A Case Study
Submitted by: Anthony A. Royupa
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.
Gainesboro has positioned itself for success in a new industry but its realignment has come with significant costs – net losses of $61.3 million and $140 million, in 2002 and 2004 respectively. In the face of these extraordinary losses, Gainesboro has tapped lines of credit in order to continue to pay high‐dividends, ballooning debt to its highest ever. In 2004, it succumbed, cutting its dividend payout, and has even failed to pay dividends in the last two quarters.
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. The problems in the latest board meeting, the firm was devoted to paying dividends as soon as possible, and dates were set for less than a year away. How to set the dividend policy was the main issue? The firm will not be able to provide a dividend at the expected rate without borrowing the funds to finance it. Having taken all of the above into consideration Ms. Swenson has narrowed her options down to three alternative strategies. These are ways to approach this by defining their dividend policy...