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Harrah's efficiency reevaluation

By Daniel Michaels, Feb 14th 2007
The imminent sale of Harrah's Entertainment is beginning to create serious doubt among its staff. As normal, they are looking for guarantee that their jobs will be protected, but if we analyze the situation, that assurance is very hard to offer.

For a better understanding of the context, let's briefly look back at Harrah's Entertainment history. Not long ago, Harrah's Entertainment was an average casino company with low-rent casinos and an unpredictable and hazardous future.

But, surprisingly, the company underlined a player loyalty card, making the recently acquired casinos more profitable. Harrah's increased its monthly profits to levels that constantly contradicted Wall Street expectations.

The company's retail guidelines and its extension strategy made Harrah's Entertainment pretty popular inside but also outside the sphere of the gaming industry.

But in spite of its apparent success, the company rusted out from inside. Bill Harrah, founder of Harrah's Entertainment, began with a small Reno bingo parlor in 1937 and rose until it developed into the primary casino company that appeared on the New York Stock Exchange in 1973.

Pulled down by its achievements, the world's biggest gaming company couldn't improve anymore its capital and satisfy the shareholders at the same time. Having no earnings expectations the company missed the opportunities to inflate in the important Asian market.

In Las Vegas casinos are more gainful than ever, as they face intensifying competition from more classy businesses that will probably open in the next years.

In this situation Harrah's Entertainment owners decided the inevitable: to sell it! About 28 billion dollars it takes to acquire the company. The offer has been acknowledged and is pending closing approvals.

The deal leaves numerous workers who helped the company develop radically over the years to speculate whether they will be required in a process that centers more on revenue. Yet, the factors aren't encouraging.

Chief Executive Gary Loveman sustained that a reevaluation of the company's efficiency is needed. Some professionals declared that last year the business’s operating costs came near to $200 million, up from $98 million in 2005 and $67 million in 2004.

Many of the company's employees have lost their jobs under this reevaluation. Harrah's spokesman Alberto Lopez replayed that this revise is a standard operating process for any business.

Keith Schwer, director of UNLV's Center for Business and Economic Research said that every business revise its employees number in a buyout. So, why should Harrah's Entertainment be any different? As a private entity, Harrah's won't require a numerous administrative staff to organize secretarial documents and communicate fiscal information to the community.

Skilled top executives, like COO Tim Wilmott, Harrah's Central Division President Anthony Sanfilippo and Senior Vice President of Operations Tony Santo, have left the company. Lopez didn't make any statement concerning their departures.

Brad Wimmer, a previous regulator with the Federal Communications Commission and UNLV economics professor who studies corporate buyouts, mentioned that in general, buyers observe immediately the opportunities to increase the productivity of a firm, and a perspective of that income opportunity is to reduce management staff. Wimmer also sustained that cost-cutting policies work. Studies revealed that management-assisted takeovers have an increased efficiency and profit.

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