American Chemical

In: Business and Management

Submitted By vranken
Words 2360
Pages 10
Bilal Al- Qureshi, Said Business School, University of Oxford 2010

American Chemical Corporation HBS Case Number: 9-290-102
Executive Summary The American Chemical Corporation (AMC) is a large, diversified chemical producer. In 1979, AMC was forced to issue a tender to sell a Sodium Chlorate plant, near Collinsville, Alabama. Dixon, a specialty chemicals company, was willing to purchase the aforementioned plant for $12m with the option to invest a further $2.25m on laminate technology. The subsequent investment in Laminate technology was expected to eliminate graphite costs and reduce power consumption at the Collinsville plant by 15% to 20%. We will evaluate the acquisition of the Collinsville by Dixon at the proposed price. Table 1 identifies the assumptions that have been used for the evaluation of this acquisition. Table 1
Assumptions Laminate Technology reduces power by a mean of 17.5% Laminate Technology is depreciated over 10 years Sodium Chlorate price growth is 8%, per annum Power cost (per KWH) growth is 12%, per annum Plant Life is 10 years Plant Salvage Value is zero EBIT is flat after 1984 Capital Expenditures: $600,000 per annum after 1984 Net Working Capital Remains flat after 1984 Definition of “Flat” Reference Pg 3, HBS 9-280-102 Pg 3, HBS 9-280-102 Pg 4, HBS 9-280-102 Pg 4, HBS 9-280-102 Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 4 http://www.imf.org/external/pubs/ft/wp/2006/wp06218.pdf

6.5% is the Equity Risk Premium Tax rate is 48.69% From 1984 to 1989, the following growth rates are used 4 year Growth rate is used for Variable Costs Capital investment is based on figures from 1980-1984 PPE and depreciation is based on figures from 1980-1984 Beta Debt is zero Debt to Equity Ratio: 35% : 65% Plant: Valuation starts in 1980 Laminate Tech valuation starts in…...

Similar Documents

American Chemical

...Statement of the Problem: Provide a concise overview of the problem (opportunity) confronting the organization and identify the firm’s decision alternatives. State the problem in such a way that it is clear that your presentation is addressing the firm’s primary problem (opportunity). American Chemical has agreed to divest its sodium chlorate plant located near Collinsville, Alabama, as part of strategy to avoid a preliminary injunction to stop their hostile takeover of Universal Paper Corporation. Dixon Corporation, a specialty chemical company, has agreed to purchase the net assets of the Collinsville plant from American for $12million, subject to approval by its board of directors. With sales concentrated in the Southeastern United States, the Collinsville plant fits well with Dixon’s strategy of supplying chemicals to the region’s paper and pulp industry. Sodium chlorate is growing in demand and would add an additional product to Dixon’s line, which could be marketed through their existing sales group. Dixon Corporation, must now decide whether or not to purchase the net assets of the Collinsville plant for $12 million and an additional $2.25 million needed to install laminate technology to increase efficiency and profitability of the plant. To reach a decision Dixon will need to determine if the investment will be profitable by evaluating future cash flows of the plant with and without laminate technology and the associated financing costs to......

Words: 4721 - Pages: 19

African Americans and Chemical Dependency

...African Americans and Chemical Dependency Name: Insitution: African Americans and Chemical Dependency Abstract Chemical dependence is the use of chemicals, which may include alcohol, drugs, and other substances that may affect normal physiologic or psychological processes, in an uncontrolled, compulsive way. It is often referred to as substance abuse. Substance abuse has been the subject of many a discussion, due to the adverse effect it has on human health, relationships, and many other spheres of human life. This paper will evaluate the incidence and prevalence of substance abuse in differing populations, with a special emphasis on African Americans. This paper will also review the steps of care that victims of chemical dependency are taken through in the rehabilitation program, with a focus on Africa American populations. Additionally, the paper will review the professional resources that are used in the treatment of chemical dependency victims among African Americans, and finally, the paper will explore the issues that impact treatment and recovery from chemical dependency among African Americans. African Americans and Chemical Dependency African Americans have historically been consistently ranked among the racial/ethnic groups with the highest rates of substance abuse. In recent years, however, the statistics seem to have improved when compared to overall ratings. According to Substance Abuse and Mental Health Services Administration (SAMHSA), alcohol use......

Words: 1602 - Pages: 7

American Chemical

...Acquisition of American Chemical Company Executive Summary August 2012 Statement of the Problem: American Chemical Corporation is selling its sodium chlorate plant located near Collinsville, Alabama. This provides Dixon Corporation with an opportunity to purchase the plants net assets for the asking price of $12 million. The following analysis is to determine whether or not Dixon should purchase Collinsville plant with debt capital or invest in building a new one. The acquisition is pending approval from Dixon’s Board of Directors. Discussion: Strategy Analysis The purchase of the Collinsville plant offers Dixon an opportunity to grow its market share in the paper and pulp industry. Adding sodium chlorate to its product portfolio will expand its product line and reach in the paper and pulp industry. Dixon and the Collinsville plant have some of the same major customers, which will enable Dixon to market the sodium chlorate through its existing sales team. The Collinsville plant is strategically located in Southeastern U.S., the heart of the paper and pulp industry. This location complements Dixon’s primary facility located in Georgia and creates a localized hub for its sales team. Purchasing the Collinsville plant, provides the following benefits over building a new plant: 1) The Collinsville plant provides the ability to start generating revenue immediately, versus in one to two years. 2) Collinsville’s existing customer base is a benefit since it is harder to......

Words: 1417 - Pages: 6

American Chemical Corporatiion

...American Chemical Corporation Context The business environment leading up to 1979 was a very challenging one as the U.S. economy was still on the heels of a period of high inflation, low growth and high unemployment that started in the 1970s. The deep recession hit almost all sections of the economy. Real gross national product (GNP) fell by 2.5 percent while the unemployment rate rose above 10 percent and almost one-third of America's industrial plants lay idle. Company The Dixon Corporation is a specialty chemicals company that supplies primarily to the paper and pulp industry. The company’s products are mainly used by paper companies as a bleaching agent for pulp. Dixon’s principal plant was located in Calhoun, Georgia, and mostly supplied paper and pulp companies in the southeastern United States. The company achieved strong growth with a compounded annual growth sales of 17% for the past 5 years (1974-1979) and improved net margins to 9.5% by 1979 as the sodium chlorate market remained resilient despite the difficult economic situation. Customers The primary customers of the sodium chlorate producers are the paper and pulp industry, which accounts for approximately 85% of total production. As such, growth in the markets will essentially mirror growth in the pulp & paper industry. The 1970s was a turbulent period for the paper and pulp industry, marked by greatly intensified competition, periods of overcapacity (especially in 1976), a deep recession......

Words: 2157 - Pages: 9

American Chemical Corporation

...Executive Summary - Valuation of Manufacturing Plant of American Chemical Corporation (ACC) Problem Statement This report discusses; 1- Determination of weighted average cost of capital (WACC), cash flows and NPV of ACC’s Collinsville Plant with and without Laminate technology. 2- Evaluation of plant’s acquisition proposal on economic grounds. 3- Evaluation of plant’s acquisition proposal on strategic grounds. 4- Strategic issues associated with the proposal. 5- At the given price and terms, should the proposal accepted. Alternatives, if any. Discussion Determination of WACC: For the purpose of determination of cash flow’s present value, WACC is determined as 16%, as shown in the attached Exhibit B. Present value of cash flows: The workings also show calculation for 5 years however, the plant have an expected life of 10 years and therefore, the cash flows are projected over 10 years. Without laminate technology, present value of 10 years free cash flows from plant (Exhibit C) is $9.2 million. The laminate technology enhances present value of plant’s free cash flows (Exhibit E) by generating $5 million over the period of 10 years mainly due to the savings accrued (which are net of tax) in power and graphite costs, giving relief (17.5% power cost is saved due to the introduction of laminate). The tax consequence of plant’s depreciation and scrap value (nil) and also enhances the laminate benefits. Terminal Value & NPV: For 10 years, Terminal value (Exhibit D) of......

Words: 1093 - Pages: 5

American Chemical Corporation

...Dixon Corporation, an American specialty chemicals producer, wants to buy Collinsville plant in October 1979 from American Chemical Corporation, another typical chemicals company. This plant initially costs $ 12 million, and additional optional $ 2.25 million needed to buy and install laminate technology to increase efficiency and profitability of the plant in order. A firm that is operating in the interests of its shareholders should accept all projects that increase the wealth of the shareholders. In the case of Collinsville, we have used the Net Present Value to make our recommendations. We could also have used another criterion: the Internal Rate of Return (IRR). All the details of the calculation of the NPV are in appendices attached (calculation of the WACC, which is 14,183%, and the NPV with and without laminate technology). Based on our calculations, without the laminate technology, the NPV of Collinsville turns out to be negative ($ 1 714.13 thousands). Thus, we do not recommend investing in this project since it is against shareholders’ interests. However, with the laminate technology that enables to cut power costs (which are the main charge) and eliminate graphite costs, the NPV of the project becomes positive ($ 2 409.23 thousands). In that case, we do recommend acquiring Collinsville plant, because it increases the wealth of the shareholders and it enables Dixon to complement its strategy of supplying chemicals products to the paper and pulp industry.......

Words: 622 - Pages: 3

American Chemical Cooperation

...I: Dixon Corporation’s problem In October 1979, Dixon Corporation (Dixon), a specialty chemical company in US, is considering the purchase of a sodium chlorate plant located in Collinsville, Alabama. The Collinsville plant is now managed by American Chemical Corporation (American), one of largest diversified chemical companies in US. Acquisition of the Collinsville plant fit well with Dixon’s strategy of supplying chemicals to paper and pulp industry. Dixon and American had reached an agreement of $12 million purchase price to acquire the Collinsville plant’s net asset. As a part of the deal, American would give Dixon an ongoing technical support of the laminate technology, a new technology developed by American to reduce the power cost by 15% to 20% and eliminate graphite cost. American ensured to realize laminate technology and make it available to the Collinsville plant. The installation of laminate was scheduled for December 1980 and would charge Dixon $2.5 million, one-time cost depreciated over a period of 10 years. Dixon planned to fund the $12 million purchase price entirely with debt capital. This funding plan would temporarily increase Dixon’s book debt-to-total capital ratio to approximately 47% and would initially raise Dixon’s book debt ratio above its target deb ratio for the consolidated company of 35%. To determine the viability of the acquisition, Dixon needs to conduct net present value (NPV) analysis to determine whether Dixon can purchase......

Words: 1129 - Pages: 5

American Chemical Corporation

...AMERICAN CHEMICAL CORPORATION 1. Executive Summary Dixon, an American specialty chemical producer, wants to buy Collinsville plant from American Chemical Corporation, another typical chemical company in 1979. Dixon wants to diversify its product line buy acquiring the aforesaid plant, which produces sodium-chlorate to supply to paper producers in Southeastern part of the US. This plant initially cost 12 mln. USD and additional 2,25 mln. USD needed to buy laminate technology to increase efficiency and profitability of the plant in order. Dixon has conducted thorough marketing research for the industry providing cash flow analysis on purchase of the plant. The cash flow analysis based with and without laminate technology cases, where the company should decide whether it should go on further to buy that plant and technology. 2. Calculating of WACC 2.1 Assumptions for calculations in the case: l Plant life is 10 years (p.4) l Salvage value of plant is 0 (p.4) l Book value of plant at end of 1979 is 10.6 million (=12 million purchase price - 1.4 million working capital) l Tax rate is 48% (calculated from Exhibit 7) l For the period from 1980 to 1984: all data of sales, depreciation and manufacturing and other costs are given in the case (Exhibit 8) l For the period from 1984 to 1989 we use the below assumption: - Price growth rate is 8% (p.4) - Power cost growth rate is 12% (p.4) - Net working capital is always 9% of sales (Exhibit 8, current asset and......

Words: 1837 - Pages: 8

American Chemical

...In 1979, American Chemical Corporation (ACC) avoided a preliminary injunction from the US government by agreeing to divest its sodium chlorate plant in Collinsville, Alabama. The result of this action was ACC executing a hostile takeover of Universal Paper Corporation. Now that ACC is required to sell its Collinsville plant, there is an opportunity for Dixon Corporation to acquire the plant for $12 million along with a $2.25 million investment for upgrading to a new technology. Statement of the Problem The CEO and Board of Directors at Dixon Corporation need to decide if they will approve the acquisition of the Collinsville plant at the price and on the terms proposed. Discussion Dixon Corporation The Dixon Corporation is a specialty chemicals company that sells primarily to the paper and pulp industry. Its main plant is located in Calhoun, Georgia, and its sales are focused in the Southeastern United States. Dixon's principal line of products includes sulfuric acid, aluminum sulfate, and liquid sulfur dioxide. The company has been consistently profitable for years, and sales at Dixon have grown from $19 million in 1975 to over $42 million in 1979 . The profits after taxes have nearly quadrupled from 1975 to 1979, and the stock price has gone up five-fold in the same period. The Collinsville Plant The Collinsville plant can produce 40,000 tons of sodium chlorate per year. The facility has 20 cell tanks that house the "D cells". These cells use graphite......

Words: 334 - Pages: 2

American Chemical - Memo

...MEMORANDUM Date: To: American Chemical Corporation From: Issue: How should ACC accrue and disclose the trial decision on their financial statement? Recommendation: American Chemical Corporation should accrue and disclose the loss contingency on its Condensed Financial Statements from the lower court’s trial decision in the lawsuit from the Environmental Protection Agency. Sources: Discussion: This memo will discuss the accounting standards and adjustments for accruing and disclosing the loss contingency for American Chemical Corporation (ACC). Mr. Molina and the management team chose not to accrue and disclose the loss in the lower court’s trial decision; this violates the FASB accounting standards. A lower trial court had imposed a $70 million fine payable to the Environmental Protection Agency (EPA) for a series of pollution law violations. The company immediately appealed to the U.S. District court and had set aside the fine to a lower cost. ACC’s external legal counsel assumed that the Court will hear the case in approximately three years, and it probably will assert the trial court’s decision to impose a fine. With the legal counsel’s analysis of similar cases, the estimated ranges of potential monetary outcomes were from $30 million to $70 million. ACC has put forth $5 million in legal fees as a reasonable estimate of the cost to appeal. With the appeal, the ACC, EPA, and the World Bank entered into an assumption agreement. ACC assigned a......

Words: 703 - Pages: 3

American Chemical

...Introduction Dixon Corporation, a U.S.-based chemical company, is mulling on buying a plant from American Chemical Corp. American Chemical’s Collinsville plant makes sodium chlorate for the paper and pulp industry. Dixon will have to pay $12 million as purchase price for the plant. It may also pay $2.25 million to complete the laminate technology developed by the plant’s research and development staff, which is expected to improve the plant’s efficiency. Dixon already has transacted business with some of American Chemical’s major customers. Dixon, however, believes that the acquisition will enable it to widen product lines and penetrate the paper and pulp industry. Analysis To determine the economic feasibility of the acquisition, we can compute for the NPV of the acquisition, with or without the new technology. The NPV will show whether the Collinsville purchase will increase shareholder’s wealth or lead the company to insolvency. Under the net present value method, the weighted average cost of capital is used as the discount rate to calculate the present value of future cash inflows. Hence, for the case study, we will compute for the WACC, prepare projected cash flows then compute the NPV. Solution WACC The all-equity beta (β) of Dixon is 1.06. We assume that we could have a beta of 1.9 for the production of sodium chlorate, basing from the betas of other chemical firms. We could re-lever Dixon’s beta by using its 35% target......

Words: 1171 - Pages: 5

American Chemical

...Authors: Philip Larson | American Chemical Corporation I prepared my answers by myself before discussing the case with anyone else. I only consulted other members of this class and this work is my own. In particular, I consulted Matt Thompson. | | 1) Do the circumstances surrounding the sale of the Collinsville plant play any role in your willingness to buy the assets? If so, how, if not, why not? On the one hand, the circumstances of the sale make me less willing to buy. In particular, both Universal and the federal government think that American’s acquisition creates antitrust issues. If this is the case, American could use its market power to change the nature of the market and make Dixon’s new plant unprofitable by setting lower prices for sodium chlorate in its other plants. On the other hand, the circumstances make me more willing to buy the assets because American has to divest the plant to comply with a court order. Therefore, they have less leverage during the sale because there are only a limited number of purchasers and American must sell. I would be more willing to purchase the plant given that demand for sodium chlorate is expected to continue increasing. On the other hand, power costs which account for the majority of manufacturing costs were rising making it more expensive to produce. 2) Which firms are relevant for obtaining an asset beta for the Collinsville investment? Using the betas, determine the appropriate......

Words: 2534 - Pages: 11

American Chemical Corporation

...1. Executive Summary Dixon, an American specialty chemical producer, wants to buy Collinsville plant from American Chemical Corporation, another typical chemical company in 1979. Dixon wants to diversify its product line buy acquiring the aforesaid plant, which produces sodium-chlorate to supply to paper producers in Southeastern part of the US. This plant initially cost 12 mln. USD and additional 2,25 mln. USD needed to buy laminate technology to increase efficiency and profitability of the plant in order. Dixon has conducted thorough marketing research for the industry providing cash flow analysis on purchase of the plant. The cash flow analysis based with and without laminate technology cases, where the company should decide whether it should go on further to buy that plant and technology. 2. Calculating of WACC 2.1 Assumptions for calculations in the case:  Plant life is 10 years (p.4)  Salvage value of plant is 0 (p.4)  Book value of plant at end of 1979 is 10.6 million (=12 million purchase price - 1.4 million working capital)  Tax rate is 48% (calculated from Exhibit 7)  For the period from 1980 to 1984: all data of sales, depreciation and manufacturing and other costs are given in the case (Exhibit 8)  For the period from 1984 to 1989 we use the below assumption: - Price growth rate is 8% (p.4) - Power cost growth rate is 12% (p.4) - Net working capital is always 9% of sales (Exhibit 8, current asset and liability items remain historical to sales) ...

Words: 1832 - Pages: 8

American Chemical Corporation

...En junio de 1979, American Chemical Corporation anunció una oferta pública de todos y cada uno de los acciones de la Corporación de papel Universal. Estadounidense fue uno de los mayores química diversificada empresas en los Estados Unidos (Anexo 1). Universal era un papel de gran tamaño y de la empresa de celulosa (Anexo 2). Gestión de Universal se opuso a la toma de posesión y, entre otras cosas, demandó en una corte federal tienen la oferta de compra bloqueado por motivos de que la adquisición de American de Universal violaría la Ley Clayton de las leyes de competencia de EE.UU.. Las dos empresas dedicadas a la producción de clorato de sodio. Universal, alegó que su adquisición por parte estadounidense reduciría sustancialmente la competencia en el sodio clorato de negocio, especialmente en el sudeste de mercado de los EE.UU., donde las dos empresas se competidores. El gobierno de EE.UU. se unió a Universal en la búsqueda de un mandamiento judicial para poner Oferta estadounidense de licitación. A pesar de que negó las acusaciones, American impedido preliminar orden judicial al acordar la venta de su planta de clorato de sodio, situado cerca de Collinsville, Alabama, en el evento adquirió Universal. Estadounidense posteriormente fue un éxito en la adquisición de más del 91% de Acciones de Universal. En octubre de 1979, American comenzó a buscar un comprador para la planta de Collinsville. Una serie de los posibles compradores se acercó, incluyendo la......

Words: 2474 - Pages: 10

American Chemical Corporation Case

...American Chemical Case The American Chemical Corporation wanted to buy any and all shares of the Universal Paper Corporation because of their combined efforts in the production of sodium chlorate. To do so without violating the Clayton Act, American agreed to sell their Collinsville production plant to Dixon Corporation. Dixon wants to buy the Collinsville plant to help diversify its specialty chemical product line. This plant initially cost 12 million dollars with an additional 2.25 million dollars needed to buy laminate technology to increase efficiency and profitability of the plant in order. Cash flow analysis with and without the laminate technology will show whether or not Dixon should go further with purchasing the plant. The cost of equity can be calculated as follows. In the case, the yield on Treasury bonds is 9.5%, which is assumed to be the risk free rate. Using a historical equity risk premium 8.4%, the CAPM method says the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%. Since little information about Dixon’s debt is provided in the case, I assumed that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%. Dixon’s target level of debt-to-asset ratio is 35%, which is used to find the cost of capital: WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87%. Calculating NPV......

Words: 498 - Pages: 2