A Case Study By: Wayne Parker 3/17/2009
Gainesboro Machine Tool Company (Gainesboro) is an enterprise in transition. Ashley Swenson is the Chief Financial Officer (CFO) of Gainesboro, who has to make a difficult recommendation to a divided board about the company’s shareholder distribution strategy as the company begins to emerge from that transition. The following analysis will provide a brief history of the company, a discussion of the underlying concepts related to Ms. Swenson’s decision, an examination of the company’s strategic and financial position and forward looking options, and finally a suggested recommendation for Ms. Swenson to present to the board of directors. Company History
Established in 1923, Gainesboro has evolved from the entrepreneurial effort of two engineering schoolmates dissatisfied with their job prospects to leading enterprise in the industrial machinery design and manufacturing industry.
Having started out designing and manufacturing machinery parts such as dies, molds, and metal presses the company was well positioned to take advantage of the war effort in the 1940’s. Their manufacturing facility was quickly adapted to produce parts for tanks and other armored vehicles as well as the production of other miscellaneous equipment used in the war effort. After the war the company focused on industrial presses and molds and by the mid 1970’s had developed the reputation as an industry leader in a business that was dominated by small, local players.
During the 1980’s the design and manufacture of industrial equipment and machinery was being impacted by the young but burgeoning information technology industry. Gainesboro was at the forefront of this evolution and quickly developed cutting edge computer-aided design and computer-aided manufacturing (CAD/CAM). Gainesboro continued to be an industry leader until the late 1990’s when the company fell behind the lightning fast technical innovation that was being fueled by a seemingly endless supply of venture capital.
From 1998 to 2004 Gainesboro’s revenues slid from $911 million to $757 million. The company underwent two restructuring initiatives in 2002 and 2004 with a combined cost of $202 million. By the end of the second restructuring Gainesboro was a much leaner organization and had developed software that it was convinced would allow it to regain its industry leading position. But the negative impact of this period on investors as well as the company’s management team was still painfully present. The company had been forced to drastically reduce its dividend in 2003 to $0.25 per share, the lowest level in thirteen years. By 2005 the board of directors had decided not to declare a dividend thought they did send a letter to shareholders stating that the discontinuation of the dividend was temporary and the company would resume paying a dividend as soon as fiscal responsibility would allow. Concept Module – Distribution to Shareholders
Profitable companies have long had to determine how to redistribute their profits to shareholders. Traditionally, companies and investors alike utilized dividends as the primary vehicle by which these profits were returned to shareholders. Recently, however, companies have started to utilize share repurchase as a means for redistributing income to shareholders.
There are three primary issues a firm must deal with when determining if it can create wealth through its distribution policy. The first issue is the level of distribution. Companies must determine how much of their free cash flow they can return to shareholders while still keeping enough cash to fund operations and drive future growth. This will vary from industry to industry but is ultimately a decision that each company will have to make for itself based on its current strategic and financial position.
Several factors may impact the level of wealth distributed by a company...