Case 1 Atlantic Corporation
Maastricht University School of Business and Economics Corporate Governance and Restructuring
1. Is the acquisition of Royal’s linerboard mill and box plants a sound strategic move? Consider the short- as well as long-term outlook for linerboard prices and the profitability of the linerboard industry. Furthermore, what basis, if any, is there for expecting AtlanticRoyal’s combined linerboard and box mill operations to do better/worse than the industry overall?
The background information about the industry and also a detailed description of the competing firms represent a good base for evaluating the firm’s decision making when engaging in the purchasing project.
From industry background perspective The outlook of the linerboard and box industry promises a healthy and stable economic recovery. First of all, the demand of linerboard and box were predicted to increase approximately by 7 percent annually. Furthermore only 1 to 2 percent new capacity might be available in the market until 1986 which results in a capacity utilization of almost 100%. The linerboard price for the year of 1987 was predicted $410 indicating high profitable sales. Thus increasing the linerboard production seems to be a smart and profitable strategic move. Especially due to its missing production capacity for linerboards the purchasing project asks for in time decision in order not to lose customers to competitors. Purchasing linerboard from Atlantic’s competitors to retain customers will have a tremendous effect on the profits. Noting that 70% of the Atlantic profits came from its building products until 1983 it faces a large capacity lack compared to its competitors. The forest products industry was directly linked to the interest rate fluctuations, thus after the acquisition of Royal’s linerboard mill and box plants would reduce Atlantic’s potential economic risk.
From market perspective The competitive environment of linerboard industry was unfavorable to Atlantic. Although Atlantic Corporation was one of the nation’s largest forest products and paper companies, it only took 1.8 percent of the whole U.S. linerboard market. Atlantic's daily output of linerboard was 780 tons, but it still had to purchase 411 tons of linerboard per day from the external market to meet production requirements. If the Atlantic aimed to increase profits and market control, the only way was to expand production capacity. U.S. Market (1983) Production (tons) the whole U.S. 14900000 Atlantic Corporation 280000 Stone Container 1147000 Royal Paper Corporation 747000 Market share (%) 100% 1.88% 7.70% 5.01%
From post-acquisition prospect perspective The 16 corrugated box plants from the Royal Paper Corporation were ideal for the Atlantic’ plants, as the combined locations of the Royal’s and Atlantic’s plants would cover most of the United States market, helping the company to cut the higher shipping cost. Secondly, if Atlantic increases its productivity it will reduce its dependence on the external market, while improving profits and enhancing position in the linerboard market. Thus, the post-combined company will greatly narrow the gap to other major competitors such as Stone Container. This will help Atlantic Corporation to achieve its strategic goal. Atlantic-Royal’s combined linerboard and box mill operation will be able to compete in the industry. The capacity of linerboard production appears to will run up to almost 100% in 1986, not leaving many options to produce the demanded product. The currently linerboard mill of Atlantic produced 780 tons per day that represented only 1.8 percent of domestic capacity, however, incorporating the Monticello mill of Royal Corporation will help Atlantic increase its linerboard capacity and market performance. If Atlantic could buy Monticello linerboard mill and 16 box plants, the chances for a strong positioning in the industry increase. Secondly, the linerboard and box sales was 8.8% as...
References: Ross, S.A., R.W. Westerfield and J. Jaffe. 2002. Corporate Finance. 6th edition, McGraw- Hill. Damodaran, A. 2002. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. 2nd edition, Whiley Finance.
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