SEALED AIR CORPORATION

Executive summary
This report is aimed analyze Sealed Air Corporation’s decision to make a special dividend payout in
1989 to its shareholders. The report will also share comments on how and why the company
increased its leverage to make this cash payout and what could be the impact of such a decision.

Been in the market since 1960, Sealed Air majorly dealt with manufacturing of different protective
packaging materials and systems. The company grew rapidly in its first 25 years of operations owing
to focus of marketing and sales but in 1980s, the growth rate declined. The focus needed to shift to
good manufacturing practices. Hence the company adopted World Class Manufacturing (WCM)
program which helped in improving not only product quality but also improved process efficiencies.

Important Considerations and Analysis

WCM also helped revive and revitalize the organization as well as improved its cash flows because of
which Sealed Air had $54 million in cash by mid-1989 which was expected to grow to more than
double in the next year. Sealed Air’s management (Dunphy) wanted to put this cash to best use but
they could not identify any good profitable acquisition or expansion projects. So, they thought that
instead of investing the amount in securities or wrong projects, it would be better to borrow some
more money and make a substantial payout to the shareholders in the form of dividends. According
to Dunphy, this leveraged recapitalization would draw shareholders’ positive attention towards the
company and boost the current ongoing momentum within the company which will help the company
on its path of continued improvement. This seemed to be good idea in general for the company and
its executives (managers as well as employees because of stock ownership). For shareholders, there
was increased risk, so it might not be a good idea especially if they are risk averse.

An excellence project such as WCM improves a company’s processes, optimizes workload, and costs
and hence helps in increasing profits and cash-flows. This essentially means that if a firm is looking
to lever up, it wouldn’t need to worry much about repayments because of steady cash-flows. Hence,
WCM (or any other excellence program) in conjunction with levering up seems to be a good and
consistent path for a firm. This was quite evident in the case of Sealed Air Corporation as well.

We should also note that the value created by Sealed Air’s borrowing action and then payout
transactions was close to $55 million (just after dividend payout, refer exhibit 1). It mostly comes
from the increased leverage and increase in tax shields arising from that.

Following this announcement, Sealed Air's management (Dunphy), also announced the adoption of
a new set of priorities as well as a new incentive structure for the employees. The firm wanted to
ensure that this initiative not only improves company’s value and performance but also strengthens
and motivates its people. The key changes and reasoning behind them are explained below:

1. New bonus plan – After the recap, manager goals were shifted from EPS to EBITDA (and
inventory turns, receivables, working capital). This was done to ensure that managers put
worthwhile effort in generating profits and cashflows. This would not only ensure that
company puts itself on a path to recover quickly from the high leverage situation but also
avoid a situation wherein company may have to be in a state of over-leveraging.
2. Employee Stock Ownership – Again the aim of this move was to ensure that interests of the
shareholders and employees are aligned. Such an action generally is self-disciplinary and
inculcates a feeling of belongingness and ownership amongst the employees.