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

3. Market negative reaction to a new equity issue:

Market reacts negatively to the new shares because the new issues of the shares depress the stock prices as it leads to the reduction in earning of share (EPS) for the near short term. When the company issue new shares, the number of investors will increase which will ultimately decrease the earning per share (EPS) and the investors may lose their confidence which may result in decrease in the share price. Further when the company wants to increase their cash inflows by issuing new equity; the market or investors view new equity issue as a negative signal which results in a reduction in stock price.

The expected decrease in the earning per share (EPS) will result in a decrease in the prices of stock. Some analyst argued that a decrease in the price is associated with the establishment of new equity share offering, which was the result of an increase in the company’s equity supply. If the short-term earning per share (EPS) is expected to fall in the future, then the company that is issuing new equity offering should not decrease the price of their stock as long as the investors or market expected from the management to earn the return of new fund at an adequate rate.

Reception of new offer of stock can be increased by lowering the price per share or by lowering the number of stock shares to be issued and increasing the price per share. It will attract the intended investors more because it counters the argument of reduction in EPS and the low price option urges them to invest more by keeping in mind the history, background and reputation of Goodyear Tire & Rubber Company. For this issue, at least two investment banks should be hired because the amount of cash needed to be generated is large.

4. VEBA (Voluntary Employees Beneficiary Association):

VEBA means Voluntary Employees Beneficiary Association, which is the type of fund trust that Goodyear Tire & Rubber Company provided to their employees. Voluntary Employees Beneficiary Association was agreed during the labor negotiation between the Goodyear Tire & Rubber Company and the united Steelworkers (“USW”) in Dec 2006. The objective OF VEBA was to provide the employee different benefits which include medical expenses, life insurance benefits, health care benefits and prescription drug costs, and other non-pension benefits. The participants that are included in the VEBA in the case of Goodyear Tire & Rubber Company are

Retirees of Goodyear that are union steel workers, employee (active or retire both) of Goodyear Tire & Rubber Company, their spouses and children.

Anticipated Market reaction to the setting up of Goodyear VEBA:

The market will respond positively to the setting up of the VEBA (Voluntary Employees Beneficiary Association), if they are shown about the transparent and fair use of the Voluntary Employees Beneficiary Association. It will create a good image of Goodyear regarding the security of their employees. As the VEBA is protected from the creditors’ claims so; it provides the company with the benefit to increase their future earning and overcome their retained earning issues. If Goodyear Tire & Rubber Company provides VEBA benefits successfully to the  post-employees, then this will reduce their tax exposure along with the advantage of raising their future potential earrings. Goodyear Tire & Rubber Company contributed $1 billion to the VEBA, which reduced its expenses by $110 million and decreased its OPEB liabilities by more than half in the end of year 2006.

But if the board which manages the VEBA funds is not chosen wisely and it is not capable of handling the funds then; the response of market will be negative in this regard.

5. KEY DIFFERENCES IN THE ISSUE PROCESS BETWEEN FOLLOW ON EQUITY AND IPO’S:

Initial public offering:

Initial public offering (IPO) is the public offering where firms sell their shares for the first to the general public which is traded on the security exchanges. Few reasons for the companies to go public includes that they want to raise the capital, to reward their employees and to attract new customers and investors. Initial public offering is usually offered by the firms that are new or are in a growing phase. To become publically traded, large private companies also issue initial public offerings.........................................

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