Atlantic Corporation – Abridged
Problem Statement
The report discusses the complexity of linerboard industry, which could have a substantial effect on the operating profits of the paper industry. This also contained management’s intention to acquire operating assets of linerboard from the market, including an evaluation that whether it would be a sound strategic move and it would enable the company to achieve the desired synergies or not.
Case Analysis
The report contains a detailed analysis of suitability, feasibility and acceptability of the project. The major areas include:
- Potential acquisition - Sound strategic move
- Outlook for linerboard prices and the profitability of linerboard industry
- AC and RPC’s combined approach to perform better than overall industry
- Offer price for AC’s operating mill and plant
- Reasonableness of assumptions
- Discount rate used in valuation
- Acquisition of linerboard’s operating assets
- Most appropriate means of financing
Potential acquisition - Sound strategic move
Atlantic Corporation’s acquisition of Royal’s linerboard mill and plants seemed to be a sound strategic move because it would enhance the existing linerboard capacity from 661,000 tons to 747,000 tons per year and it would also provide an opportunity for the firm to achieve synergies in the long run. The next year seemed to be a healthy one for the industry, as strong demand and 100% utilization would increase the total profits hence; such a strategic move would increase the consolidated profits of both organizations.
The information provided in Exhibit 2 suggests that the consumption of linerboard was expected to increase in forthcoming years, with a limited increase in production capacity, which might cause the linerboard to be unavailable or it might be available at a higher price; hence such an acquisition would enable them to avoid any adverse changes of price on operating profit.
Further, AC was one of the largest producers of paper product in the whole industry and linerboard was continuously being used in the operations to ship the goods; hence unavailability of such material would restrict it to fulfill its future contracts, which would threaten the share value of the shareholders, so such an acquisition would enable them to fulfill customer requirement and to compete against their competitors by offering reduced prices to customers.
Outlook for linerboard prices and the profitability of linerboard industry
Linerboard prices were expected to increase from $270 per ton in 1983 to $360 per ton in 1985; which showed an increment of around 33 percent. If the actual scenario reached the estimated prices so Atlantic Corporation would have to suffer increased prices of linerboard which would substantially threaten the operating profit of the company; in addition it would also increase the working capital requirement of the company.
On the other hand, if AC acquired the linerboard mill and other plants from RPC, it would substantially contribute towards the overall profitability of the company by reducing the cost of linerboard and hence increasing profit.
The analysts have predicted that only 1% to 2% of new linerboard capacity was expected in the forth coming years which would increase the demand of linerboard product and reduced supply would pressurize the buyers to purchase the product at higher price. Further, it has also been predicted that the price of linerboard product will rise by $420 per ton by the end of 1986.
AC and RPC’s combined approach to perform better than overall industry
Atlantic Corporation’s potential acquisition would lead to a backward integration which would increase the efficiency and would enable them to achieve synergies in the long run. Liner board’s sales are predicted to increase by 7% with a forecasted economic expansion. In addition, the prices of linerboard are expected to rise by $420 per ton by the end of 1986 which indicated that the linerboard industry was growing and was expected to achieve tremendous profits in the forthcoming years, if...............
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