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