All American Pipeline Harvard Case Solution & Analysis

All American Pipeline Case Study Solution

Goodyear’s Diversification strategy:

It can be said that Goodyear’s strategy to acquire the Celeron Corporation in 1082 was one of the most appropriate strategies that were available to the management of Goodyear at that time. It is very important for the company to spread the revenue streams into two or more sources, in case the economic and financial performance of one industry suffers, the loss of Goodyear will be compensated from the improvement in the performance of another sector. Furthermore, this is also one of the most lucrative opportunities for the management to achieve economies of scale by combining the non-core functions of both the organization which mainly includes accounting, marketing and administrative functions.

In addition to this, the diversification strategy of Goodyear is also very successful because of the growth in the industry in which Celeron is operating and the competencies of the management is also one of the most critical factor in improving the market reputation of the company and its acquisition. The fact that huge reserves of oil are discovered in the coast of Santa Barbara also makes the investment more fruitful. Finally, the management of Celeron have purchased All American Pipeline Company which is one of the most appealing characteristics of the diversification strategy of Goodyear.

Debt levels of Goodyear:

The debt levels of Goodyear are decreasing continuously which can have very positive impacts on the financial and operational performance of the company. The debt level goes down from a high level of 42% to a lowest level of 22% which is mainly due to the effective strategies of the management and because of the excellent financial performance of the company. It can be said that Goodyear will not have to pay large interest costs because of this lower gearing levels and the risk of ordinary stockholders will also be minimal which can allow the management to raise finance from equity investors at very low rates. Apart from the equity investors, the risk of loan providers will also be low because of the lower debt levels, the management can borrow the funds at very cheap interest rates. Furthermore, the management of Goodyear can avoid the restrictive covenants imposed by the loan providers if the debt level is very high which can reduce the growth of the organization.

Equity held by the Directors and management:

Approximately 20% of the common stocks of Goodyear are held by the directors and other senior management. On the other hand, it is also anticipated that more shares will be offered to the management which is in line with their employment contract.

Recommendation:

It is recommended that the management of Goodyear should have to sell the All American Pipeline Company in the year 1988. As the discounted cash flows of the company will be negative and because the terminal value of the company is also very low which is making the investment opportunity less lucrative. On the other hand, the WACC is also very high which is making the discounted cash flows in the later years substantially lower.

However, the recommendation is based on the financial projections, the financial projections are based on various projections which involves uncertainties, and little fluctuation in the projection can affect the results of the discounted cash flows workings which can ultimately reduce effectiveness of the recommendation. Furthermore, certain assumptions are made in calculating the discounted cash flows, little adverse movements in the assumptions can also affect the final valuation of the company.

 

All American Pipeline Harvard Case Solution & Analysis

 

Assumption:

The main assumptions are as follows:

  • It is assumed that all the financial projections provided are free from errors and are based on reasonable stats.
  • Terminal growth rate is assumed to be 4%.
  • Credit rating of All American Pipeline Company is assumed to be AAA.
  • Market risk premium is assumed to be 14%.
  • Equity Beta of the All American Pipeline Company is assumed to be 0.8.....................

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