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CASE STUDY

CORPORATE STRATEGY

FMC Corporation Recapitalization

Disusun Oleh :

Ahadi Aprianto (08/271138/PEK/12536)


Desi Setyawan (08/271110/PEK/12508)
Ludit Farramita (08/271120/PEK/12518)
Wiwik Rachmarwi (08/271133/PEK/12531)

Dosen Mata Kuliah :


Dr. Bambang Riyanto LS., MBA

Program Magister Manajemen


Universitas Gadjah Mada
2009

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FMC Corporation Recapitalization

Questions :

1. Evaluate the capital restructuring (recapitalization) move taken by the


management.
2. Explain the proposed restructuring scheme.
3. What were the potential negative effects?
4. What were the potential positive effects?
5. Who benefitted from the strategic measure? Internal shareholders? External
shareholders?
6. Explain how this strategic actions could improve the value of FMC?

Answers :

1. Evaluate the capital restructuring (recapitalization) move taken by the


management.

• Strategic issues :
o Strong cash position in early 1986.
o Management feared a takeover bid by potential raiders.
• Strategy :
o Recapitalize the company.
• Plans :
o Conversion of the company’s outstanding Convertible Securities, the
incurrence of obligations under the Bank Agreements, the issuance of the
Senior Subordinated Derbentures abd the Subordinated Derbentures, the
repayment of certain existing indebtedness, and the payment of costs
related to the Recapitalization.
• Main Goals :
o The recapitalization plan had three main goals : (1) eliminate a takeover
attempt, (2) give FMC employees a greater stake in the company and its
future by expanding employee ownership, and (3) invest aggressively in

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existing businesses and concentrate on current and related businesses.
• Impact :
o Recapitalization would raise interest expense so would impact on
decreasing net income.
o On the balance sheet, it would decrease marketable securities, trade
receivables, short term debt, current portion of long term debt, but
would raise long-term debt.

2. Explain the proposed restructuring scheme.

• Restructuring scheme :
o Conversion of the company’s outstanding Convertible Securities, the
incurrence of obligations under the Bank Agreements, the issuance of
the Senior Subordinated Derbentures abd the Subordinated Derbentures,
the repayment of certain existing indebtedness, and the payment of
costs related to the Recapitalization.
• The details of the scheme can be shown below :
o Public shareholders : All public shareholders would receive $80 in cash
and one share of the recapitalized company for each common share
held.
o Management and Employee Benefit Plans : Management and holders of
stock in employee benefit plans would receive 5.67 shares for each
share held.
o Employee Thrift Plan Shareholders : These shareholders would receive
4.209 new shares and $25 per share for each share held.
• 11.3 million shares held by the company’s pension plan would retired in
early 1986 to ensure that they could not be seized by anyone seeking control
of the company.
• Employee ownership of FMC would rise from 19% to 41% and the proportion
of stock held by the public would decline from 81% to 59%.

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3. What were the potential negative effects?

• Potentially harm financial or firm performance.


• Fraud risk.
• Diminish ability to make acquisitions and develop internally.
• Reputation risk.

4. What were the potential positive effects?

• Avoiding vulnerability to takeover by other firm.

• Efficiency or company’s performance.

• Reducing taxes since receiving debt.

• Management incentives.

• Wealth transfer effects.

• Asymmetrical information which could raise firm’s value.

5. Who benefitted from the strategic measure? Internal shareholders? External


shareholders?

• Both internal shareholders and external shareholders benefitted from the


strategic measure.
• Internal shareholders gained benefit from ownership of the company,
ensuring firm continuity, and lessen takeover risk from other company.
• External shareholders gained benefit from receiving premium price of the
stock they held.

6. Explain how this strategic actions could improve the value of FMC?

• Value of the firm is a combination of :


o Value all equity financed.
o PV of tax shields.

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o PV of other benefits of leverage.
o PV of benefits of control change.
o PV of benefits from M & As.
o PV of benefits of changes in strategies, policies, operations,
organization structure.
o PV of costs of financial distress.

• Based on Modigliani-Miller Theory, since having long term debt and then
decreasing WACC, the recapitalization strategy proposed by Mallot could
raise value of the firm.
• Since the management has more information than investors, information
(assymmetric information) and transaction costs are possible manners to
improve or exploit the value of FMC because.