Sealed Air Corp.s Leveraged Recapitalization (A) Harvard Case Solution & Analysis


Changing priorities and Incentive structure:

  1. After the execution of re-capitalization program, it is necessary to change priorities and incentive structure in order to create shareholder value through following strategies:
    1. Focusing on customers, which is the critical variable in ensuring the long term success of the organization as they are the main stakeholders with heavy influence over the organization’s ability to generate profitability.
    2. The cash flow maintenance serves as a key variable in ensuring the organization’s survival and success as it is a real measure to increase its shareholder value.
    3. World class manufacturing helps the organization to maintain quality in its operations through total quality management and just in time.
    4. Innovation is made through identifying new ways of producing product or selling it. It also includes the technological development in the organization’s product.
    5. Increase in earnings per share is a key ratio, which is often viewed by shareholders for making investment decisions.
    6. A new bonus plan that focuses on the effective management of cash flows are critical in ensuring the long-term success of the organization, so this approach would avoid taking any reliability on non-cash flow measures such as accounting profit that merely create value in papers, not in reality.
    7. Share ownership plans, which allows giving some stake of the organization to its employees in order to align their objective with that of shareholders. Moreover; the incentive plan also includes the sharing of profit which would further motivate employees to take initiatives.

As analyzed above, the rapid and radical increase in debt requires a commitment to pay interest and repayment on time, which entails the need to maintain the cash flow while creating shareholder value, so these steps are necessary in ensuring long-term success for the organization as a whole after the implementation of the re-capitalization program.

WCM without re-capitalization:

  1. World class manufacturing is a type of innovation adopted in the manufacturing techniques of the organization after facing a massive disruption in its manufacturing process due to excessive focus on sales and marketing.

The Concept embraces following techniques such as those summarized below:

Total quality control: This method seems to put emphasis on maintaining quality through regular quality checks and suggestions. In addition to this, it also emphasizes the search for continuous improvement in manufacturing processes.

Just in time: This removes the need to store any inventory unless there is a customer order, which requires the procurement of inventory. The ordered inventory would be processed at the same time to deliver it to the customer. So keeping inventory is wasteful and it also reduces cash flows.

The concept also embraces concept such as the use of material and employment involvement in improving the quality of operations through suggestion-making.

The concept has not been able to continue creating more value in operations due to the fact that there is a limit to everything. So taking a re-capitalization would have allowed the organization to become stricter about maintaining its cash flows and avoiding any inefficiency in its operations. It also focuses the attention on taking discipline approach towards capital evaluation program due to which the WCM approach would not continue to yield more benefits in the long term without the implementation of the re-capitalization program.

Re-capitalization without WCM:

  1. The implementation of WCM has allowed the organization to improve its manufacturing process by reducing any unnecessary cost in the storage of inventory, inefficiency in the production process, any duplication of work and also the elimination of non-valued added activities. All these benefits accrue in the form of an increase in employee productivity and larger increase in cash flow from operations. Hence, if the organization would not have implemented it first, then it would not have been able to work out the re-capitalization program because without any improvement in manufacturing processes there has been no improvement in cash flow generation from operations, in addition the lack of quality in operations would have led to cash deficiency and losses due to which the implementation of the re-capitalization program would have further aggravated the situation.

Leverage good for all the companies?

  1. Increase in leverage is not good for any company because it depends on the organization’s ability to generate cash and continuing making profit in the future.

Although, the benefit of taking too much debt results in the form of more tax relief available on interest payment however; the financial distress cost along with regular payment of interest and principal repayment schedule put a constraint on organization’s ability to pursue any profitable opportunities……………………………………

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Less than a year after Sealed Air embarked on a program to improve production efficiency and product quality, the company borrowed almost 90% of the market value of its common stock and paid it as a special dividend to shareholders. Management purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that upset the status quo and promoted internal changes, which included the creation of a new target, change the compensation system and the reorganization of production and capital budgeting processes. “Hide
by Karen H. Wruck, Brian Barry Source: HBS Premier Case Collection 21 pages. Publication Date: May 10, 1994. Prod. #: 294122-PDF-ENG

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Sealed Air Corp.s Leveraged Recapitalization (A)