For defensive recaps, the effects are so varied -- negative as well as positive -- as to make research results inconclusive. Future cash flows would be committed to lenders who had a legally enforceable claim on a specified cash flow stream.
Most of us would suppose that nobody would elect to exchange one security for another unless the latter was more valuable than the first, giving the investor a positive return. The loan imposed some stringent contraints on the company, including severe limitations on capital expenditures.
It will result in the lower profit for Sealed air leveraged recapitalization company and thus tax liability will be lower for the company resulting from higher leverage or loan amount…………. It gives one an opportunity to analyze the concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of high leverage.
Sealed air leveraged recapitalization purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that disrupted the status quo and promoted internal change, which included establishing a new objective, changing compensation systems, and reorganizing manufacturing and capital budgeting processes.
At Sealed Air, capital tended to have limited value attached to it - cash was perceived as being free and abundant.
The simplest measure of value added comes from the tax shield gained when a firm, which has debt capacity resulting from free cash flows in excess of ongoing needs, increases its leverage.
First, management, as shareholders, would receive a substantial payout. Leveraged recapitalization[ edit ] One example of recapitalization is a leveraged recapitalization in which the company issues bonds to raise money and then buys back its own shares.
Why did Sealed Air undertake a leverage recapitalization? However, company can recover itself from negative equity by utilizing the amount of debt effectively to generate more profits from its operations. Moreover, the banks had a negative reaction.
This will result in complete buyout to change its leveraged position completely. This decision provides a context in which to explore how financing decisions affect organizational structure, management decision making, and firm value.
The result is a far more financially leveraged company -- usually in excess of the "optimal" debt capacity. The danger is that it is only that - a financial transaction.
Based on these, one should be able to evaluate the net effect, positive or negative, of the following types of exchange offers: Typical examples are allowing common shareholders to exchange their shares for bonds or preferred stock, or vice-versa.
The reasons for this transaction may include: Getting control over the company via a friendly or hostile takeover Disciplining the company with excessive cash Creating shareholder value via gradual debt repayment Nationalization[ edit ] Another example is a nationalization in which the nation in which the company is headquartered buys sufficient shares of the company to obtain a controlling interest.
Usually, incumbent equityholders cede control. A key indicator of whether leverage is having the desired disciplinary effect is the post-recap balance sheet progress. The market response to announcements of leveraged recaps depends on whether they are defensive or proactive.
Financing the Transaction Many shareholders felt this leverage would make the company riskier.
The classic Modigliani-Miller calcuation of the present value of the tax shield is obtained by multiplying the amount of debt by the tax rate of the firm. Other results of leverage include the disciplinary effects of having to meet debt service payments, and the possible negative effects of the costs of financial distress.
Exchange Offers involve giving one or more classes of claimholders the option to trade their holdings for a different class of securities of the firm. If the company does not have enough cash to pay back its liabilities on demand for consecutive time only then, the company will be declared insolvent.
Please place the order on the website to get your own originally done case solution. Desire of current shareholders to partially exit the investment Providing support of falling share price Disciplining the company that has excessive cash Protection from a hostile takeover Rebalancing positions within a holding company Help to improve the stock of the company during a time of poor economic conditions  Leveraged buyout[ edit ] Another example is a leveraged buyoutessentially a leveraged recapitalization initiated by an outside party.
Usually, current shareholders retain control. Therefore, current value of equity takes into account the product of current market price with respect to its outstanding ordinary shares.
This case provides an illustration of how financing decisions affect organizational structure, management decision making, and firm value.
Yet according to research studies, some types of exchange offers result in negative returns, while others produce positive net returns. How much value was created? In a successful recap the value of the dividend plus the value of the stub exceeds the pre-recap share price.
After the large dividend has been paid, the market value of the shares will drop. One could argue that the decision to recapitalize demonstrates a failure on the part of the top management team; they should have been able to find something productive to do with the money.
This is just a sample partical work. The reasons for such a recapitalization include: Although such recaps are designed as a takeover defense, a high percentage of firms that adopt them are subsequently acquired.Situation: Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency and product quality, the company borrowed almost 90% of the market value of its common stock and paid it out as a special dividend to shareholders.
A leveraged recapitalization in case of Sealed Air in my point of view was a good idea because the corp. was in a stage where they had adequate manufacturing capacity to meet the demand for its products during the next several years without significant additional capital expenditure.5/5(2).
In the case of Sealed Air's leveraged recap (HBS Case ), management purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that disrupted the status quo and promoted internal change, which included establishing a new objective, changing compensation systems, and reorganizing.
A security code is added protection against credit card fraud. It is a 3 or 4 digit number appearing on the front or back of your credit card. Leveraged recapitalization. One example of recapitalization is a leveraged recapitalization in which the company issues bonds to raise money and then buys back its own shares.
Usually, current shareholders retain control. The reasons for such a recapitalization include. Sealed Air Corporation-Leverage Recapitalization Case Solution, Q1 (b): Leveraged recapitalization: Company has executed its leveragedrecapitalization plan .Download