Sealed Air Case – Investment Banking
A leveraged rationalization Is when a corporation turns to the debt markets to Issue bonds and uses the proceeds to buy back shares or distribute equity dividends to Investors.
This could be driven by macro-economic factors such as low interest rates on borrowed capital, which makes debt cheaper than equity, thereby making leveraged rationalization a viable option for companies.
Or it could be driven by micro- economic factors such as a need to balance company’s leverage and improve operational efficiency. 2. As an B balancing advisor what would be the underlying circumstances?given the following end-objectives? that would lead you to consider such a financial transaction to your client?brevity as usual underlying circumstances that led to the recapitulation decision by Sealed Alarm The excess free cash flow, which had tempted the managers management were: to waste money on substandard projects. Sealed Air did not have good They had sufficient capacity in their plants to investments or M opportunities et future demand, without significant additional capital expenditure They had been generating sufficient cash flow from operations to ensure sustainable growth Given these circumstances, I would advise such a transaction only to clients who operate in mature, non-cyclical industry and has poor financial leverage but needs shareholder value creation.
This move would be beneficial only to companies that have a history of steady, predictable cash flows and low levels of debt on their balance sheets. By undertaking a leveraged rationalization, such a firm can significantly increase its financial leverage. The increased leverage results in higher value for all shareholders as it magnifies operating returns, and therefore benefits by: 1) Modernizing future cash flows and returning that money to shareholders to reinvest; 2) Boosting the firm’s near term earnings growth rate and its return on equity; and 3) Creating new equity based incentives for management.
Furthermore, It should be noted that the tax shields associated with the Interest expense of the additional debt used to finance the transactions are an additional source of value. 3.
What were Sealed-Lair’s business circumstances at the time of he leveraged rationalization: and, as its B financial advisor which of the above best Corporation seems to be one of the firms that successfully used leveraged rationalization during the sass to increase value for shareholders.
The stock of Sealed Air was undervalued in 1989 as the company was generating free cash flow (> $man) in excess of what it could spend, thereby creating a doubt in investors’ minds about the company’s ability to successfully deploy that capital for growth purposes. Threat of New Entrants was medium in this industry segment and a new entrant loud have to make significant investment on assets and setup an efficient manufacturing, R and supply chain to compete their product. However, the threat of Rivalry is high.
This is because of the matured industry and the limited scope for rapid growth. To gain market share new entrants may try to compete on price which would significantly bring down the value for the entire industry.
Threat of Suppliers is insignificant since raw materials are easily available, and the threat of substitute is moderate to low. Though some of the packaging materials have ewe substitutes, the growing consumer preference to buy fresh meat and fish can decrease the demand for padding products.
Finally, the threat of Buyers – this is quite high. Due the nature of the product, there is little scope for brand loyalty. This means that the customers might go for the cheapest product available in the market.
Though the analysis of the five industry forces we can say that Sealed Air faced moderate to high business risk. At this point in time, the best fit motivation or need for the company was negation of business risk, increased financial leverage and shareholder value creation.
So the company’s management team decided to purposefully use leveraged rationalization as a watershed event, creating a crisis that disrupted the status quo and promoted internal change, which included establishing a new objective, changing compensation systems, and reorganizing manufacturing and capital budgeting processes. 4. Describe three or four results of this “transaction” for sealed-air? focusing on why it was looked at by its CEO as being more than Just a “financial transaction”? Put another way, how did it change the future course of the company..
. N what specific ways? The transaction was looked at by its CEO as being more than just a “financial transaction” because of the need for higher leverage and shareholder value creation. This changed the course of the company as: a. The company’s stock price increased b. The company’s valuation increased c. The company also gradually lowered its debt to normal levels over the years.
5. At the time of the leveraged recap the company was clearly the number #1 bubble-wrap company of the time. (We all love to step on those bubbles and make them crack to the delight of all).
But where has the company evolved?is it today a versified company that has lost its way or does it still seem focused on its core competency..
. Which Sealed Air has evolved from a bubble wrap company to a think they are in the business of products that both supplement and compliment bubble wrap – to avoid erosion of market share from competitors. I think Sealed Air is still focused on their core competency of product leadership by putting the needs of their customers first. 6. Looking at the annual report (wry.
Sealed-air. Com) where would you position the company in terms of its business need for more or less flexibility?
Does their capital structure stack-up? Any changes you would suggest to the Treasurer… He doesn’t bite (at least I don’t think so). I think the business had enough cash flow flexibility and that it does not need more.
After a leveraged rationalization, their cash flow objective was redefined in such a manner that it took care simultaneously to increase sales and margins, have less inventory, less capital expenditure and faster collection. Their capital structure looks a lot more stable after the rationalization move and I would not suggest any changes to the treasurer.