Bankruptcy in 2004, Interstate Bakeries, Term Paper

Total Length: 1104 words ( 4 double-spaced pages)

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Similarly, establishing payment plans with vendors may help reduce monthly costs and free up extra cash. The benefit of such restructuring is that it would allow the company to avoid the highly invasive Chapter 11 process, where there is a loss of control as creditors and a court get to weigh in on company operations. The downside of debt restructuring is that Interstate would still have to pay its debts in full, and quite likely much more in the long run, as interest accrues.

Another option for Interstate would be to find ways to free up or generate extra cash. The company could sell assets, particularly assets that are not critical to core operations, or lay off some of its workforce. The advantage of this process is that it can improve cash flow without accruing additional debt, and Interstate did pursue these options on a limited basis (Twitty). The downside is that the company is essentially mortgaging its future by disposing of human and capital resources. If the company feels that debt levels are the only real problem, it might not make sense to aggressively shed resources the company could use to grow.

Finally, Interstate has the option of selling its business completely. Perhaps a company with a stronger balance sheet could manage Interstate and pay down its debt. If the purchaser is from the same industry as Interstate, there may be overlap and synergies that would allow staff cuts or the sale of factories or equipment. The downside, of course, is Interstate management would be surrendering control of the company and shareholders would have to approve the deal.

In short, Interstate had other options for generating more cash or perhaps reducing monthly debt levels.
However, all of these options provided trade-offs that company management was unwilling to make. Company management felt like it had a solid business if debt levels could be reduced. Chapter 11 provided a way to reduce those debt levels without having to sacrifice corporate control or sell resources that might prove necessary.

Conclusion

The decision to file for Chapter 11 bankruptcy reorganization was the right one for Interstate, given its debt and operational problems. The company was faced with declining market share, high costs and a great deal of debt, all of which impacted cash flow. Certainly, Interstate could sell off some assets and make drastic cuts in order to improve cash flow, and corporate management did make some of those moves. However, sell-offs and cost reductions alone were not going to allow the company to fully stabilize, and selling and cutting too aggressively made little sense. After all, Interstate still had well-known products and a strong distribution system, and those positive aspects needed to be kept in place as a foundation for the company's future.

Also, Interstate had the option of restructuring its debt, possibly extending terms, but this was an inferior option to Chapter 11, which allowed debts to be retired. By filing Chapter 11 bankruptcy, Interstate was able to get a handle on its costs, alleviate its debt, and emerge as a stronger and more stable operation.

Works Cited

"Corporate bankruptcy" Securities & Exchange Commission 2005. 2 April 2007. http://www.sec.gov/investor/pubs/bankrupt.htm.

Murphy, John Francis. "What are the different types of bankruptcy?" The Bankruptcy Lawyer 2005. 2 April 2007. http://www.thebankruptcylawyer.net/types_of_bankruptcy.htm.

Twitty,….....

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