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Atlantic Corporation – Abridged Case Solution & Answer

Atlantic Corporation – Abridged Case Study Solution

Introduction

One of the largest forest products/paper organization – Atlantic Corporation, operates at national level. In the year 1983; it reported sales of around $6.5 billion and net income, i.e. approximately $105 million. The organization offered its services in three different business areas like: chemicals, paper and pulp and building products. Atlantic was primarily classified as the organization for forest products by the analysts, because around 60 percent of the sales and 70 percent of the operating profit stemmed from the building product division of the organization. This division was the largest producer of plywood around the world.

With the change in economic growth; the forest products industry demonstrated rapid and dramatic responses. Plywood’s sales and profit were mainly associated with the construction activity, which was in direct relation with the fluctuations in the interest rate. (Piper, 1996)

Problem Statement

Considering a significant increase in the Linerboards demand; the strategic approach of Atlantic Corporation was to bring a significant increase in the capacity of Linerboard across the firm.The handsome and well-publicized premium payment by Royal Paper for the repurchase of large stock blocks,were threatened by the hostile investor. Due to this reason, Atlantic Corporation is willing is acquire the assets of Royal Paper. Thus, there is a requirement to evaluate the acquisition decision and financing options in order to acquire the Royal Paper.

Evaluation of Royal Paper’s acquisition decision

The performance and growth of forest products industry wereassociated with the shift in the economic growth. The demand of linerboard and box sales are expected to increase by 7 percent, leading the company towards a strengthened industrial production. By the end of the year 1986; the availability of new capacity is expected to increase by 1 to 2 percent. At historical production level; the operating rates are known to increase to 99 percent i.e. up from 84 percent of 1982 level.

Based on an increased demand of linerboard;its prices would increase to around $420 per ton by the end of 1986 as compared to $270 per ton of the year 1983. The sales of linerboard is considered to be profitable as indicated by a significant increase in the product price i.e. an increase of $150. The strategic approach to bring improvement in the production of linerboard tends to be an effective approach. This is particularly, due to an increase in the demand of linerboard products to meet the consumer needs. In return, the organization would be able to retain its potential customer base against its competitors in the forest products’ industry.

Similarly, an increase in product price with high utilization rate,would bring an improvement in the overall economic growth. This makes the industrial dynamics more favorable for the organizations which represent high capacity of linerboard and box products production. Additionally, the current industry dynamics indicate to the future unavailability or availability of linerboard at extremely high price ranges. Such change in industrial trends would last a negative influence over the profitable growth of Atlantic’s linerboard and box product sales followed by an increase in the raw material’s cost.

The construction cost of linerboard mill is estimated to be around $750 million as compared to the acquisition cost of a best mill at the cheapest rate, i.e. approximately $319 million. The growth of the forest products’ industry of Atlantic Corporation, tends to be associated with the change in the interest rates. Due to this reason, the organization is required to expand the business in this particular domain,because of no significant impact of the interest rate. Thus, the linerboard industry is one of the industries that remainsunchanged with the change in interest rates i.e. no adverse impact on the prices.

Royal Paper’s management and its shareholders

The sales and profit of Royal Paper demonstrated a consistent growth by 8 to 9 percent annually. The decline in the sales during 1982 and 1983 werebecause of the weakened paper and the forest product market. The linerboard capacity of 661,000 is expected to increase by approximately 747,000 tons per year, in comparison to the purchase of Atlantic Corporation linerboard i.e. around 150,000 tons per year from its competitors. Considering the threatened market position of investors;the deal to sale the Monticello Mill package to Atlantic Corporation has been represented as the bestaccording to the shareholders. The approach to sale the organization to the Atlantic Corporation has been quite difficult for Royal Paper, because of the prominent threats from the investors despite a significant improvement in its performance…………………………….

 

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