Union Carbide – Group report #2 (Erica’s questions)
1. Situation Analysis – in each of the three phases what were the critical issues for corporate financial management and what was the appropriate priority for each of these issues? The case “The Union Carbide Deal” highlights three phases of the company’s financial situation. The first phase includes the Bhopal plan disaster and GAF takeover attempt. The second phase is the debt burden, and the final phase is the bank financing and equity. In discussing the first phase, the Bhopal accident is really the catalyst for all the financial issues Union Carbide experienced from 1984 when it occurred until long past the end of the case and its eventual merger with Dow Chemical. As described in a New York Times article by Claudae Deutsch, “the bitter aftertastes continue to tarnish their corporate reputations….Those issues have had lingering impacts on their valuations on Wall Street,'' (Deutsch, p.2) The impact of this devastating loss of human life was understandably massive on Union Carbide, threatening their financial stability and public perception, so much so that the Wall Street Journal was discussing the possibility of a declaration of bankruptcy within just a couple of days. The critical issues impacting corporate financial management for Union Carbide following the accident at Bhopal included quickly dropping stock price. “Before the disaster, UCC stock traded at between $50 and $58; in the months immediately following the accident it traded at $32-$40“ (Shrivastava p.2). Other critical issues were the downgraded bond credit rating, and a $470 million settlement with Indian Supreme Court that, while seen as paltry by many compared to the long term damages caused by the Bhopal leak, was still a blow to Union Carbide’s financial situation (Broughton). The GAF takeover attempt was a serious and intentional threat to the company. The most critical issue as a result was the need to free up enough money to protect itself from the corporate raider Sam Hayman that was taking advantage of Union Carbide just eight months after the crisis in Bhopal had shaken up the company. To generate the capital to buy itself out of takeover, Union Carbide announced the elimination of 15% of its workforce, closed plants, and sold it’s successful consumer products division including home and automotive products. Corporate restructure is a huge financial undertaking, especially in the face of bad press, but the company managed to stay afloat, avoiding the bankruptcy prediction. Their strategy showed promise when after publically announcing moral responsibility for the accident and lives of those taken at Bhopal, Union Carbide’s shares actually rose by 7% (Broughton). Of all the issues in the phase involving Bhopal and the GAF takeover, the highest priority issue was how to generate cash. If it had been just the Bhopal accident, Union Carbide could have continued to act in good will to recover its public image, rebrand, etc. But the threat of takeover put them in a position of having to examine all of their assets and ultimately completely restructure and downsize a company that had been operating for over 70 years and was month the Fortune 500 in it’s industry. But in doing so, “the company avoided a hostile takeover, placed a significant portion of UCC's assets out of legal reach of the victims and gave its shareholder and top executives bountiful profits” (Broughton).
The second phase was the debt burden significantly threatening Union Carbide’s possibility for financial recovery from Bhopal and the GAF takeover threat. “At the end of 1986, debt accounted for a staggering 80 per cent of capitalization. At the end of 1991, debt still remained at 50 per cent of capitalization and sales were $7.35 billion” (Shrivastava p.2). There were 2 main financial issues with the debt burden which were the covenants on the debt and the high interest expense. The high interest...
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