The case of Polaroid in 1996.
Executive Summary
The case of Polaroid in 1996 is a popular topic of discussion amongst finance specialists due to the complex issues involved. Specifically, after a long period of unsuccessful moves to discover a sales vehicle that will enable the company to resume its success of the early 1970's, in the mid-1990's the company is found on the verge of bankruptcy. Its new CEO Di Camillo is facing a very large debt, which is due to mature in six years.
Furthermore,although the company does not perform well in the US market, there seems to be still demand in some overseas emerging markets, including Russia. However, in order for the company to maintain and strengthen its position there, they must find a way out of their overdebting and this cannotb be done unless th3e debt is restructured.
Given the situation described in detail in the case study, there are a few steps to be taken on the part of Polaroid to avoid the immediate dangers they face. Specifically:
1. The company must stop repurchasing their sales as a defence against potential hostile takeover moves by predators.
2. A mixed structure should be adopted as for capital restructuring adjusted to the scenarios of decreasing profitability and increasing profitability. In the former, the restructuring proposal involves a 60% to 40% proportion of new debt/ new shares issued. The existing debt of the company will be rearranged with the use of either long-term bonds or new shares issued. This proportion of debt vs equity reflects the assumed risk by the debtors and the shareholders and the terms in which both groups are willing to contribute to this capital restructuring, given the risk factor they face.
3. In the case of increasing profitability, high expectations take over the increased rewards associated with high risks and a 50% debt over 50% equity scheme is proposed. Again, this scheme takes into account the high expectations of both parties and the ease of the shareholders with regards to the earnings
The case of Polaroid in 1996 is a popular topic of discussion amongst finance specialists due to the complex issues involved. Specifically, after a long period of unsuccessful moves to discover a sales vehicle that will enable the company to resume its success of the early 1970's, in the mid-1990's the company is found on the verge of bankruptcy. Its new CEO Di Camillo is facing a very large debt, which is due to mature in six years.
Furthermore,although the company does not perform well in the US market, there seems to be still demand in some overseas emerging markets, including Russia. However, in order for the company to maintain and strengthen its position there, they must find a way out of their overdebting and this cannotb be done unless th3e debt is restructured.
Given the situation described in detail in the case study, there are a few steps to be taken on the part of Polaroid to avoid the immediate dangers they face. Specifically:
1. The company must stop repurchasing their sales as a defence against potential hostile takeover moves by predators.
2. A mixed structure should be adopted as for capital restructuring adjusted to the scenarios of decreasing profitability and increasing profitability. In the former, the restructuring proposal involves a 60% to 40% proportion of new debt/ new shares issued. The existing debt of the company will be rearranged with the use of either long-term bonds or new shares issued. This proportion of debt vs equity reflects the assumed risk by the debtors and the shareholders and the terms in which both groups are willing to contribute to this capital restructuring, given the risk factor they face.
3. In the case of increasing profitability, high expectations take over the increased rewards associated with high risks and a 50% debt over 50% equity scheme is proposed. Again, this scheme takes into account the high expectations of both parties and the ease of the shareholders with regards to the earnings
References: Bizjournals.com (2005) "Polaroid 's debt rating cut because Second Quarter Loss", in http://www.bizjournals.com/boston/stories/2001/06/11/daily42.html Hyperstrategy.com (2005), "Case Study: Polaroid 1996", in http://www.hyperstrategy.com/c5.htm McCracken, M. E. (2005), "The Cost of Capital " in http://teachmefinance.com/costofcapital.com Reem Hackal (2005), "What is a Corporate Credit Rating", in Investopedia.com http://www.investopedia.com/printable.asp?a=/articles/03/102203.asp