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Cargill: Keeping The Family Business Private Case Solution & Answer

Cargill: Keeping The Family Business Private Case Solution

Introduction

After the death of Margaret A. Cargill in the fiscal year 2006; her company’s stake was passed to the Margaret A. Cargill philanthropies (MAC), as a result if which the foundation became one of the largest philanthropic foundation in the United States of America. In order to fulfil the Margaret’s philanthropic objectives; the foundation wanted to liquidate her shares through an initial public offering. This situation became quite challenging for the company’s CEO, as the IPO was not a recommended solution by the Cargill’s family and the CEO had to create a balance between the interests of all shareholders i.e. on one side the foundation wanted to have liquidity through an IPO and on the other hand, the Cargill’s family were completely disagreed. The company’s top management ultimately decided to spin off the 64% stake in one of the North Americas largest fertilizer company, i.e. Mosaic, in order to maintain the company’s control by exchanging Margaret’s stake. The company’s key owners, the Cargill family, was not deeply involved in the company’s operations. The key question was whether the Mosaic spin off best served the company’s long-term interests and what were the other options for liquidation of the Margaret’s stake in the company (Wiwattanakantang, 2016).

Question 1

Cargill has always been a secret and a complicated business since years. The company has managed to reach out of the public’s eye since its inception. The company has not revealed any financial information and it has always resisted on issuing its shares to the public. Though going through the public offers has many potential advantages, but the company’s resistance towards issuing an IPO was mainly because of few reasons, which are explained below:

Improved Monitoring

The company has different business lien s with diverse range of products, the company controls whole supply chain as it is considered to be a chain rather than a part of the chain. If the company goes public, then it would have to share all the key secrets and financials to public and other relevant stakeholders. Going public would increase the level of monitoring over the company by the government or the regulatory authorities. The company wanted to maintain a private ownership and secrecy of the business.

Loss of Management Control

As mentioned in case, 88% of the company’s shares are held by eth Cargill family has always wanted to make a tighter control over the company’s management. If the company goes public, then the Cargill family would have to share the stake into the public and other external shareholders will have a control over the company’s management. The dividends of the company, which are mostly distributed between the Cargill families, would then be shared among all the shareholders.

Increased Corporate Governance

A private firm does not have a defined set of rules according to the regulatory or reporting authorities. However, if the Cargill issues an IPO, it would require the company to have a defined code of conduct, corporate governance, environmental and societal rules to be implemented within the organization. In addition, the company would also have to report its key financials to the shareholders and the general public, which have remained secret over the time.

Question 2

The spinoff was not in the long term interest of Cargill because the company has given up majority of the company’s stake by providing the foundation a highest stake in the company of 34%. This reduced the management control of Cargill family over the key business. The voting power of the shareholders was hence diluted, which means that new shareholders will be voting in the ley decisions of the company. As the company has remained very safe in its investments and acquisitions, it might be possible that the future investment don’t take into account the previous organization culture and practices into decision making. This would ultimately reduce the employees and shareholders’ morale and satisfaction.

Secondly, the spinoff results in a volatile stock price, which actually happened with the Mosaic’s stock price. Before the spinoff, the share price had reached $85.04 by January 2011. However, after the spinoff the share price dropped by 6% as investors anticipated a much bigger supply of eth company’s shares. In addition, the shareholders of the company, specifically the Cargill family did not want to lose the relevant stake in company, which has led to a conflict of interest between the company’s long term owners and the new shareholders. It might lead towards a loss in the legacy of the company being a private business in the future.

Lastly the spinoff would create a long term impact over the increase in the parent company’s cost i.e. the Cargill. As mentioned in case, the parent company would have to bear the capital gains tax or the dividend tax of almost 35%, which would impact the returns of the parent company’s shareholders.

Question 3

The spinoff has put the minority stakeholders in a worse off situation. It is because the shareholders were not willing to liquidate the relevant investment in company to the foundation, but the tax laws require the company to spinoff all the company’s stake. This situation ultimately led to the loss of voting power for the minority shareholders as the shares received by the minority shareholders were of less value. Though the minority shareholders owned a larger share of Mosaic’s stake i.e. 35.9 percent but the relevant voting power of these minority shareholders was reduced by 11.11 percent i.e. a loss of two-thirds in the voting power of the company. Most importantly, eth stocks given to other shareholders had the option of conversion and class voting rights but the minority stockholders were not provided these options. Ultimately, the minority stockholders would have no say in the management of the company. The key decisions would have an impact on the stockholders but no concern would be given to the interest of minority stockholders………………………….

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