Canadian Pacific: Unlocking Shareholder Value In A Conglomerate Harvard Case Solution & Analysis

INTRODUCTION

Canadian pacific was considered to be a true iconic company in Canada as well as it was the national champion. The incorporation of this Canadian pacific company took place on February 15, 1881 by making use of the act of parliament.

In addition to this, the grant of almost $25 million in cash is provided to Canadian Pacific Ltd. On the other hand, almost 25 million acres of land as well the associate rights that are attached to the minerals were also given to this company.

Hence, during the expansion of the railway business, it was quite appealing for CPR in terms of entering the new business lines and these lines of businesses complemented its rail operations. Furthermore, it also went towards expansion into shipping as well in the late 1980’s.

Thereafter, it involved itself in the construction of hotels for its passengers in most of the major Canadian cities that were having popularity in the tourist destinations because it had the ability to attract as many passengers as they possibly could.

Despite this, while moving into these types of new business lines, CPR also moved into the coal mining business as well as the production of gas and oil. Thereafter, by the fiscal year 1971 the restructuring of the Canadian pacific company took place, which resulted in the creation of a holding company, named as Canadian pacific limited.

Hence, this restructuring was able to allow the other businesses of CPL in which it was involved to avoid operating as being a part of the rail company, which is intensely regulated as well.

In addition to this, CPL continued its strategy in order to make the acquisition of several businesses through the fiscal year 1970. As a result, it was having the ability to become an owner of almost over 160 businesses along with 100 minor investments.

Hence, by the early 1990’s there was deterioration in the financial performance of CPL, which resulted in a change in the leadership because it was realized that O’Brien did not intend to be a caretaker CEO of Canadian pacific limited.

PROBLEM STATEMENT

In the fiscal year January 2001, the Chief executive officer of Canadian pacific limited was involved in contemplation about the future of his firm. On the other hand, CPL was considered to be among the oldest conglomerates in Canada by having its operations in railways, the natural resources, shipping as well as the hotels for its passengers.

There was a reflection of the conglomerate discount in its stock market capitalization of almost CDN $13.5 billion, which is almost 12 to 35% of the value.

However, to eliminate this conglomerate discount and to bring an increase in the shareholders’ wealth, the CEO performed the weighting of the merits and demerits of spin-offs as well as the divestment of assets. Hence, the CEO was in search of the option that would result in brining value for the shareholders of Canadian pacific limited.

CASE ANALYSIS

By taking into account, the valuations have been performed in relation to the discount cash flows as well the comparable have also been taken into consideration. Moreover, the time that comprises of the fiscal years 1998, 1999 and 2000 has also been taken into account.

Thereafter, in order to evaluate the terminal value the time has been extended into perpetuity. In addition to this, the costs of goods sold are also showing an increasing trend, how ever they are not as high as compared to the revenues of Canadian company limited. Hence, this also seems that the company is able to keep the selling and administration expenses in control and this is evident by taking account of quite a small increase in these costs.

Nevertheless, the depreciation seems to be increasing in the fiscal year 2000, which is showing a growth rate of 18.00%. Hence, by deducting all of the expenses from the revenues,the operating income or earnings before interest and tax EBIT have been evaluated.

Apart from this, it is evident that EBIT is increasing in the fiscal year 2000 and there are increased chances that this will continue to grow in the future as well. Thereafter, the depreciation has been added back to the operating income as well as the net working capital has also been taken into consideration.....................

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