Corporate Restructuring and Industrial Research and Development (1990) / Chapter Skim
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Appendix A: Industrial Research and Corporate Restructuring: An Overview of Some Issues
Appendix A: Industrial Research and Corporate Restructuring: An Overview of Some Issues
Pages 121-135
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From page 121... ...
What is the available evidence on the relationship between recent corporate restructuring activity and industry R&D? What are the positive and negative perspectives on how corporate restructuring affects industrial R&D?
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From page 122... ...
.3 For the period from 1977 to 1985, growth rates in inflation-adjusted company funds for R&D did not fall below 6 percent Since 1986, however, the growth rate has fallen below half of that minimum, and forecasts suggest further decline in 19~.4 Why that R&D spending growth rate has fallen is less clear. One way of gaining insight is to examine the it&D-to-sales ratio, a measure of the research intensity of a company (or industry)
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From page 123... ...
Research intensifier generally grew during the late 1970s and early 1980s, but with a few exceptions the computer and chemical industries, in particular stabilized or even dropped slightly in the mid-1980s. The percentage rate of change in inflation-adjusted R&D spending can be broken down into two components~hange in research intensity, and change in inflation-adjusted sales.5 Figure 3 shows that the declines in 1986 and 1987 in inflation-adjusted R&D did not reflect a continuous decline in either research intensity or inflation-adjusted sales of American research-performing firms in manufacturing.6 In the face of a declining sales base in 1985 and 1986, the relative size of the research effort of American it&D-performing companies increased.
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From page 124... ...
While there was little growth in such major sectors as computers, motor vehicles, aerospace, and instruments, in 1987 chemicals and electrical equipment grew respectably. Is there some deeper logic to the overall sluggish growth that emerges from the aggregation of these seemingly diverse industry experiences?
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From page 125... ...
The creation of the AT&T Bell Laboratories and Bell Communications Research from the predivestiture Bell Labs; the transfer of RCA's Sarnoff Laboratories to SRI International in the wake of General Electric's acquisition of RCA (and sell-off of its consumer electronics business) ; and the reorganization of research at G.E.'s Schenectady central research facility are examples of possibly significant "corporate restructuring" which are not directly linked to the high-profile leveraged buyout.
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From page 126... ...
First, after inflation, the "normal" firms in the NSF sample had R&D growth rates which remained substantially below the pre-1986 norm (up 2 Amy description here is based on various unpublished memos from the NSF. 9 See National Science Foundation, "An Assessment of the Impact of Recent Leveraged Buyouts and Other Restructurings on Industrial Research and Development Expenditures," February 1, 1989.
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From page 127... ...
Second, growth in foreign countries of inflation-adjusted company R&D funds was not totally dissimilar to that in the United States. Figure 5 charts NSF data on industry funds for R&D (a slightly different definition than that used earlier, since it includes funds for R&D performed outside of the company itself)
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From page 128... ...
The second Lichtenberg and Siegel study directly tackles the issue of the impact of LBOs on company R&D expenditure by examining changes over time in the average research intensity of 43 firms involved in LBOs, and comparing the LBO firms' research-to-sales ratio with the average research intensity of all it&D-performing firms.~5 The 11 We exclude from this discussion Kohlberg Kravis Roberts ~ Co., "Presentation on Leveraged Buy-Outs," January 1989, on the grounds that the data presented there which include projections rather than actual historical numbe~are not comparable with the other studies discussed. See William F
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From page 129... ...
Note Bronwyn Hall's observation that the LBOs in her sample generally did much less R&D than the average manufacturing firm: "the recent increase in acquisition activity due to leveraged buyouts or other such private purchases is more or less orthogonal to the R&D activity in manufacturing. Even if all such purchases resulted in the complete cessation of R&D activity by the firm, this would amount to only around 500 million 1982 dollars annually compared to expenditures on R&D by the manufacturing sector of approximately 40 billion 1982 dollars annually." Other information also points to the lack of much overlap between LBOs and R&D activity.~7 How can these studies be squared with the seemingly contradictory NSF results?
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From page 130... ...
One's view of whether this is socially desirable boils down to judgments about the source of that increased value. If the gain in market value results from the more efficient or productive utilization of a firm's assets or cash flows, then that ought to be counted in the benefit column and offset whatever costs involving R&D resources might be created.
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From page 131... ...
Increasing the debt load shouldered by the firm, it is argued, makes firms worry more about having enough cash flow to meet interest charges in times of adversity, and therefore concentrate more on short-term projects generating quick paybacks than would have been the case with a less leveraged financial structure. ~ put this argument in perspective, it is helpful to sketch out how a firm's optimal financial structure is determined.~9 Because interest payments are deductible from taxable income, and dividends are not, the tax system tips a company toward debt as a source of funds.
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From page 132... ...
Critics of corporate restructuring also argue that other costs, unrelated to R&D, are imposed on society by excessive restructuring activity. Substantial resources may be absorbed by legal and financial maneuvers, with no real return to society.2i The increased leverage created by restructurings may increase the business failure rate during a downturn, creating macroeconomic costs external to the firm.
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From page 133... ...
Such free cash flow must be paid out to shareholders if the firm is to be efficient and to maximize value for shareholders."23 Managers, on the other hand, may prefer to use those resources in ways designed to increase their influence and compensation, by plowing funds into investment projects in order to increase the company's size or growth rate. It has been argued that such free cash flow and hostile takeover activity should increase when high real interest rates make many projects less attractive investment opportunities, or as industries mature and the most profitable projects are exhausted.24 Increased debt, in addition to making the restructuring possible, creates a fixed charge against future cash flows.
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From page 134... ...
One important point made by Jensen is that the example created by hostile takeovers against unprofitable investment of free cash flow by management serves to discipline other managers observing these events. The hostile takeovers of some firms may induce other firms not subject to an actual takeover attempt to respect stockholder interests, and cut insufficiently profitable activities.
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From page 135... ...
That will come when the United States economy enters a significant recession.
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