Session 10 Case Study

Hager Werkzeugmaschinen
On 13 October 2009, a despondent Gunter Hager found himself in the local district court in Bielefeld to declare the bankruptcy of the small high-performance machine-making company, Hager Werkzeugmaschinen GmbH, he had founded and built up over the past 32 years. In the wake of the crisis 2008, demand for the type of capital equipment his firm produced had collapsed and for the first six months of 2009, the company had seen no new orders. For the 37-strong workforce, there was less and less to do as existing orders were shipped. Even these existing orders were not without their problems. Hager had to negotiate with cashstrapped buyers who were threatening to cancel orders about payments dates and, in many cases, he had to agree extended payment terms. Particularly difficult negotiations took place with large public companies that, in the wake of economic downturn and keen to conserve cash, made demands for deferred payment periods for as long as six months. So even without the need to finance new work in progress, Hager had no option but to ask his bankers to extend existing working capital facilities, let alone provide new finance for new orders. However, Hager thought he had seen the worst of the economic recession when two months prior to the bankruptcy proceedings, he received a major order worth 1.5 million enough to keep the company busy for the next 12 months. Nevertheless, several days later, the companys bank announced it was reviewing the companys working capital finance and Hager lamented that, The bank even put existing credit lines into question. With time fast running out, Hager had no success in securing alternative lines of working capital as new lenders took their time to review his business. The poor cash flow situation faced by the company did nothing to help. The inevitable happened and Hagers effort to save his business came to nothing. He could only look on as the bankruptcy rapidly unravelled what he had toiled to build up. All companies need to manage their working capital needs and to have sound financing in place. The credit crunch has tested the cash management practises at firms and, in number of cases, shown how vulnerable the company was to an interruption in cash flow as the firm became insolvent and went out of business. Small and medium-sized companies are the most vulnerable as they mostly lack access to the capital markets and often depend heavily on bank financing. Germanys often small and family owned Mittelstand companies, like Hager Werkzeugmaschinen, suffered badly since they are heavily reliant on bank credit.

Discussion Questions 1. Identify the major problems in Hager Werkzeugmaschinen working capital management in this case. 2. Analyse and suggest optimal solutions for Hager Werkzeugmaschinen working capital management. 3. Which current asset investment strategies should Hager Werkzeugmaschinen apply?

4. Explain why you think a company should or should not focus on technical excellence at the expense of sound financial management.

References 1. Moles, P., Parrino, R., Kidwell, D. (2011) Corporate Finance. Glasgow: John Wiley & Sons.