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    American Chemical Corporation was considering acquiring the Collinsville sodium chlorate plant from Dixon Corporation for $12 million. The plant produced sodium chlorate, which is used to bleach pulp for paper production. American Chemical analyzed the cash flows of operating the plant from 1980-1984 and incorporating a new laminate technology. It estimated the plant's cost of capital and calculated a positive net present value, indicating the acquisition would be profitable. Key risks included increased competition in the commodity sodium chlorate market. The plant and new technology could be a low-cost entry point for American Chemical into the sodium chlorate industry.

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    Case 1 Sol

    Uploaded by

    stig2lufet
    633 views22 pages
    American Chemical Corporation was considering acquiring the Collinsville sodium chlorate plant from Dixon Corporation for $12 million. The plant produced sodium chlorate, which is used to bleach pulp for paper production. American Chemical analyzed the cash flows of operating the plant from 1980-1984 and incorporating a new laminate technology. It estimated the plant's cost of capital and calculated a positive net present value, indicating the acquisition would be profitable. Key risks included increased competition in the commodity sodium chlorate market. The plant and new technology could be a low-cost entry point for American Chemical into the sodium chlorate industry.

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    American Chemical Corporation was considering acquiring the Collinsville sodium chlorate plant from Dixon Corporation for $12 million. The plant produced sodium chlorate, which is used to bleach pulp for paper production. American Chemical analyzed the cash flows of operating the plant from 1980-1984 and incorporating a new laminate technology. It estimated the plant's cost of capital and calculated a positive net present value, indicating the acquisition would be profitable. Key risks included increased competition in the commodity sodium chlorate market. The plant and new technology could be a low-cost entry point for American Chemical into the sodium chlorate industry.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    633 views22 pages

    Case 1 Sol

    Uploaded by

    stig2lufet
    American Chemical Corporation was considering acquiring the Collinsville sodium chlorate plant from Dixon Corporation for $12 million. The plant produced sodium chlorate, which is used to bleach pulp for paper production. American Chemical analyzed the cash flows of operating the plant from 1980-1984 and incorporating a new laminate technology. It estimated the plant's cost of capital and calculated a positive net present value, indicating the acquisition would be profitable. Key risks included increased competition in the commodity sodium chlorate market. The plant and new technology could be a low-cost entry point for American Chemical into the sodium chlorate industry.

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    American Chemical Corporation HBS Case

    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

    American Chemical

    Large diversified chemical company 1979 announces tender offer to acquire Universal Paper Corp

    Universal Paper corporation


    Paper and pulp company
    Fibers in wood pulp

    Opposed takeover (anti trust law) Both firms were competitors in the Southeastern U.S. market as both engaged in production of sodium chlorate

    Court Resolution
    American Chemical Corporation will divest its sodium chlorate plant located near Collinsville, Alabama In October 1979, American began looking for a buyer for its plant. Several potential buyers were approached including Dixon Corporation a specialty chemicals corporation Dixon agreed to purchase net assets of the Collinsville plant for $12 million.

    Product: Sodium Chlorate

    The main commercial use of Sodium chlorate is making chlorine dioxide then used in bleaching of pulp to produce paper

    Market for Sodium Chlorate

    Growth in sales/capacity
    1.20 1.00 0.80 0.60 0.40 0.20 0.00 1970 1972 1974 1976 1978 1980

    sales growth capacity growth

    Average price
    $/ton
    450 400 350 300 250 200 150 100 50 0 1970 1972 1974 1976 1978 1980 $/ton

    The Collinsville Plant

    The Collinsville Plant

    The laminate technology


    Use of this laminate would eliminate graphite costs and reduce power needs by 15% to 20% Could be installed in the Collinsville plant Technology offered at price $2.5 million (could be depreciated over 10 years) Installation scheduled for December 1980

    Cost of capital for valuation


    Find comparable firms Estimate the project FCF s beta Calculate WACC for the Collinsville plant

    Finding comparable firms

    Comparable firms

    Estimating project s 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

    The Dixon Corporation

    Estimating project s 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%

    Estimating future FCF s (1980-84)

    Estimating future FCF s (1980-84)

    Estimating future FCF s (1980-84)


    Downward price pressure due to increased competition (entry & new technology) Increased variable/fixed costs (estimated) Stationary CapEx Continuation value (predict growth in FCF s)

    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

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