Goodyear Tire & Rubber Co.–1988 Harvard Case Solution & Analysis


1. What are the key issues Goodyear should consider in order to select the investment bank(s)

that will advise, support and place this company as follow-on equity issue? How should the company determine how many banks to hire?

2- Suppose you have been selected to advise Goodyear on this transaction. What are the

strengths and weaknesses of an equity offer by Goodyear at this time? Would you advise thecompany to proceed? Would you advise on alternative methods of raising cash? What is the best solution for the firm?

3-Why does the market typically react negatively to a new equity issue? Is there anything that can be done to improve the reception? How may investment banks help in this process?

4. How do you anticipate the market reaction to the setting up of Goodyear VEBA, the company’s future earnings potential and need for funding?

5-What are the key differences in the process between follow on equity and IPO’s key?

6- Issuers have several choices with respect to the method of SEO issue. What are some the key differences across the block sale, accelerated book build and fully marketed offers

in case Exhibit 6? Which one would you advise Goodyear to follow?

7. What are the costs of equity issuance? What do you estimate that Goodyear would incur with its proposed offering? How may investment banks affect (either way) such costs?

8- Should Epperson invest in Goodyear’s offer?

1.   Key issues Goodyear should consider in order to select the investment bank(s):

Goodyear Tire & Rubber Company should select the investment bank that offers low cost and have control over the issuance and timing of the shares. Investment bank plays an important role for the company because investment banks have deep knowledge and expertise in the area of SEO (seasoned equity offering) and help the company to generate sufficient funds to be invested towards the growth of the organization.

The investment banks efficiently publish the prospectus that explain the detail of shares to the investors before the purchase of shares made and accurately examine the financial statements of the company. Some other issues that Goodyear should consider while selecting investment bank(s) are that the Goodyear Tire & Rubber Company should also consider the time saving factor while selecting the investment bank and that the investment bank help them to save the money; additionally, the timing of the process of issuance should also betaken into account. The company’s requirements to hire investment banks depend upon the size and the current financial situation of the company.

The amount of funds company needed to generate also help in making decision of hiring investment bank(s). In the given case of Goodyear, value of stock offered is $ 22.5 million. On the other hand, Goodyear is required to contribute $ 700 million to VEBA funds .The number of new share issuance of stocks and the decision to expand company’s operations also determines the company’s need of hiring investment bank(s).

2. Strengths and weaknesses of an equity offer by Goodyear:

The strength of an equity offer by Goodyear Tire & Rubber Company includes that offering new equity shares will raise funds, which can be used by Goodyear in order to reduce its debt borrowings. Further, strength of an equity issue is that the equity` offered by Goodyear will help the company to increase its present cash inflows and also enhance the future earning of the company.

It will also provide an opportunity for the company to improve its inflows. Further, new equity offering by Goodyear Tire & Rubber Company will provide an opportunity to the company to improve its position of competition and provide assets  to the firm that helps it to earn growth.

The weaknesses of an equity offer by Goodyear are that there is a cost associated with seasoned equity offering which include both direct cost and indirect cost. The new equity offering depends on the price of the stock during the time of its issuance. The market risk is also associated with the season equity offering. The main drawback of new equity offering is that a decrease in the stock price results in a decline in the earning per share (EPS); so the company should not proceed in this regard. Further, a decrease in EPS will undermine the confidence of shareholders which may result in a decrease in share price.

The alternative methods that Goodyear Tire & Rubber Company can use in order to enhance the cash flows of the company are by using convertible bonds, credit management, preferred stocks, and debt offerings. These all methods help to increase the cash inflows of the company and provide financial stability by raise funds. These methods help the company to protect against market fluctuations and at the same time provide an opportunity to the company to get benefits of cash increment. Goodyear may also raise the required cash by the sale proceeds of engineered products to Carlyle group and by the credit facilities available to it........................

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Set two years after joining the company made an attempt to restructure due to the use, sale of assets, and share repurchases. The case provides an opportunity to analyze the impact that had on the restructuring. 1) the cost of capital, 2) investment solutions, and 3) the competitive behavior of other firms in the industry "Hide
by Timothy A. Luehrman Source: Harvard Business School 19 pages. Publication Date: November 21, 1989. Prod. #: 290016-PDF-ENG

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