1)Was it a good idea to undertake a leveraged recapitalization in the context of its changing environment? Sealed Air had traditionally neglected manufacturing in favour of marketing, they were able to do this because of a lack of competition, however mid-1980s increased competition and expiring patents on products. Sealed Air reacted to this increasing competition by introducing the WCM-World Class Manufacturing program which promoted manufacturing excellence. This increased SA’s cash and debt capacity.
Competitors were marketing cheap imitations of SealedAir’s products by inventing around SA’s manufacturing process patents. Sealed Air Corporation’s leveraged recapitilization was a good idea in the context of its changing competitive environment as the company had reached a stage in the mid-1980s where competition was increasing as other competitors started to produce the products that were previously patented by the company such as the air cellular patent which had expired. Competitors were producing the products previously patented by Sealed Air in abundance and were selling them for a cheaper price.
The company specifically faced increasing competiton in Europe as prior to the mid-1980s Sealed Air was unable to secure a strong position with patents and distributors that would allow them to take advantage of their innovative products for a much longer period of time. 1989- stock price seemed to be undervalued, it was depressed and did not seem to be improving in the near future. Sealed Air had a problem with managing their cash, Sealed Air had 50 million in cash and short term investments and the cash on hand as stated in the case was expected to double in the next year.
Reason stock was undervalued was because Sealed Air had alot of free cash flow which tempted the company to waste money. Excess free cash flow arises when the company has more free cash in excess of that needed to fund the company’s positive NPV investment opportunities and to run the comapny’s everyday operations. Simply paying out the cash balance (54 million) would not solve the problem of the exces free cash flow and would not signal to investors that management was going to get rid of the excess cash. )What alternatives existed for the excess cash? Launching a capital expenditure program, buying another cpmpany, increasing the regular dividend, or initiating a portfolio of securities and managing the portfolio for its investors. The company could have found someting productive to do with the money. 3 altenratives for handling excess cash: 1-Dividend increases 2-Share repurchases or extraordinary dividends 3-Debt repayments 3)What was the proforma impact of the special dividend and how much value was created?
Impact of the dividend: after announcement of special dividend, stock rose and then after the stock went ex-dividend, the stock fell to $12. The stock later eventually rose steadily to $20 by the end of the year. The stock price rose much higher in the years that followed the dividend as the company paid of its debt and reduced it to a normal leverage level. 4)Was the leveraging up compatible with the manufacturing excellence? 5)Why did SealedAir’s investor base turnover post-recap?
Many institutional investors sold their holding of Sealed Air after the recap because of several reasons: •Institutional investors are more conservative because of guidelines they are obliged to comply to •The company’s negative net worth and extremely high leverage due to the recap •Goals of some institutional investors towards companies with consistent growth and limited downside risk •Investment manager’s policies that required certain market cap •Pension funds policies that did not allow holding dividend paying stocks (Sealed Air would not pay dividend after recap) •New investor base: more speculative investors looking for significant gains, limited partnerships and wealthy private investors 6)What changes where there in organisational priorities? 7)What was the effect of the recap on firm performance?
