Introduction
Nova is a Chemical Company based in Texas and formed in 1951. With the passage of time it diversified its product line and listed on stock exchange in 1977. It hasdivided its operations in three divisions in order to serve the market with greater efficiency.
In the eleventh month of 1989 Nova Chemicals faced two opportunities, one of investment in its product division of EPD which also shows a significant expansion in last few years and second of the sale of its IPD division which is also considering a slow growing division since last few years.
Should Nova Sell its IPD Division
Quantitative Analysis
Nova Chemical functionalizes its orations into three divisions IPD, EPD and LPD. IPD is referred as the Industrial Product division, which produces mostly the basic chemicals, like ethylene and propylene. This division is not operating effectively since last few years and show low growth as compared to the other divisions of the Nova Chemicals.
It is expected that it could be due to not investing in making the plant flexible with respect to petroleum and natural gas. Almost all its competitors shift their production plants into flexible plants due to the presence of more volatility in petroleum and gas prices. This high degree of volatility in petroleum and oil prices could be the reason of less growth in Industrial product division.
Basic chemical division seeks significant boom till 1988 but after the year 1988 its growth limits to 2-3% and analyst are expecting that this trend of low growth will continue for the next five years approximately. Therefore president is very much anxious and uneasy from the results of this division and about the competitive position of the company.
According to the forecasted data free cash flows for two divisions in which the financial options are available is calculated and it is clear from the results the IPD division is generating 408 million dollars NPV with terminal value including. Whereas on the other hand the EPD division in which investment option is available generating isNPV of 1475 million dollars with incorporating terminal value.
Despite of the fact that significant initial investment involved in purchase of the plant in year one and two and generating negative cash flows in these years, it is generating NPV more than three times the NPV of IPD. This shows the potential of growths in Industrial product division and EPD divisions in future.
Qualitative Analysis
The IPD divisions showing very low growth form last few years which affecting the company in different ways. Low growth in that division causes low profits, which is very critical and unsatisfactory situation for both existing and new shareholders. It could affect the brand image of the company which may affect the organization adversely.
Low profit generating divisions put pressure on the management and staff, some employees can’t handle such pressures which could result in dissatisfaction and mental distress, and therefore it may leads to further poor performance of the division. It may also create the insecurities among the employees which will further affect the performance of the staff.
Nova Company is operating in a very high competitive market with much number of competitors. Many competitors are also big in size from Nova Chemicals so it cannot bear such performance from any of its division because there is high certainty of losing competitive position in such situation.
The current performance of the IPD division is also affecting the aspects of corporate governance.The principle of the corporate governance is expected to follow which tells that the management should engage in such policies and procedures which will protect the interest of all stakeholders. Engaging in such a business which is not following the basic principle of corporate governance is unethical.
Under performing of a single division could affect the competitive position of the company and it may result in increase of the competition because under performing in business reduces the barrier to new entrants.Nova Chemical Corporation Case Solution
Selling the IPD
In current situation when the president and the management is uneasy about the position of the business and according to the analysis performed by the analyst it is also clear that this trend of under performing of IPD division will continues for the next five years approximately then continues to operate with such business is not beneficial.............................
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