property ad costructio sectors; the freezig of iteratioal moey wholesale markets o which they had come to rely heavily for fuds. The et result was that the baks paicked ad started callig back existig loas ad curtailig ew ledig, precisely whe SMEs most eeded access to credit to fiace their restructurig. The reductio i the availability of bak credit was a direct cause of the collapse i the mortgage broker sector that so severely affected oe of the case study compaies, First Credit. Furthermore, the demad from the baks to the ower of aother case study compay, George Mordaut, to retur loas they had give him was a cotributory factor to the dowfall of his compaies. Cocer over Irelad s escalatig bakig crisis was oe of the key factors which led to the Irish Govermet seekig fiacial assistace of up to 85b from the EU ad the Iteratioal Moetary Fud (IMF) i November Recet govermet budgets have focused o tacklig the large fiscal deficit, ad uder the terms of the EU/IMF rescue deal there were will be further reductios i exchequer expediture, alog with icreases i taxatio, over the ext three years. Followig a geeral electio i February 2011 a ew govermet, comprisig the Fie Gael ad Labour parties, came ito power i March The agreed programme for govermet icludes a emphasis o supportig SMEs. Busiess demographics The lack of a official busiess register i Irelad makes it difficult to calculate how may eterprises are startig up, ad how may close dow. This situatio is ow beig rectified by the CSO which has begu to compile a atioal register of busiess eterprises. The mai data sources used by the CSO for this are the atioal tax collectio agecy, the Reveue Commissioers, ad the Compaies Registratio Office (CRO) which holds statutory iformatio o Irish compaies ad busiess ames. 4 Recet research from the CSO idicate that, i 2009, SMEs 5 i Irelad accouted for 99.8% of the coutry s eterprises, 69% of private sector employmet, 52% of turover ad 51% of gross value added. Data published by the CSO reveal that there were over 195,000 eterprises active i the private busiess ecoomy 6 i Irelad i 2010, with early 1.24 millio people egaged 7 i them. This represeted a decrease of 5.4% i eterprises ad 5.5% i people egaged from the previous year As show i Table 2, public ad private limited compaies accout for just uder 50% of busiess eterprises i Irelad. A SME is defied as a eterprise that has fewer tha 249 employees ad has either a aual turover ot exceedig 50m or a aual balace sheet total ot exceedig 43m. The private busiess ecoomy covers the NACE Rev 2 sectors B N (excludig activities of holdig compaies). People egaged icludes employees, workig proprietors ad family members. 4 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

7 Restructurig i SMEs: Irelad The CSO s study of Irish busiess demography i 2010 also shows that, durig 2010, over 11,000 eterprises were created, with a average of 0.9 people egaged per eterprise. Sector D, Electricity, gas, steam ad air coditioig supply, was the sector with the highest eterprise start-up rate 8 of 12.3% (38 eterprises). The sector with the secod highest start-up rate was Sector J, Iformatio ad commuicatio, with a 9.2% start-up rate (928 eterprises). More tha 24,000 busiesses ceased durig 2009, resultig i a loss of early 35,000 jobs. The sector where closures had the largest effect o employmet was Sector F, Costructio, with 17.1% of eterprises i this sector ceasig durig the year, resultig i a loss of 7.7% of jobs i the sector. This was followed by Sector L, Real Estate Activities, with 11.6% of eterprises closig, resultig i a loss of 6.9% of jobs. Over a quarter of all eterprises active durig 2010 started tradig betwee 2006 ad These ew eterprises accouted for 5.3% of people egaged i the busiess ecoomy i Table 1 shows the umbers of eterprises i the busiess ecoomy durig Table 1: Irish busiess demography NACE Rev 2 (umber of active eterprises* ad umbers of people egaged ad employees) Idicator Active eterprises (umber) 211, , , , ,431 People egaged (umber) 1,443,072 1,528,295 1,503,034 1,308,786 1,237,385 Employees (umber) 1,307,471 1,392,564 1,370,216 1,190,851 1,126,796 * excludig activities of holdig compaies (B to N) Source: CSO, 2012 Table 2 provides a breakdow of Irish busiess eterprises by type of legal structure (sole traders, ad public ad private limited compaies). It shows that public ad private limited compaies accout for just uder 50% of the total while idividual proprietors formed 42% of the total with other forms of owership holdig the balace. Table 2: Irish busiess demography NACE Rev 2 (umber of active eterprises* by type of legal structure) Idicator Idividual proprietorship 105, , ,351 87,708 82,118 Other legal forms of owership 16,184 15,696 16,200 16,584 16,210 Public ad private limited compaies 90,524 94,196 97, ,283 97,103 Total 211, , , , ,431 * excludig activities of holdig compaies (B to N) Source: CSO, 2012 Table 3 provides a aalysis of active eterprises i the busiess ecoomy by employmet size. The table shows that, i 2010, eterprises employig fewer tha 10 people accouted for 177,547 eterprises or 90% of the total umber of eterprises. SMEs form 99.8% of the total umber of active eterprises with large compaies (those employig more tha 250 employees) accoutig for the balace of 0.2%. 8 New eterprises as a percetage of active eterprises. Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

8 Restructurig i SMEs: Irelad Table 3: Irish Busiess Demography NACE Rev 2 (umber of active eterprises* by employmet size) Employmet size Uder , , , , , ,279 12,626 12,099 10,385 9, ,743 7,025 6,773 5,647 5, ,002 3,202 3,076 2,574 2, ad over Total 211, , , , ,431 * excludig activities of holdig compaies (B to N) Source: CSO, 2012 Data o the structure of the SME sector i Irelad is also available from the Europea Commissio through its Small Busiess Act (SBA) Fact Sheet for Irelad Table 4 shows the umber of SMEs i Irelad compared with the EU27 by size, category ad their associated employmet ad value added data. The SBA fact sheet data reveal that Irelad has relatively higher cocetratios of small, medium-sized ad large busiesses tha the Europea Uio average, where micro firms are comparatively more prevalet. The SBA data covers NACE categories C to K, whereas the CSO data outlied above covers NACE categories B to N, so the two datasets are ot comparable. Table 4: SMEs i Irelad No. of eterprises Employmet Value added Irelad EU27 Irelad EU27 Irelad EU27 Number Share Share Number Share Share Billio Share Share Micro 72, % 92.1% 212, % 29.8% % 21.6% Small 12, % 6.6% 230, % 20.4% % 18.9% Medium-sized 2, % 1.1% 217, % 16.8% % 17.9% SME 86, % 99.8% 659, % 66.9% % 58.4% Large % 0.2% 328, % 33.1% % 41.6% Total 87, % 100.0% 987, % 100.0% % 100.0% Notes: Estimates for 2010, based o figures from the Structural Busiess Statistics Database (Eurostat). The estimates have bee produced by Cambridge Ecoometrics. The data cover the busiess ecoomy which icludes idustry, costructio, trade, ad services (NACE Rev. 1.1 Sectios C to I, K). The data do ot cover eterprises i agriculture, forestry, fishig or the largely omarket services such as educatio ad health. Source: SBA Fact Sheet Irelad The SBA Fact Sheet makes several observatios: The SME sector s cotributio to the ecoomy, as measured by its gross value added, fell by five percetage poits, from 53% to 48% betwee 2007 ad 2010, suggestig that small ad medium-sized eterprises were hit hardest by the ecoomic dowtur, ad thus produced comparatively less tha large eterprises. From 2007 to 2010, the SME sector i Irelad lost 15% of its total workforce ad produced 18% less fial output (gross value added). By compariso, large eterprises lost 9% of their workforce ad oly 6% their gross value added. 6 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

9 Restructurig i SMEs: Irelad The costructio sector, ad SMEs i costructio, suffered the hardest blow. Out of more tha 128,000 jobs lost by SMEs, a quarter was i the costructio sector, which was reduced to less tha half its size i The Irish ecoomy was ot expected to recover sigificatly util after It will probably take eve loger to regai pre-crisis levels (especially o employmet ad productio levels i the SME sector) ad to cotiue the positive progress made by the SME sector before the crisis. Restructurig Restructurig withi the eterprise sector is a sigificat ad topical issue i public debate i Irelad as a result of the demise of the Celtic Tiger 9 which has led to icreased uemploymet ad a rise i the umber of eterprises goig ito liquidatio. There have bee a umber of high-profile cases of busiessme who have goe i a very short period of time from beig amog Irelad s wealthiest idividuals to be beig declared bakrupt. The restructurig of the mai, Irish-owed, fiacial istitutios ivolvig essetially their atioalisatio by the Govermet is a hotly debated public topic. However, it is importat to ote that, durig the early part of the Celtic Tiger era, busiess cofidece was high as a result of icreased export sales, while durig the latter years buoyat cosumer demad stimulated busiess growth. This cofidece traslated ito icreased busiess activity 10 ad cosequetly employmet. At a political level, oe of the key Govermet aims is to achieve the objectives of the EU/IMF Programme of Support: restructurig ad recapitalisig the bakig system; achievig fiscal stability; returig the Irish ecoomy to growth. Growig the ecoomy is see as a importat method of accomplishig this goal, primarily through icreasig exports, ehacig iovatio, research ad developmet ad supportig SMEs. The provisio of credit to SMEs is a key Govermet cocer. The Programme for Govermet, published i March 2011 by the two icomig govermet parties, highlights the actios the ew Govermet would take to get the baks ledig to idustry ad etrepreeurs. 9 The Celtic Tiger is the colloquial term for the period betwee 1993 ad 2007 durig which the Irish ecoomy grew strogly. There are differeces betwee the growth that occurred before 2002 (strog export-led growth) ad post 2002 which was largely fuelled by a domestic property market bubble. The subsequet collapse of the property market combied with domestic fiscal ad bakig crises ad global fiacial ad ecoomic dowturs sice 2007 have spiralled Irelad ito a major bust. 10 Due to the lack of a atioal busiess register, the umber of busiesses registerig for Value Added Tax (VAT) is ofte used as a proxy for measurig eterprise growth. Data from the Reveue Commissioers show that the umber of busiesses registerig for VAT icreased from 25,472 i 2001 to 35,842 i 2005 a icrease of 41%. The umber of busiesses registered for VAT stood at 195,282 i 2001 but icreased by 21% to 236,090 i Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

10 Restructurig i SMEs: Irelad A 2012 study by Lawless et al., for the Cetral Bak, SMEs i Irelad: Stylised facts from the real ecoomy ad credit market, idicated that Irish SMEs are experiecig ufavourable credit coditios, ad that the level of o-performig loas o Irish baks SME books is extremely high, with large, risky, exposures i sectors associated with the Celtic Tiger: hotels ad restaurats; costructio; professioal; real estate; wholesale ad retail. The study by Lawless et al. showed that, while atioal policies focused o the importace of export-led recovery, may SMEs depeded o the domestic market to geerate busiess, ad therefore employmet. The study also idicated that SMEs were more affected by the ecoomic dowtur tha large firms. Small firms experieced the greatest declie i employmet i , losig 8% of jobs o average, with micro ad medium firms also reducig employmet cosiderably. Large firms, however, experieced a average employmet fall of 2% each year, which is also sigificat but shows greater resiliece tha the SME group. The study by Lawless et al. also oted that Cetral Bak of Irelad data show a large expasio of credit to the private sector betwee 2005 ad 2008 followed by a sharp cotractio across all sectors to Additioally, the study reported that, i terms of loa rejectio rates, iterest rates, collateral requiremets ad fees ad commissio, Irish SMEs appear to be experiecig much tougher credit coditios tha the euro area average. I relatio to loa performace, the study revealed that early a third of all SME loas were o-performig as of December Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

11 Relevace of differet types of restructurig for SMEs This sectio provides a review of the literature i relatio to the relevace of differet types of restructurig for Irish SMEs. The review has idetified sigificat gaps i research i relatio to the differet types of restructurig, particularly the absece of atioal statistics o SMEs that are udergoig restructurig. Some of the available data o restructurig do ot ecessarily focus o SMEs or do ot disaggregate SMEs from the total busiess populatio. There are, for example, a umber of official sources of data o eterprise bakruptcy/closures but it is ofte ot possible to distiguish the umber of SME closures from the overall total. The available data from public sources o restructurig primarily focuses o formal restructurig, for example, bakruptcy, or where the CSO has carried out a survey of restructurig as part of a EU-wide study, for example, offshorig/delocalisatio. Data o issues such as iformal restructurig of SMEs or family successio withi a familyowed SME are lackig. Other data o SME restructurig are available from private sector sources, for example busiess service providers ad trade associatios, but there is ofte little detailed iformatio available o survey methodologies to substatiate the fidigs preseted. Relocatio The Irish busiess literature is silet o the issue of relocatio by SMEs. This may be attributable to the fact that Irelad, geographically, is relatively small. Outsourcig The review of the limited literature o outsourcig i Irelad idicates that it ca ecompass a eterprise s core fuctios, for example, maufacturig; or fuctios that are acillary to its mai activities, such as IT or logistics. Developmets i ICT mea, for example, that SMEs ca use cloud-based services to outsource the storage of computer data i domestic or foreig locatios. IT outsourcig is commo amog 72% of Irish orgaisatios, accordig to a study published i 2007 by the Irish Computer Society (ICS). This figure rises to 84% whe public sector orgaisatios are omitted. Accordig to the ICS research, smaller IT departmets outsource less tha their larger couterparts, despite the assumptio that smaller orgaisatios would ot have the skills ad mapower to cope with the icreasig complexity of systems or to facilitate the offerig of ew IT services. However, the outsourcig survey did ot idicate how it defied smaller IT departmets, or did it provide details of how may of the survey respodets were SMEs. Offshorig/delocalisatio Offshorig/delocalisatio, while ot extesively studied i Irish busiess literature, is a well-kow pheomeo to Irish busiess people. A large umber of multiatioal compaies have maufacturig facilities i Irelad, because they are attracted by Irelad s low corporatio profits tax, educated workforce ad access to EU markets. Despite these beefits, some multiatioals have moved their maufacturig plats to lower cost coutries i the Far East, although they cotiue to base their productio support services i Irelad. I 1990, for example, the US computer multiatioal compay Dell Computers established a large maufacturig plat i Irelad, which it closed i 2009 with the loss of Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

12 Restructurig i SMEs: Irelad 1,900 jobs. It trasferred operatios first to Easter Europe ad the to the Far East 11, but it still retais a umber of sales ad support operatios i Irelad. The review of Irish literature has show there is little data o the extet to which SMEs i Irelad use offshorig/delocalisatio (i cotrast, there are a cosiderable umber of studies examiig multiatioal offshorig/delocatio). I 2008, the CSO published a report, Iteratioal sourcig: Movig Irish busiess activity abroad, which preseted the results of a ad hoc survey o iteratioal sourcig coducted i The purpose of the survey was to establish data o the movemet of Irish busiess activity abroad durig the referece period ad to establish eterprises future plas for The CSO study targeted all eterprises i the o-fiacial sector havig 100 or more employees ad therefore covered medium-sized eterprises withi the SME spectrum. However, the study did ot disaggregate the study results relatig to the iteratioal sourcig activities of medium-sized eterprises from that of the total survey populatio. The results idicated that, betwee 2001 ad 2006, 38% of large Irish eterprises egaged i iteratioal sourcig. This level of iteratioal sourcig was higher tha reported by other Europea coutries that coducted a similar survey. The level of iteratioal sourcig of Irish busiess activity was highest i the maufacturig sector (57%) ad the trasport, storage ad commuicatio sectors (54%). Bakruptcy/closure The large rise i closures ad bakruptcies has received extesive debate i the Irish media, largely as a result of the demise of the Celtic Tiger ad the sigificat icrease i uemploymet i Irelad (estimated at approximately 14%). There has bee sigificat media coverage of a umber of high-profile compay liquidatios ad etrepreeur bakruptcies, may of which had bee major players i the costructio/property sector. These iclude property developer Berard McNamara who publicly admitted, i 2010, that he was broke ad that his compaies owed 1.5 billio, ad costructio ad fiacial services busiessma Sea Qui 12, who wet from beig the richest ma i Irelad with a estimated worth of 3.7 billio i to bakruptcy i It is importat to ote that, uder the Irish legal system, oly idividuals ca go bakrupt. Compaies that are uable to meet their debts (creditors or court liquidatio) or where the owers of the compay o loger wish to maitai the busiess (volutary liquidatio) are woud up. Compaies which face fiacial difficulties, but which are potetially viable may opt for examiership (see the sectio o iteral restructurig for a discussio o examiership). There are legal obligatios o compay directors i Irelad to esure that they act prudetly where their compaies are facig fiacial difficulties, particularly i relatio to employees ad creditors. The pealties for a director who has bee foud by the courts to have acted recklessly ca be severe ad ca iclude heavy fies ad disqualificatio, for several years, from actig as a compay director. 11 Also see 12 Oe of the compaies cotrolled by Sea Qui was Qui Isurace which uderwet iteral restructurig as reported i the Europea Restructurig Moitor: 13 Suday Times Rich List, Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

13 Restructurig i SMEs: Irelad While there has bee cosiderable public discourse o bakruptcy ad compay closures, there has bee little empirical research o this form of restructurig. Data compiled by the CRO idicate that the umber of liquidatios ad closures amog icorporated busiesses is icreasig ad, sice SMEs accout for over 99% of eterprises i Irelad, it ca be cocluded that this form of restructurig has become more prevalet. Merger/acquisitio Extesive data sources of mergers ad acquisitios i Irelad are lackig ad ted to focus o the merger activities of larger eterprises. As previously idicated, the lack of a comprehesive busiess register i Irelad makes it difficult to research the umber of eterprises that have merged. The CSO 14 has idicated that their eterprise demographic database does ot iclude chages to the overall eterprise populatio due to mergers, break-ups, a split-off or the restructurig of a set of eterprises. The CSO has, however, published data o the reasos for which eterprises were expected to access fiace i 2010 (see Table 5). The data show that 6.7% of eterprises surveyed expected to apply for fiace for mergers ad acquisitios. Table 5: Reasos why eterprises expect to request fiace (%) Reaso 2010 Maitai the busiess 60.4 Grow domestic activities 45.8 Fiace export sales 10.6 Develop iteratioal activities 9.4 Fiace iovatio ad research ad developmet 8.2 Mergers ad acquisitios 6.7 Other reasos 12.9 Total 100 Source: Cetral Statistics Office The CSO data do ot, however, provide a breakdow of these eterprises by compay size. 14 Presetatio by Jillia Delaey, Statisticia, Cetral Statistics Office (CSO) etitled Overview of CSO Demography release, give at the Workshop o Busiess Demography ad Job Chur statistics, Dubli Castle, May 12, Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

14 Restructurig i SMEs: Irelad The Competitios Authority is a statutory body that admiisters ad eforces the primary ati-trust legislatio relatig to the acquisitio of Irish udertakigs, ad it has statutory resposibility for moitorig mergers ad acquisitios i Irelad so as to esure that the iterests of cosumers are protected ad that competitio is ot reduced. Compaies cosiderig a merger/acquisitio must otify the authority if, i the most recet fiacial year: the worldwide turover of each of two or more of the udertakigs ivolved i the merger or acquisitio is ot less tha 40m; each of two or more of the udertakigs ivolved i the merger or acquisitio carries o busiess i ay part of the islad of Irelad; the turover i Irelad of ay oe of the udertakigs ivolved i the merger or acquisitio is ot less tha 40m. The authority s miimum turover threshold of 40m is just withi the defiitio of medium-sized eterprises used by Eterprise Irelad. This defiitio states that a medium-sized eterprise is oe which has betwee 50 ad 249 employees ad has either a aual turover ot exceedig 50m or a aual balace sheet total ot exceedig 43m. I theory, the authority has a remit for reviewig mergers ivolvig medium-sized eterprises. While it publishes data o the umber of mergers it is otified about (40 i 2011), it does ot provide a breakdow of the mergers by compay size. The Irish Takeover Pael is the statutory body resposible for moitorig ad supervisig takeovers ad other such trasactios i relevat compaies i Irelad. For the purposes of the Irish Takeover Pael 1997, as ameded (1997 Act) a relevat compay icludes public limited compaies or other bodies corporate, icorporated i Irelad, whose securities are curretly beig traded, or (if the subject of a takeover or other relevat proposal) were traded withi the previous five years, o the Irish Stock Exchage, the Lodo Stock Exchage, the New York Stock Exchage ad Nasdaq. As the Irish Takeover Pael primarily focuses o public compaies listed o the stock exchage, its relevace to SMEs is very limited. Fiacial istitutios, stockbrokers ad legal service providers frequetly advertise i the busiess press the mergers ad acquisitios i which they have assisted. The stockbrokig firm, NCB, produces a quarterly report o mergers ad acquisitios ivolvig Irish compaies, M&A Tracker Survey, ad though it provides sectoral iformatio (such as food, or fiacial services) of merger ad acquisitio activities, it does ot provide a breakdow of the size of the eterprises ivolved. Iteral restructurig Little published data exist o the extet of iteral restructurig withi SMEs i Irelad. However, a ew legal arragemet, examiership, has bee established i Irelad which provides court protectio to help compaies i fiacial difficulties to restructure where there is a good chace of beig able to save the busiess. 15 Essetially, a isolvet compay that goes ito examiership is cocooed by the comprehesive protectio of the High Court for a period of up to 100 days as it attempts to restructure its cost base, reegotiate or exit from oerous leases ad put i place a scheme with its creditors, icludig its ladlord. 15 A iformative website, has bee produced by accoutats, Hughes Blake, which provides extesive iformatio ad case studies o examiership. 12 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

15 Restructurig i SMEs: Irelad The process is maaged by a outside party kow as the examier, usually a accoutat. Eterig examiership is the oly way i Irish law, outside receivership or liquidatio, that a compay ca, for example, had back a oerous leasehold iterest to a ladlord. The appoitmet of a examier has bee a optio for isolvet compaies i Irelad sice Durig the recessio of the 1980s, there was icreasig demad for the itroductio of a US Chapter 11-type recovery process which would eable fudametally good busiesses that were uder pressure to survive. Examiatio was itroduced as a result ad the iclusive process ivolves the examier leadig the compay through a recovery process ivolvig maagemet, leders, creditors, suppliers ad staff. Kow i law as examiatio, over the years it has become colloquially kow as examiership. Ay compay that has a reasoable prospect of survival, provides employmet, ad that is viable ca be a suitable cadidate for examiership. May commetators argue that a compay should have a certai level of turover, be a certai size or have a certai level of assets i order for it to qualify, due to the cost of the process. However, examiership is accessible to practically all compaies. It is possible to take a low-cost examiership applicatio i the circuit court if the debts of the compay are less tha 317,000 (risig later this year to 500,000). Legislators i Irelad opted for this more maagemet-friedly form of recovery process whe desigig the examiatio legislatio ad, from a compay director s poit of view, examiership i Irelad ca be distiguished from the rather more oerous admiistratio provisios of UK compay law. Examiership frequetly ivolves brigig ew capital ito the busiess ad this ca result i existig shareholders havig to cede cotrol to ew shareholders, ad hece its iclusio i the iteral restructurig category. Examiership may help to save some or all of a compay s jobs. However, there have bee o studies or reports that have reviewed the situatio of employees of a small or medium-sized eterprise subject to a examiership. Successio i family busiesses is a form of iteral restructurig which has ot received much attetio either i busiess literature. A report by Tom Marti ad Associates (2008) o family-owed small ad medium-sized eterprises i Irelad idicated that the trasfer of busiess owership from oe geeratio to the ext was a key issue for this cohort. Family-owed eterprises are estimated by the CSO to accout for three-quarters of all Irish eterprises ad to accout for half of employmet i the private sector. Successio is see as a much more complex issue i a family-owed busiess tha i ay other busiess. The small amout of available research idicates that a miority of family busiesses make it through to the ext geeratio ad very few make it to a third. Busiess expasio The lack of a comprehesive busiess register i Irelad makes it difficult to idetify the umber of SMEs that are expadig. A umber of proxy idicators, such as ew Value Added Tax (VAT) registratios/deregistratios, ca be used to gauge the tred i eterprise start-ups ad closures. However, these proxy idicators provide little iformatio o SME busiess demographic treds as the uderlyig data do ot disaggregate small ad medium sized eterprises from the total populatio. The Global Etrepreeurship Moitor: Etrepreeurship i Irelad: The Aual Report for Irelad (Fitzsimos ad O Gorma, 2010) otes that Irish etrepreeurs ad eterprises have similar, or slightly better, scores to the OECD average i relatio to Irelad s Global Exchage Market expasio idex (which combies measures of ewess of product/service to customers, the extet of competitio ad the ewess of techology). Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

16 Restructurig i SMEs: Irelad The iteratioalisatio of SMEs has received more attetio i the busiess literature give that it is a importat meas of busiess expasio ad also because it is a atioal policy objective. Erst & Youg s 2011 aual Globalisatio Idex 16 published i Jauary 2012 shows that Irelad is the world s secod most globalised atio i terms of GDP (after Hog Kog), ad remais the most globalised atio i the wester world. The report also says that Irelad is forecast to maitai its overall secod place rakig util at least I the 2010 editio of the aual global report, Irelad was reported to have displaced Sigapore to become the world s secod most globalised ecoomy. I the 2011 editio, the report cofirms that, i additio to retaiig its secod positio overall, Irelad is the most globalised wester ecoomy ad the most global ecoomy worldwide i two key categories: global techology exchage; global movemet of fiace ad capital. Ecouragig SMEs to iteratioalise is a key atioal objective. Eterprise Irelad, the atioal agecy for the developmet of idigeous idustry, says that its missio statemet is: to accelerate the developmet of world-class Irish compaies to achieve strog positios i global markets resultig i icreased atioal ad regioal prosperity. I its strategy documet, Trasformig Irish Idustry, Eterprise Irelad committed itself to a target of assistig its cliet compaies to geerate a additioal 4 billio i ew export sales durig Erest & Youg, Globalizatio Idex 2011, web lik: 14 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

17 Drivers of restructurig Overview The literature o the drivers for SME restructurig i Irelad is scat, with the exceptio of the impact of the ecoomic, fiacial ad bakig crisis o the eterprise sector, particularly i terms of bakruptcies ad closures. The icreasig level of uemploymet i Irelad is testimoy to the umber of eterprises that have closed, especially i the costructio sector. I February 2012, PriceWaterhouseCoopers (PWC), the professioal services provider, published the summary results of its survey, Busiess Barometer, which revealed that two-thirds of Irish compaies were plaig to restructure their busiesses i The survey suggests that key drivers for restructurig icluded makig the busiess more efficiet, reducig the umber of employees ad reducig debt. The PWC survey also foud that 70% of busiesses hoped to make sigificat chages i the year ahead, eve as they believed the process would be a sigificat challege for them, while 87% of those surveyed said their busiess had become more viable sice they restructured. No data were available o the size of the compaies surveyed. The mai fidigs of the PWC publicatio are summarised here. Streamliig (60%) is by far the most popular restructurig activity beig plaed i the year ahead. Other such iitiatives iclude headcout ratioalisatio (48%), debt refiacig (35%) ad busiess cosolidatio (25%). Nearly three-quarters (69%) of this restructurig focused primarily o operatioal restructurig. Less tha a third (31%) focused primarily o fiacial/debt restructurig. Other geeral busiess reports also idicate that cost reductio ca be a primary motivatig factor i respect of SME restructurig. However, this may ot be uiversally true. As previously metioed, a study o IT outsourcig i Irish eterprises oted that cost reductio was ot the domiat motivator i IT outsourcig decisios. Of greater ifluece was facilitatig the offerig of additioal IT services while cocetratig o core competecies, eablig the implemetatio of scalable IT solutios, ad icreasig the fuctioality of the offered IT services. The decisio to outsource was ot foud to be liked to curret performace of the IT departmet, as lack of i-house skills was ot idetified as a major ifluecig factor. A study o outsourcig i the supply chai sector (see below) idicates that a desire to focus o key activities may lead to the outsourcig of less essetial activities. The developmet of ew markets particularly iteratioal markets ca be a cotributig factor to SME restructurig. A study, Supportig the iteratioalisatio of SMEs (Europea Commissio, 2007), recommeded that Member States should cosider iteratioalisatio as part of policies to ehace competitiveess. The study oted that, as coutries progress through the value-added ladder this would lead to mergig iteratioalisatio ad iovatio uder oe sigle umbrella. It said that, iside Europe, this was already startig to happe i Irelad, Filad ad Norway. Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

18 Restructurig i SMEs: Irelad Outsourcig The literature o the drivers for the use of outsourcig by Irish SMEs is relatively small. However, a 2005 survey of supply chai maagemet capability amog compaies 85% of which were SMEs etitled Competitive Challeges: Chai reactios A aalysis of supply chai maagemet ad competitive solutios for the islad of Irelad, by the Natioal Istitute for Trasport ad Logistics (Smith ad Huber, 2005) foud that there was a desire amog respodets to focus o key competecies. This meat that activities which were cosidered o-core had the potetial to be outsourced. The study foud that, at a operatioal level, compaies both i the Republic of Irelad (ROI) ad Norther Irelad (NI) have become aware of third-party orgaisatios that could trasport goods more cheaply, more speedily ad with higher levels of customer service tha i-house operators. Respodets cofirmed that outsourcig of trasportatio was likely to accelerate i the ext three years, alog with just-i-time ad overight deliveries, as well as shorter delivery times. The survey idetified that ROI compaies expect to be affected to a greater extet by shorter delivery times, smaller ad more frequet drops ad the outsourcig of the trasport fuctio tha NI firms. However, the Smith ad Huber (2005) study poited out that all firms eeded to be agile ad iovative amid icreasig supply chai complexities ad customer demads for shorter delivery lead times. A study of IT outsourcig published by the Irish Computer Society i 2007 idicated that tactical (that is, short-term) motivatios are more ifluetial tha strategic objectives i determiig Irish IT outsourcig policy. Offshorig/delocalisatio The CSO report, Iteratioal sourcig: Movig Irish busiess activity abroad (2008), highlighted that efficiecyseekig factors were the mai motivatios for Irish eterprises to source iteratioally. Both the reductio of labour costs ad the reductio of other costs raked highest amogst the reported motivatig factors, whilst the focus o core busiess activity was the fourth highest motivatig factor. However, it is importat to ote that, while the survey icluded medium-sized eterprises as well as large eterprises, the report did ot differetiate the offshorig/delocatio motivatios of the former. Busiess expasio: iteratioalisatio The small size of the Irish market ofte compels firms to seek iteratioal sales at a early stage of their developmet. A study by Terjesa, O Gorma ad Acs, Itermediated mode of iteratioalizatio: ew software vetures i Irelad ad Idia (2008), provides a case study of a small Irish compay, Cylo, which produces techical solutios for buildig maagemet systems (BMS): The small Irish market required that the etrepreeurs seek iteratioal sales (for example, by 1992 it was estimated that the Irish market represeted oly 1% of the Europea market for Buildig Maagemet Systems). At this time Cylo had four staff ad sales of approximately 100,000. I seekig how best to iteratioalise, the etrepreeurs chose a strategy of sellig to firms with a established presece i overseas markets. The authors cocluded that the small size of the Irish market prompted the etrepreeurs to iteratioalise. 16 Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

19 Distictive characteristics of restructurig i SMEs Aticipatio, plaig ad preparatio of restructurig evets A examiatio of available literature reveals a lack of research ito how SME ower/maagers go about aticipatig, plaig ad preparig for restructurig. What few publicatios exist suggest that the majority of small ad mediumsized eterprises do ot have a high level of plaig or preparedess. A survey by the Small Firms Associatio (SFA) i 2009 idicated that 67% of small family-ru busiesses do ot have a exit strategy for their busiess. Almost half (47%) of those who had strategies preferred to sell the firm ad 48% iteded to pass the busiess o to a family member. This survey also revealed that 69% of the busiess owers would seek advice o successio plaig from their accoutat ad 26% would tur to a solicitor or a busiess adviser. A study (Nummela et al, 2006) of iteratioalisatio modes used i the software sector i Irelad ad Idia idicated that there were two optios ope to SMEs: a direct mode ad oe where multiatioal eterprises were used as itermediaries. The study oted that the latter was particularly relevat to Irish software SMEs, give the large umber of multiatioal software compaies with a presece i Irelad (these multiatioals were importat as customers, as referral poits for iteratioal customers, or as previous employers of the compay s fouders). Maagig restructurig The literature review idetified a cosiderable gap i the literature o the issue of how restructurig was maaged i small ad medium-sized eterprises. The study by the SFA recommeded that i relatio to successio: with a high proportio of the Irish busiess commuity populated by family-ru busiesses, it is vitally importat for the ecoomy that the owers of these busiesses have the ability to successfully maage the issue of trasferece. Ower-maagers eed to cosider all the issues at the earliest possible time, ad the select ad implemet the appropriate successio pla at the right time to obtai the best result. Ower-maagers eed to realise that a successful trasitio of a busiess miimises disruptio, esures cotiuous profitability ad guaratees satisfactory returs to employees, parters ad shareholders. The CSO study, Iteratioal sourcig: Movig Irish busiess activity abroad (2008), revealed that: 30% of all large Irish eterprises sourced core busiess iteratioally; 29% of eterprises sourced o-core support busiess fuctios iteratioally; the support busiess fuctios most likely to be sourced iteratioally by Irish eterprises were distributio (16%), marketig ad sales (13%) ad egieerig (13%). Europea Foudatio for the Improvemet of Livig ad Workig Coditios,

20 Restructurig i SMEs: Irelad By far the most popular destiatio for Irish iteratioal sourcig activity was the other Member States of the former EU15. Of those Irish eterprises egaged i iteratioal sourcig durig the referece period: 79% sourced some busiess fuctios withi the EU15; oe-third sourced some busiess fuctios to the 12 ew Member States of the EU that joied i 2004; 25% sourced to the USA ad Caada; 24% sourced to Chia. Actors i the restructurig process The Aritake-Wild (2007) study o restructurig i Irelad idetified a umber of actors that ca assist compaies experiecig restructurig. These iclude public sector bodies, employer ad sectoral represetative orgaisatios, employee represetative orgaisatios ad other orgaisatios, as well as private sector compaies. Some of these orgaisatios ca provide assistace ad advice to SME owers/maagers i relatio to restructurig. There are public sector orgaisatios whose remit is to ecourage SMEs to expad ad to iteratioalise. Eterprise Irelad, the atioal developmet agecy for idigeous compaies i the maufacturig ad iteratioally traded service sectors, is tasked by the Govermet to facilitate the developmet ad growth of Irish eterprises i world markets. Eterprise Irelad is resposible for the maagemet of the etwork of city ad couty eterprise boards that provide support to busiesses employig fewer tha 10 people. The Aritake-Wild report oted that the Govermet had established a umber of mechaisms to assist employeremployee relatios. It also oted that a umber of social partership arragemets had bee put i place at a atioal level, but also that some of these had ot filtered dow to eterprise level. Though the Aritake-Wild report was comprehesive i its coverage of the actors that could help busiesses udergoig restructurig, it did ot look at the actors that specifically focused o restructurig i SMEs. The review of the literature foud oly a limited umber of reports or studies that examied the stakeholders that, potetially, could have a role or iput i SME restructurig. Oe study of IT outsourcig poited to the potetial role that exteral service providers could have i persuadig SMEs to egage i restructurig, specifically outsourcig (Irish Computer Society, 2007). Bria Keedy of Lake Commuicatios, author of the study, oted that orgaisatios with small IT departmets outsourced less ad suggested some possible reasos for this tred 17 : The fact that small orgaisatios i Irelad are outsourcig IT services less tha their larger couterparts perhaps suggests that outsourcig service providers do ot focus their sales efforts o smaller firms. However, a more worryig alterative explaatio is that smaller orgaisatios do ot yet fully appreciate the relevace of IT i achievig strategic goals ad sustaiable competitive advatage over the log-term. 17 Quoted i the olie publicatio, The Register ( 9 March, Europea Foudatio for the Improvemet of Livig ad Workig Coditios, 2013

21 Restructurig i SMEs: Irelad The study oted that, for the 28% of Irish orgaisatios that choose ot to outsource IT services, the mai deterrets are: ucertaity regardig providers ability to supply the required level of service; apprehesio about the realisatio of outsourcig beefits ad goals; cocers over the maagemet of the outsourcig providers. Fears over future employmet for the orgaisatio s workers are ot a major ifluecig factor i the IT outsourcig decisio. Though there is a lack of data o the participatio of trade uios i SME restructurig, aecdotal evidece appears to suggest that employee represetatives are ivolved i egotiatios i redudacies for those employees beig laid off. The mai focus for the ivolvemet of trade uios is to esure that the umber of their members affected by the redudacy programme is miimised, ad to secure the best possible redudacy package for their members who are made redudat. The employee represetatives will also seek to ifluece the method used by the employer to determie the redudacy selectio process for example, last i first out. Similarly, if a compay is goig ito liquidatio ad all employees are beig laid off, trade uios will ofte seek to egotiate with the liquidator to esure that all staff wages ad due beefits are paid. Trade uios ca tell employees of their rights i SMEs that are restructurig or cosiderig redudacies. However, i the three Irish case studies, work coucils, trade uios or other employee represetatives were ot ivolved i the restructurig process. Noe of the employees was a member of a trade uio ad cosequetly did ot have ay trade uio represetatio durig the restructurig process. The Irish Natioal Orgaisatio for the Uemployed (INOU) has published several guides to assist trade uios i dealig with members who are beig made redudat or whose compay is beig liquidated. The INOU also provides traiig courses for employers, trade uios ad employees facig redudacy. The courses cover issues such as tax ad redudacy, social welfare etitlemets ad educatio optios. Europea Foudatio for the Improvemet of Livig ad Workig Coditios,