In this report we will evaluate Bally’s business strategy, finances and operations to identify the cause of its corporate governance problem. Our team will find alternatives to improve Bally’s business strategy, increase their stock-price, restore shareholders confidence in the company and improve its image in front of the public (prospective members). Finally, we will and make a recommendation and set an implementation plan to resolve all the issues faced.
2. CENTRAL ISSUE (Ilka)
Despite what appeared to be some marketing and operational successes enjoyed by Bally’s, the company still faced a major decision in 2004 – should they remain a competitor or sell their company? With some of the efforts appearing to pay off, there were still some fundamental issues at hand and it had not been clear as to whether or not what was being done was enough to turn the company around.
What, however, what was at the center of Bally’s problems and what were some of the problems the company faced as a result? The critical issue presented here is Bally’s lack of corporate governance. Corporate Governance is defined as a set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled.
Many of the internal problems Bally’s was a direct result of having no governance policy in place, such as: poor accounting standards and practices, unethical and inconsistent sales practices, sudden management changes, a drastic drop in the company stock price and aggressive growth.
Perhaps, one of Bally’s biggest issues if not the biggest was Bally’s poor accounting standards and practices. In 2004, Bally’s auditors resigned and the SEC began to investigate the company’s accounting practices. As a result, Bally’s was unable to report 2003 figures until the latter part of 2004. In addition, the company changed the way they recognized revenues to be more consistent with the retention patterns of their customers. These changes proved costly for Bally’s, with 2003 results reporting a $581m charge.
Additionally, it appeared that Bally’s also struggled with unethical and inconsistent sales practices. Toback, CEO of Bally’s, had inherited a “distinctive way” of selling club memberships. There had been no clear and uniform pricing strategy for the company, with enrollment fees ranging from $49 to $199 and monthly dues ranging anywhere from $19 to $39. Not only was there inconsistency between the prices any 2 members paid, but new members were often times required to purchase 36 month contracts up front or finance their membership by obtaining a loan from Bally’s directly. Many members, however, were unhappy with a 36 month commitment and often times made requests to have these memberships cancelled. Bally’s had been accused of not honoring requests and using deceptive means to collect member fees. The FTC required Bally’s to pay $120,000 in penalties and refund membership fees to many of its customers.
An alarming decision came in December, 2002 when former CEO Lee Hillman decided to step down suddenly “to pursue new challenges and interests and to spend more time with his family.” Hillman had attempted to improve company performance, he had “sold off outlets and rationalized Bally’s brand portfolio.” Under Hillman, 19 clubs were divested in an effort to make the gym more profitable. Subsequently, the chain began once again to expand in the number of locations, product offerings and customer reach.
Throughout its years, Bally’s had diversified many of its product offerings. In addition, Bally’s executed an aggressive expansion plan. By 2003, Bally Total Fitness enjoyed 420 owner operated locations (see exhibit 4), 3600 members and 23,000 employees. As a result, Bally’s was recognized as having the “broadest geographic distribution of any owner-operated health club chain in the United States.” The expansion, however, did not come without its share of costs. “The expansion left Bally with considerable debt, including $300 million of notes due in 2007.” Having closed some locations in their earlier years, apparently, the desire for growth outweighed the benefits of improving financial performance. It certainly did not appear as if Bally had taken into consideration the company’s stockholders or their stakeholders.
In spite of some progression that Bally’s had made the company saw its stock continuously dive (see exhibit 7). In late 2000 the company reached its peak stock price of approximately $33 and steadily declined afterwards. In early 2002, up until the middle of 2004 Bally’s witnessed its worst weeks in the history of the company.
Unclear and inconsistent accounting procedures, unethical sales practices, sudden management changes, and aggressive expansion were all symptoms of a lack of corporate governance that can most directly be seen in the company’s overall stock performance.
3. ALTERNATIVES(Matt)
3.1 Alternative I – Institute a Corporate Governance Policy
-PR
-Hire an external auditors by board members
3.2 Alternative II – Hire an Industry Expert to Replace Current CEO
3.3 Alternative III – Sell of Company
It would increase the stock price which benefits the shareholders ( Corporate Governance).
4. RECOMMENDATION(Rob)
Best alternative is to implement an effective corporate governance policy. (Explain with details)
5. IMPLEMENTATION PLAN(Diana)
6. CONCLUSION
7. APPENDICES
Could we do without this sentence. I am a bit confused by it.
That’s weird for 2003 they quote two different number of gyms (410 in pg 6)
