FMC Corporation

Case Study
Group 2 Member:
• Agung Taufiqurrakhman
• Andhika Sinusaroyo
Question No.1

“Evaluate the capital restructuring (recapitalization)

move taken by the management”
• Financial Highlights which required Strategic Actions:
• Abundance of cash in early 1986
• Stock price only 9 times earnings (P/E ratio of 9). Generally, P/E ratio lower than
15 is considered low.
• A higher P/E ratio generally indicates higher growth potential, and vice versa.
• With these conditions in hand, management feared a takeover bid by potential ri
ders.

• Options of strategies to alleviate risk of their 1986 financial condition:

1. One option was taking the company private through a leverage buyout. Risks: potenti
ally competing with corporate raiders which might top out any bid he would make. Ro
bert Malott as the CEO did not take this path, and we agree that the risks would poten
tially disastrous for the company.

2. Another option to recapitalize the company. This was the path that Malott had took. Alt
hough avoiding the risks of leverage buyout from the first option, it did not mean this o
ption was without any risks. The risks (related with the goals) of the recapitalization str
ategy are explained below.
• The option of recapitalization had three main goals:

1. Eliminate a takeover attempt.

2. Give FMC employees greater stake in the company and its future by expanding
employee ownership.
3. Invest aggressively in existing businesses and concentrate on current and related
businesses.

This plan involved the potentially high risk that earnings would be more sensitive to
short-term operating fluctuations. Yet, his confidence lies with the historical data that
proves that the company’s debt could be repaid with cash from operations.
In our opinion, this was sound judgement from Malott.

• Overall, from the viable options that Malott had at the time, the strategic deci
sion to go for recapitalization was the best path to take to alleviate risks of
their 1986 financial condition.
Question No.2

“Explain the proposed restructuring scheme. What

were the potential negative effects? and What were
the potential positive effect?”
The Restructuring Scheme

• The Restructuring plan had 3 main goals: eliminate a takeover attempt, give
FMC employees a greater stake in the company and its future by expanding
employee ownership, and invest aggressively in existing business.

• The detail of the scheme as follows:

• Public shareholders: All public shareholders would receive $80 in cash
and one share of the recapitalized company for each common share held.

• Management and Employee Benefit Plans: Management and holders o

f stock in employee benefit plans would receive 5.67 shares for each shar
e held.

• Employee Thrift Plan Shareholders: These shareholders would receive

4.209 new shares and $25 per share for each share held.
Negative Potential Effects: Positive Potential Effects:

• Potentially harm financial or firm • Reducing the takeover risk by

performance other firm
• Reduce the company’s ability to • Efficiency on company’s perfor
make acquisitions and develop mance
internally • Reducing taxes since receiving
• Fraud risk debt
• Reputation risk • Management incentives
• Asymmetrical information which
could raise firm’s value
Question No.3

“Who benefitted from the strategic measure? Intern

al shareholders? External shareholders?”
“Both internal and external shareholders will be benefitted from the strategic
measure”

1. Internal shareholders:
• Gained benefit from ownership of the company
• Ensuring firm continuity
• Reduce the risk of takeover from the other company

2. External shareholders:
• Gained benefit from receiving premium price of the stock they held
Question No.4

“Explain how these strategic actions could improve

the value of FMC”
• Value of the firm is a combination of:
1. Value all equity financed
2. Present Value of Tax Shields
3. Present Value of other benefits of leverage
4. Present Value of benefits of control change.
5. Present Value of benefits from M & As.
6. Present Value of benefits of changes in strategies, policies, operations, organization
structure.
7. Present Value of costs of financial distress.

• Based on Modigliani-Miller Theory, since having long term debt and then decre
asing WACC, the recapitalization strategy proposed by Mallot could raise the
value of the firm

• Since the management has more information than investors, information (asym
metric information) and transaction cost are possible manners to improve or ex
ploit the value of FMC.
Thank you