Sealed Air, a highly profitable company with minimal financial issues, decided to undertake a leveraged recapitalization in order to "strengthen and motivate the organization." The management of Sealed Air was "unable to identify profitable acquisitions or expansion projects" and simply "increasing the dividend…[would be] admitting defeat." Starting with the World Class Manufacturing program to improve Sealed Air's manufacturing process, Sealed Air established new priorities, such as using cash flow from operations as a major factor in managers' bonuses instead of earnings per share, and Sealed Air put more emphasis on employee stock ownership after the recapitalization.
We believe that Sealed Air made a good choice to leverage themselves to the extent that they did, and that decision benefitted multiple parties. Management believed that they were not as well suited to invest the $54 million in Sealed Air's cash as their investors would be able to, thereby making those investors happy with the company's decisions. Any shareholders that kept their shares following the recapitalization did not lose equity in Sealed Air, which could have happened if Sealed Air decided to issue more shares. The company itself was able to stay independent without any need for an anti-takeover device. In order to determine how much value was created from Sealed Air's decision to leverage itself, we had to figure out the present value of the interest tax shield. For the senior secured bank credit agreement of $136.7 million, we reduced the principal by the given repayments from 1991 to 1996 and each year calculated the interest due by multiplying the 11.5% by the beginning balance at the start of each year. Each interest amount for those years was multiplied by the corporate tax rate (34% for 1991 and 1992 and 35% thereafter) in order to determine the present value of the tax shield, and the NPV of $15,904,368 was determined based on those individual year values. For the...
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