Kennecott Copper Corporation Harvard Case Solution & Analysis

Kennecott Copper Corporation Case Solution

Problem Diagnosis

This case focuses upon the $ 550 million tender offer of cash for acquiring the total outstanding shares of the Carborundum Corporation by the management of the Kennecott Copper Corporation. This case provides the detailed rationale behind the acquisitions and the divestitures made by the management of Kennecott Copper Corporation over the past years and analyzes the situation in terms of the current proposed acquisition.

The purpose of this report is to basically analyze the strategy which has been adopted by the management of Kennecott Copper Corporation regarding the divestitures and the acquisitions. The analysis of the management strategies needs to be performed and whether the decisions made by the management have served in the best interests of the shareholders of Kennecott Copper Corporation or not. All the findings are to be provided to one of the hedge fund which is seeking to make significant investment in Kennecott Copper Corporation.

Analysis

The analysis has been performed critically analyzing the strategies which has been adopted by the management of Kennecott Copper Corporation over the past years and whether those strategies were in the best interests of the shareholders of Kennecott Copper Corporation or not. A range of the areas have been analyzed as highlighted below:

The Rationale behind Peobody Coal Acquisitions

The management of Kennecott Copper Corporation had purchased the business and the assets of the Peobody Coal Company for a total cash purchase price of $ 285 million. This acquisition could be characterized as a conglomerate acquisition as the acquisition of Peobody was in a business which was unrelated to the business of Kennecott Copper Corporation. At the time of the acquisition, the Peobody Coal Company was the largest domestic producer of the coal whereas the Kennecott Copper Corporation was the producer of the copper and the copper products. Since the business of both the companies is simply unrelated therefore, this is characterized as the conglomerate business.

There were two major benefits which the management of the Kennecott Copper Corporation was seeking from this acquisition and these two related to the profitability of the Kennecott Copper Corporation. Firstly, the purpose of this acquisition was to stabilize the wide swings in the profitability of Kennecott Copper Corporation and secondly, this acquisition opportunity was expected to provide the Kennecott Copper Corporation with future investment opportunities which would be outside the copper industry.
However, if we analyze the post-acquisition situation then it could be seen that both of these objectives had not been achieved. Firstly, the Peobody Company made little contribution to minimize the swings in the profitability of the Kennecott Copper Corporation. Infact, there were many wider swings experiences after the acquisition as compared to the swings in 1960s. Moreover, due to unexpectedly poor earnings of Peobody, huge capital expenditure requirements in order to meet the environmental standards and the opposition from US Federal Trade commission and the US Department of Justice had also hindered to meet the second objective of this acquisition and thus resulting in the divestiture of the Peobody Company.

Objections to Peobody Acquisition & Divestment of Peobody

At the time of the acquisition of the Peobody Coal Company, the management of Kennecott Copper Corporation had received objections from the US Department of Justice and the US Federal Trade Commission. The only reason behind these oppositions was that the acquisition of the Peobody Coal Company would lessen the competition in the coal industry and a complaint had been filed under section 9 in the August of the year 1968. However, the FTC and the US DOJ were both satisfied and the management of Kennecott Copper Corporation was successful to overcome the opposition...................

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