Leveraged Recap
Case2: Leveraged Recapitalization
Client: Sealed Air Corporation
I.Executive Summary
Founded in 1960, Sealed Air grew rapidly during its first twenty-five years because many products had strong patent protection. By the mid-1980s, the patent of air cellular had run out and competition was getting fiercer. The managers started to pay attention to manufacturing. Therefore, the Sealed Air launched World Class Manufacturing to promote manufacturing performance. After a year, this program had revitalized the company and enabled Sealed Air to have $54 million in cash. Because there was no profitable project available, Sealed Air managers decided to use Leveraged Recapitalizations to provide large payout to shareholders.
Leveraged Recapitalizations was a good idea for the Sealed Air Corporation’s shareholders and the company. The reasons are as follows: (1) Benefit the shareholders
A year after Sealed Air implemented the WCM, it had $54 million in cash and expected the cash to double in the next year and a half. The manager felt strongly that the company should not hold on to the cash because shareholders are not paying to invest their money in securities. So it was time to give the money back to the shareholders----a large payout to shareholders.
(2) Benefit the company
When the sealed Air Corporation undertook a leveraged recapitalization, the tax shield helped to decrease the tax of the company. A taxes shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. Since a tax shield is a way to save cash flows, it increases the value of the business, and it is an important aspect of business valuation. Moreover, after the leveraged recapitalizations, the employees would have incentive to work more efficiently, because the company had more debt than before.
II. World Class Manufacturing (WCM) (1) Introduction
The CEO believed that a change in the strategic direction of
Client: Sealed Air Corporation
I.Executive Summary
Founded in 1960, Sealed Air grew rapidly during its first twenty-five years because many products had strong patent protection. By the mid-1980s, the patent of air cellular had run out and competition was getting fiercer. The managers started to pay attention to manufacturing. Therefore, the Sealed Air launched World Class Manufacturing to promote manufacturing performance. After a year, this program had revitalized the company and enabled Sealed Air to have $54 million in cash. Because there was no profitable project available, Sealed Air managers decided to use Leveraged Recapitalizations to provide large payout to shareholders.
Leveraged Recapitalizations was a good idea for the Sealed Air Corporation’s shareholders and the company. The reasons are as follows: (1) Benefit the shareholders
A year after Sealed Air implemented the WCM, it had $54 million in cash and expected the cash to double in the next year and a half. The manager felt strongly that the company should not hold on to the cash because shareholders are not paying to invest their money in securities. So it was time to give the money back to the shareholders----a large payout to shareholders.
(2) Benefit the company
When the sealed Air Corporation undertook a leveraged recapitalization, the tax shield helped to decrease the tax of the company. A taxes shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. Since a tax shield is a way to save cash flows, it increases the value of the business, and it is an important aspect of business valuation. Moreover, after the leveraged recapitalizations, the employees would have incentive to work more efficiently, because the company had more debt than before.
II. World Class Manufacturing (WCM) (1) Introduction
The CEO believed that a change in the strategic direction of