Case - FMC - 02

CASE STUDY

CORPORATE STRATEGY

FMC Corporation Recapitalization Disusun Oleh : Ahadi Aprianto (08/271138/PEK/12536) Desi Setyawan (08/271110/PEK/12508) Ludit Farramita

(08/271120/PEK/12518)

Wiwik Rachmarwi

(08/271133/PEK/12531)

Dosen Mata Kuliah :

Dr. Bambang Riyanto LS., MBA

Program Magister Manajemen Universitas Gadjah Mada 2009

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FMC Corporation Recapitalization Questions :

1.

Evaluate the capital restructuring (recapitalization) move taken by the management.

2.

Explain the proposed restructuring scheme.

3.

What were the potential negative effects?

4.

What were the potential positive effects?

5.

Who benefitted from the strategic measure? Internal shareholders? External shareholders?

6.

Explain how this strategic actions could improve the value of FMC?

Answers : 1. Evaluate the capital restructuring (recapitalization) move taken by the management.

• Strategic issues :

•

o

Strong cash position in early 1986.

o

Management feared a takeover bid by potential raiders.

Strategy :

o •

Recapitalize the company.

Plans : o

Conversion of the company’s outstanding Convertible Securities, the incurrence of obligations under the Bank Agreements, the issuance of the Senior Subordinated Derbentures abd the Subordinated Derbentures, the repayment of certain existing indebtedness, and the payment of costs related to the Recapitalization.

•

Main Goals : o

The recapitalization plan had three main goals : (1) eliminate a takeover attempt, (2) give FMC employees a greater stake in the company and its future by expanding employee ownership, and (3) invest aggressively in 2

existing businesses and concentrate on current and related businesses. •

Impact : Recapitalization would raise interest expense so would impact on

o

decreasing net income.

o

On the balance sheet, it would decrease marketable securities, trade receivables, short term debt, current portion of long term debt, but would raise long-term debt.

2. Explain the proposed restructuring scheme. •

Restructuring scheme :

o

Conversion of the company’s outstanding Convertible Securities, the incurrence of obligations under the Bank Agreements, the issuance of the Senior Subordinated Derbentures abd the Subordinated Derbentures, the repayment of certain existing indebtedness, and the payment of costs related to the Recapitalization.

•

The details of the scheme can be shown below : o

Public shareholders : All public shareholders would receive $80 in cash and one share of the recapitalized company for each common share held.

o

Management and Employee Benefit Plans : Management and holders of stock in employee benefit plans would receive 5.67 shares for each share held.

o

Employee Thrift Plan Shareholders : These shareholders would receive 4.209 new shares and $25 per share for each share held.

•

11.3 million shares held by the company’s pension plan would retired in early 1986 to ensure that they could not be seized by anyone seeking control of the company.

•

Employee ownership of FMC would rise from 19% to 41% and the proportion of stock held by the public would decline from 81% to 59%.

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3. What were the potential negative effects?

•

Potentially harm financial or firm performance.

•

Fraud risk.

•

Diminish ability to make acquisitions and develop internally.

•

Reputation risk.

4. What were the potential positive effects?

•

Avoiding vulnerability to takeover by other firm.

•

Efficiency or company’s performance.

•

Reducing taxes since receiving debt.

•

Management incentives.

•

Wealth transfer effects.

•

Asymmetrical information which could raise firm’s value.

5. Who benefitted from the strategic measure? Internal shareholders? External shareholders?

•

Both internal shareholders and external shareholders benefitted from the strategic measure.

•

Internal shareholders gained benefit from ownership of the company, ensuring firm continuity, and lessen takeover risk from other company.

•

External shareholders gained benefit from receiving premium price of the stock they held.

6. Explain how this strategic actions could improve the value of FMC?

•

Value of the firm is a combination of : o

Value all equity financed.

o

PV of tax shields. 4

o

PV of other benefits of leverage.

o

PV of benefits of control change.

o

PV of benefits from M & As.

o

PV

of

benefits

of

changes

in

strategies,

policies,

operations,

organization structure. o

•

PV of costs of financial distress.

Based on Modigliani-Miller Theory, since having long term debt and then decreasing WACC, the recapitalization strategy proposed by Mallot could raise value of the firm.

•

Since the management has more information than investors, information (assymmetric information) and transaction costs are possible manners to improve or exploit the value of FMC because.

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