MRC Inc

De La Salle University Ramon V. Del Rosario College of Business Financial Management - FNC535M

MRC INC. A Case Analysis & Corporate Strategy Individual Report Member’s Name

“Role” in the Group

Ranieses, Jessica Jaye

Contributor / Researcher

College Degree BS Business Management

Dean Atty. Joe-Santos Balagtas Bisquera MBA Professor

Ranieses, Jessica Jaye Nov. 26, 2016

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TABLE OF CONTENTS Executive Summary Problem Operational Institutional Corporate Objective Areas of Consideration Environmental Opportunities & Threats Macro-Economic Indicators Political Economic Demographic Socio-Cultural Market Profile & Outlook Competition Technology Business Resources Corporate Franchise Shareholders & Key Officers Marketing Profile Product Price Place & Distribution Promotion and Advertising Financial Profile Profitability Financial Leverage Competitive Advantage Alternative Strategies Conclusion & Strategic Decision Grand Design & Execution

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Executive Summary MRC is a Cleveland- based car parts manufacturing company. The most important product lines were power brake systems for trucks, buses and automobiles; industrial furnaces and heat- treating equipment; and automobile, truck and bus frames. In 1957, Mr. Archibald Brinton, CEO at the time had initiated an active program of diversification by acquisition. Until 1957, virtually all sales were made to less than a dozen large companies in the automotive industry, with car and truck frames for 85% of the $70 million sales total. By the end of 1960, the diversification campaign had resulted in five acquisitions, two of which were major transactions. Acquisition of Ross Engineering Corporation increased MRC sales by $27 million in 1957 and the purchase of Surface Combustion Corporation in 1959 added about $38 million to annual sales. In late March 1961, now president Mr. Brixton was grappling with the question of whether to acquire American rayon, Inc. (ARI), a Philadelphiabased corporation and third largest producer of Rayon in the United States. Mr. Brixton was troubled by ARI’s erratic earnings record and mediocre long- run outlook. However, he recognized that MRC would benefit greatly from ARI’s liquidity and borrowing capacity. MRC is currently overleveraged and needs cash in order to continue with its strategy. Currently, long term debt for MRC is $22.7MM. With the benefit MRC can get from ARI, it is recommended to proceed with the acquisition. However, since long- term prospects for the rayon industry remains to be grim, MRC must proceed with liquidation of ARI after acquisition. From this, MRC will be able to pay off its debts as well as proceed with its diversification program.

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Problem Institutional Should MRC proceed with the acquisition of ARI? Operational What steps should be done after acquisition should it proceed? If not, how then can MRC address its problem with cash and being overleveraged? Corporate Objective MRC’s diversification program aims to achieve uncoupled growth prospects from the cyclical and unexciting automotive industry. Areas of Consideration Environmental Opportunities & Threats Macro-Economic Indicators1 Political With John F. Kennedy as president, many Americans have believed that the 1960s are the “dawn of the golden age.” He promised policies and reforms directed towards eliminating injustices and inequality. In 1964, JFK was shot and his successor, President Johnson developed programs aimed at eliminating poverty. Economic The 1960s was characterized by “long, uninterrupted economic expansion”2. The housing and computer industry grew more than the leading industries in the 1950s which are the automobile industry, chemicals and electrically- powered consumer durables. Demographic

1 http://elcoushistory.tripod.com/economics1960.html 2 http://elcoushistory.tripod.com/economics1960.html Ranieses, Jessica Jaye Nov. 26, 2016

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This period was the time of the “baby- boomers” wherein birth rate grew double and triple for third and fourth children respectively. Socio- cultural Much of the 1960s were characterized by civil rights movement by black people and growing number of student activists. Market Profile & Outlook The longer- term outlook for the rayon industry was grim. The rayon industry had enjoyed one of the most spectacular successes in the history of American enterprise. Rayon is currently used in tire production, however, market share in tires is decreasing yearly. As of 1960, only 64% market share. Competition MRC:  Chrysler ARI:  American Viscose Corporation Business Resources Corporate Franchise MRC’s diversification program had reduced MRC’s dependence on any one industry. The program carried MRC into a widening variety of markets and technologies. Shareholders & Key Officers MRC Inc. Mr. Archibald Brixton President Mr. Richard Victor Vice President for Mergers & Acquisitions

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American Rayon, Inc. Mr. James Clinton President Marketing Profile Product MRC’s most important product lines include power brake systems for trucks, buses and automobiles; industrial furnaces and heat- treating equipment; and automobile, truck and bus frames. For ARI, main product is Rayon, which is used in manufacturing tires. Price Not specified in the case. Place & Distribution Details were not explicitly mentioned in the case. Promotion and Advertising Details about the company’s promotion and advertising were not mentioned. Financial Profile Profitability Return of total capital of MRC experienced decreased between the years 1957 and 1958. It continued to decrease until 1960 wherein it was able to pick up sales through the acquisition of Surface Combustion Corporation. Financial Leverage By 1961, MRC had largely exhausted its borrowing capacity. Between 1956 and 1960, long- term debt had risen from less than $4 million to more than $22 million. With MRC near its debt limit and the P/E ratio Ranieses, Jessica Jaye Nov. 26, 2016

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around 10 times, the entire diversification campaign was I danger of collapsing.

Competitive Advantage MRC was able to avoid the risks involved in concentrating on one industry through its diversification program. Alternative Strategies Alternative 1: Proceed with the acquisition of ARI The benefit MRC might get from acquisition of ARI would be from its liquid and stable funds. Based on forecasting future cash flows of ARI (Appendix A), the value of the firm is $36MM and MRC is willing to pay $40MM. Of that $3MM, $20MM are liquid assets not needed for daily operations which MRC can sell off immediately. Should the acquisition proceed, this would help MRC in paying off its $22MM long term debt and allow them to continue to borrow.

ADVANTAGES

DISADVANTAGES

● $20MM in liquid assets which MRC● can use to offset their debt. ● Allows MRC to continue with the ● strategy of diversification ● ●

Company is already losing market share Recent profitability is due to reduction of cost rather than increase in sales Negative long- term market prospect ● MRC management lacks the technical knowledge and skills to ensure ARI profitability

Alternative 2: Proceed with the acquisition of ARI and liquidate after

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The benefit MRC can get from buying ARI is evident, however, since the long- term market outlook of ARI is grim, coupled with the lack of technical know- how of MRC management, ARI might present problems to MRC in the long- run. As such, one alternative MRC can consider is to use the liquid assets of ARI and cash generated in the process in order to pay off its debts as well as continue its diversification strategy. ADVANTAGES

DISADVANTAGES

● $20MM in liquid assets which MRC● can use to offset their debt. ● Allows MRC to continue with the strategy of diversification ●

Acquiring ARI might have consequences in the overall diversification strategy of MRC despite the plan to liquidate it after

Alternative 3: Do not proceed with the acquisition of ARI From this alternative, MRC can just look at other possible companies it can acquire that will help achieve its objectives of addressing its leveraging problems as well as continue its diversification strategy. ADVANTAGES

DISADVANTAGES

● Will compel the different divisions of● Debt will continue to blow- up until MRC to find ways to increase sales MRC finds another company to and address its increasing debt acquire or another alternative to address its problem Conclusion & Strategic Decision Among the three alternatives, it is recommended that MRC proceed with the acquisition but to liquidate it in a short- term prospective. This recommendation is due to the price to which ARI is being sold as well as the benefit MRC can get from buying the company. However, with the negative outlook for the rayon industry, liquidating ARI is the best option for MRC especially with the lack of the capability of MRC’s management to handle ARI. Ranieses, Jessica Jaye Nov. 26, 2016

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Grand Design & Execution After acquisition of ARI, MRC must use the liquid assets of ARI and cash generated in paying off its debt as well as continue with its diversification program through improving its financial leverage.

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Appendix A

Net Sales Earnings before taxes Income taxes Net earnings Depreciation Profit before taxes

1961 55,000 4,840 2,323 2,517 2,968 5,485

1962 55,000 5,390 2,587 2,803 2,929 5,732

1963 55,000 5,390 2,587 2,803 2,891 5,694

1964 52,000 3,640 1,747 1,893 2,851 4,744

1965 48,000 2,724 1,308 1,416 2,772 4,188

1966 42,600 1,917 920 997 2,511 3,508

1967 40,070 841 404 437 2,476 2,913

Tax Rate inflation rate Less Capital Expenditures Working Capital Less Increase to Working Capital Free Cash Flow

48% 1.07% 0.30 (41,200) 46,685

48% 1.20% 0.30 5,732

48% 1.24% 0.30 5,694

48% 1.28% 0.30 4,744

48% 1.59% 0.30 4,188

48% 3.01% 0.30 3,508

48% 2.78% 0.30 2,913

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