PHELPS DODGE CORPORATION Harvard Case Solution & Analysis

INTRODUCTION

The Copper Industry had collapsed in the year 1981 in the US and it had resulted in a plight among the major copper companies in US. However, the one company, which was more vulnerable to the decline in the prices of copper, was the Phelps Dodge Corporation. The reason for this is that since, the decline in the prices, the sales revenue had declined for Phelps Dodge Corporation because it was the main source of revenue for the company and because of this; it had generated consistent losses for 3 years. The senior vice president of Phelps Dodge Corporation, Mr. Yearly, had also conducted a market study and this study showed that the copper prices would remain depressed for the next several years. This was a prolonged decline in the prices of copper and thus the management of the company was pressurized to go for either corporate diversification or corporate planning to respond to the volatility of the copper prices in the long term. The history of Phelps Dodge Corporation and the financial analysis shows that diversification cannot control the price volatility of copper and thus management should go for corporate restructuring and enter into future contracts to lock in the copper prices in future.

Problem Identification

Phelps Dodge Corporation is one of the largest producers of copper in US. However, Phelps Dodge Corporation had begun to face significant financial difficulties in 1984 and was reporting significant financial losses since the last three years. The company was financing its operations through external debt and the debt to cash ratio had touched sky high at about 70%.

The decline in the copper prices had created an earthquake effect within the copper industry in US however, Phelps Dodge Corporation was more vulnerable to the decline in the prices of copper as copper was its main source of revenue. The copper prices were also expected to remain depressed for the next several years as conclude by the market study, which was conducted by Mr. Yearly, the senior vice president of Phelps Dodge Corporation.

The company was now reporting losses in each quarter, which were higher than $ 25 million, and therefore, the management cannot wait for such a prolonged time. Therefore, the management had to take an immediate action now otherwise, the company would be liquidated. There were a number of different alternative options, which were being considered by the management of Phelps Dodge Corporation to turnaround the company’s financial condition.

The first option for the management was to go for corporate restructuring and under this option, the management would be able to increase its revenues, strengthen its balance sheet and cut down its extra operational costs. The second alternative for the company to control the volatility of the copper prices in the long term for to go for corporate diversification and enter into other businesses. Through this, Phelps Dodge Corporation would be able to achieve financial growth and long-term stability in the copper prices. The company had diversified into a number of different businesses previously also but they had achieved mixed results...............

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