American Chemical Corporation HBS Case - PowerPoint PPT Presentation

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American Chemical Corporation HBS Case

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    1. American Chemical Corporation HBS Case

    2. American Chemical Corporate HBS Case Background The Collinsville opportunity Appropriate cost of capital for valuation Estimate cash-flows for Collinsville plan Estimate cash-flows for laminate technology Valuation of the opportunity Strategic implications

    3. American Chemical Large diversified chemical company 1979 announces tender offer to acquire Universal Paper Corp

    4. Universal Paper corporation

    5. Court Resolution

    6. Product: Sodium Chlorate

    7. Market for Sodium Chlorate

    8. Growth in sales/capacity

    9. Average price

    10. The Collinsville Plant

    11. The Collinsville Plant

    12. The laminate technology

    13. Cost of capital for valuation Find comparable firms Estimate the project FCFs beta Calculate WACC for the Collinsville plant

    14. Finding comparable firms

    15. Comparable firms

    16. Estimating projects beta For each firm we calculate D/E ratio We take beta debt to be zero Beta equity from table Calculate beta assets for each firm Use the average for beta assets of the Collinsville project

    17. The Dixon Corporation

    18. Estimating projects WACC obtain D/E ratio for Dixon corporation Use beta assets and beta debt to estimate beta equity for Collinsville project Use CAMP to calculate r equity and r debt for the Collinsville project Long-term Treasure bills carry 9.5% interest Historical equity premium is about 6-7%

    19. Estimating future FCFs (1980-84)

    20. Estimating future FCFs (1980-84)

    21. Estimating future FCFs (1980-84) Downward price pressure due to increased competition (entry & new technology) Increased variable/fixed costs (estimated) Stationary CapEx Continuation value (predict growth in FCFs)

    22. Conclusions and Strategic implications Valuation Reduced selling costs and cheap TVA power together with laminate technology lead to positive NPV Reconsider deal terms Attractiveness relies on Laminate technology Risks and opportunities Commodity business Requires low production costs and large scale Currently controls 13% of regional market. But entry into the industry is expected. Metal electrodes produce savings of 30% relative to 17.5%. Introduces a cost disadvantage. Collinsville as method of entry into the sodium chlorate industry Cheap way to enter, acquire customers and market share without competing with existing players The laminate technology limits the potential damage form new technology deployed