American Chemical Corporation Analysis Essay

Executive SummaryAmerican Chemical good deals Collinsville base in Alabama is being sought by Dixon a speciality chemicals company. This plant mainly specialises in Sodium Chlorate reapingion and fits well with Dixons strategy of give chemicals to paper and pulp industry. It would also complement Dixons existing product line. The plant cost $12million in investment and requires up to$ 2.25 million for upgrading to new engine room. An in-depth investigation and analysis is conducted for both the company and the industry to accurately determine the worth of investment in the Collinsville plant. Net familiarize values atomic number 18 calculated for each(prenominal) possible scenarios. After a thorough analysis of the data, suitable recommendations atomic number 18 provided.IntroductionDixon, an American specialism chemical producer, wants to buy Collinsville plant from American Chemical Corporation, an some other typical chemical companyin 1979. Dixon wants to diversify its p roduct line by acquiring the aforesaid plant, which produces sodiumchlorate to supply to paper producers in S offh-eastern lift off of the US. This plant initially cost USD 12 million and additional USD 2.25 million needed to buy laminate technology to increase efficiency and profitability of the plant in order.Ab surface The Collinsville PlantAmerican Chemical Corporations plant in Collinsville had the capacity to produce 40000 tons of sodium chlorate per year. Sodium chlorate is produced via the electrolytic vector decomposition of salt, water and energy. The important factors for us to consider regarding sodium chlorate is where the adopt for this chemical comes from. 85% of demand for the product is derived from the paper and pulp industry, where it is employ in the production of the bleach that is used to whiten the paper. The remaining 15% comes from its use as a soil sterilant, in uranium mining and in the production of other chemicals.Sodium Chlorate commercialize in US ABargaining Power of Customers * Customers include Paper & Pulp Producing Companies resembling Georgia Pacific and Universal * Because of uplifted competition among the sodium chlorate producers, the bargaining power is being increased. * The demand is also increasing at the rate of 8 to 10% per year with extra usage in the plant effluent problems of paper corporations. Competition within Industry * Highly Competitive Market * Market Leaders like Hooker, Pennwalt, American & Kerr-McGee keep up more than 55% of the US Market * Huge occur of small medium enterprises with active shares in the sodium chlorate market in US * Paper Companies like Universal also have their own NaClO3 plants actively participating in the competition. * Companies like Brunswick and Southern are specialised only in NaClO3 production Threat of New Entrants* Union Chemicals and Lousiana Paper Company have already announced their entry into the competition with 40000 and 35000 tons plants respectively Threa t of Substitutes * Graphite Rods used in the production of NaClO3 are being replaced with Metal or Laminate rods. * This would eliminate graphite costs and also overthrow power costs by approx. 30% Issues surrounding Collinsville opportunity1. Impact on revenues Reduction in margins due to overcapacity Although sodium chlorate prices were judge to increase, the overcapacity would cause number of tons to reduce (competition) and therefore, hit the margins. 2. Impact on costs Increase of electricity from $0.019 in 1977 per kWh to $0.025 per kWh in 1979. Besides, due to upward revaluation of assets, depreciation was pass judgment to increase. 3. Impact from adoption of technology Depreciation would increase and Dixon was required to pay all costs cerebrate to the installation of laminated electrodes. 4. Impact of Financing of acquisition Temporarily increase Debt to capital ratio to 47%. purpose debt to capital ratio 35% ValuationThe Next important step is the valuation of sodium chlorate plant i.e. Collinsville Plant for Dixon Company. The given values and assumptions are summarised in the following tablesUsing NPV Rule for the project Without Laminated ElectrodesDetails of the expect values is given in Exhibit 1As the table is clearly indicating the net impart value is a negative value if the Collinsville Plant is valued assuming that the graphite rods are not substituted with the laminate ones. This project may not be profitable considering this negative value. Using NPV Rule for the project With Laminated ElectrodesDetails of the expected values is given in Exhibit 2For shrewd the NPV of project in case of Laminated Electrodes, the power costs are reduced by 20%. The Graphite costs are suck upn as adjust since there is no utilisation of graphite in the newer technology. Also the capital expenditures for first year are taken as 2.5 million $(the cost of project). Now, the NaClO3 plant in Collinsville is valued using discounted cash fly the coop assu ming the plant would operate using new replaced laminate electrodes when they become available. In this project, it is founded out that the Net present value is positive suggesting the project is profitable if $2.25mn of laminate electrodes is included in the overall $12mn deal.Calculations of betaThe systematic put on the line of the project could be the risk of the production of sodium chlorate in the industry. Therefore, we calculate beta of the project ground on the beta of the sodium chlorate industry. The beta of Brunswick and Southern will be used to calculate the Beta un-leverd for the firm because the two firms purely produce sodium chlorate. Their Beta will be first unlevered. because weighted average of those un-levered Betas will be used to calculate the levered beta of the firm.Debt/Equity ratioFor calculating levered Beta we take Dixons rear end capital structure (D/E ratio of 35%). Financing by the debt package will temporarily increase Dixons D/E ratio to .47. B ut we take .35 as the D/E ratio for calculation as the company will ensure that it maintains its target D/E ratio in the long run.Monte Carlo AnalysisMonte Carlo analysis is used to gauge the sensitivity of free cash flows on the Net present value of the project. This is used to seize various sources of uncertainty inherent in the cash flows. Monte Carlo Analysis is performed on both the germane(predicate) scenarios in the case and the variations are plotted in a graph.For the Unlaminated factoryAfter installing laminationRecommendationsBasing on our detailed calculations following recommendations are made to Dixon Corporation * The net present value (NPV) of Collinsville plant (without the lamination technology) comes out as -0.89 million. Since the NPV value is negative it is advisable not invest in this project and company should follow up on other alternatives. * If the new Lamination technology is installed in the Collinsville plant then the Net present value comes out as $1 0.919 million. This is attributed mainly to the huge savings in power and graphite costs. Even though it requires a $2.5 million extra investment, the benefits far outweigh the costs.Because of a high NPV value it is advisable to invest in the Collinsville plant and install the lamination technology. This investment will not only create synergies because of the similarity in the trade but also add value to shareholders wealth. * If terminal values are taken as zero in (assuming no residual value)then the NPV of Collinsville plant comes out as -$2.928 million. And after installation of lamination the NPV becomes as 3.6 million $. Because of the high NPV value in the later scenario it is advisable to implement advanced Lamination technology while investing in Collinsville plant.