Case analysis on "USG Corporation"

USG Corporation Case Analysis
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USG Corporation Case Analysis
Introduction
USG corporation is a renown construction firm and producer of gypsum products in 1988. The board of directors had approved a recapitalization on 2nd May, 1988. Through the recapitalization plan, the company was exchanging every outstanding share for a common stock of $37.00, $5.00 in the indicated amount of the 16% subordinated pay-in-kind debentures, and as well as one share after the recapitalization. The chairman and CEO of USG Corporation, Robert Day noted that the recapitalization plan was consistent with the firm’s commitment to enhance or maximize value for shareholder while leaving them on a continuous equity stake. After the announcement by the company, the share price was valued at $41.50, up for $0.50. However, before the implementation of the recapitalization plan, shareholders were required to approve in a meeting to he held on 8th July, 1988 (President and Fellows of Harvard College, 1996).
Another notable aspect from the case is that the recapitalization was never the only option existing to shareholders. There was an outstanding tender offer of about $42.00 per share from the Desert Partners, a takeover group based in Texas. The offer from the Texas based group was expected to expire by 10th June, 1988. Notably, the group had also indicated their willingness to increase the offer to $50.00 for each share, debt, and stock. However, there was no official change on the tender offer. Before the expiration of the offer, it was expected that shareholders would agree or disagree to tended their shares to Desert Partners, or wait for the recapitalization plan proposed by the board. It is upon the shareholders to decide whether to vote in favor of the recapitalization plan or tender their shares to Desert Partners (President and Fellows of Harvard College, 1996).
In this case analysis, we will review USG’s business, its previous performance, and the outlook into the future. We will also explain why USG is the target of a hostile takeover, and the best course of action for the company. Secondly, the analysis will also value USG under the current operating and financial strategies. The firm analysis will compare how the valuation compares with the current market price. Notably, USG corporation will be valued based on the proposed recapitalization plan. Finally, the analysis will explain how the CEO and Chairman of USG should respond to the tender offer from Desert, as well as argue whether the proposed recapitalization plan is the best approach for the company. From the perspective of Desert Partners, we will also argue how to respond to the recapitalization plan.
USG’s Business Review
Based on the information presented in the case, it is clear that USG’s shareholder is experiencing a dilemma. They are expected to either favor the recapitalization plan or vote in favor of the tender offer from Desert Partners in the purchase of the USG Corporation. It is essential to note that the company has been performing well for several years. This is seen from the historical evidence presented throughout the case study. In this regard, the clients, shareholders, and other stakeholders within and outside the organization are satisfied with the performance of the entity. The aspect can be seen through the strong connection between the stakeholders and the brand. This is also enhanced by the strong connection between the stakeholders and the brand. It has been achieved through the building of a competitive position, that is the main basis for enhancing performance and productivity in the organization (President and Fellows of Harvard College, 1996).
It is because of the significant contributions from the company managers and stakeholders that investors are interested to takeover the organization. The interest also arises from the low market price of the organization. The solution to the prevailing issues would only be achieved through the recapitalization plan, which was overseen by the CEO, Mr. Robert Day. The intention was to ensure that the hostile takeover from Desert Partners is dissolved and the company continues to operate under the new restructuring (President and Fellows of Harvard College, 1996).
As seen through the case study, we can deduce that the company was target of a hostile takeover because there were no concrete benefits to shareholders, and the firm sustainability. From the analysis, the managers never sat back and watch things unfold regarding the takeover. It was the intention of the company to ensure that the best choices are made for the benefit of shareholders and the organization. Through the recapitalization plan and the tender offer from Desert Partners, it was perceived that the tender offer was never sufficient and it was better for USG corporation to continue developing the recapitalization structure. It was also apparent that the recapitalization had potential of causing the company a high amount of debt, which would lead to the forceful selling of important business units within the organization. However, Robert Day, the CEO of the organization argued that the company was known as a market leader in the gypsum and construction sector. Therefore, it would be easier to handle the arising debts and ensure that all issues are addressed appropriately (President and Fellows of Harvard College, 1996).
Although there are prospects that Desert Partners might increase their offer, there is no official communication to guarantee that. This implies that the best decision for the company is to do the recapitalization and ensure that interests of all parties are protected. This will be a basis for overcoming the hostile takeover that never meets the actual market price of the company. As a market leader in the sector, the company must understand its unique contribution and ensure that diverse aspects related to its financial performance are fulfilled. It would be easier to handle the debt from the recapitalization plan instead of accepting the hostile acquisition of Desert Partners.
Through the influence of its managers, the company was able to attain a better market position and fulfill its obligation to its shareholders. There were numerous objectives that were attained through th recapitalization structure. First, we can see from the annual savings that were estimated to be more than 23 million dollars in 1988. Moreover, there was an improvement in the declining earnings per share from the stocks. Through these incentives, the firm was able to enhance it dividend value and warrant sustainability of its operations. This would never have been achieved through the acquisition by Desert Partners (President and Fellows of Harvard College, 1996).
Value of USG Corporation
DCF Valuation
The Discounted Cash Flow method was utilized in the valuation of the company, which intended to reveal the true worth of the company. The approach is effective because it discounts future cash flows that can be generated from the company following specific discount rates. In this regard, we were able to determine the cost of equity, we utilized the Capital Asset Pricing Model was also applied. Notably, the risk-free rate from the analysis was 8.5% and beta recorded as 1.37 as reported in the case study. Moreover, for effective valuation of the company, we also assumed a market risk premium of 10%. These figures and assumption were helpful in determining the cost of equity within the firm. Based on the DCF method, we established that the equity of the company at 21.98%. Notably, the weight of equity as well as debt are taken from the financial statement and balance sheets (attached in appendices), and are valued at 56.9% and 42.7% respectively. After determining these, we also found that the weighted average cost of capital was 14%, which is the foundation upon which the future cash flows will be discounted back to the current value. Based on the DCF method, the value of USG was found to be $1336.24. The difference between the company value or enterprise value and the debt value gives the equity vale. When this is divided by the total shares outstanding, we can get the value for each share at around $33.01. The figure is high compared to what is being offered by Desert Partners. Therefore, the option is not feasible because shareholders will be at a loss when they opt for the option.
Analysis
The process of valuing the company is conducted to ensure that recommendations follow the best alternatives available to decision makers. This is important to ensure that USG corporation performs well and aligns with the best performance alternatives. In this analysis, we have highlighted the approach is intended to maximize of shareholders value, and enhancing the best alternatives. Through the valuation, the shareholders would be able to determine whether the tender offered by Desert Partners is worth or not. On the other hand, if it is less than the value of the company, they can forgo the offer and choose another alternative to address the issues. Based on the valuation analysis, there are also significant risks associated with proposed tender from Desert Partners. Although the intent to increase the offer has been registered, there is no direct communication from the company or formalized communication of the offer. Therefore, the formalized offer is still under the required price and does not meet the value of USG (President and Fellows of Harvard College, 1996).
The value calculation showed that the company had total assets valued above 2 million dollars in 1986 and 1987. In addition, the liabilities and equity of the company were valued at the same as the asset value. Therefore, the company operations were breaking even. In this regard, it was easier for the organization to restructure itself through the recapitalization plan in order to enhance its performance. This was the most effective strategy to guarantee positive results and meet its shareholder objectives. In the valuation, it was also revealed that there was a consistent shareholder equity deficit that was decreasing between 1988 to 1992. The results from the balance sheet, and other financial data are attached in the appendices (President and Fellows of Harvard College, 1996).
In the fresh recapitalization plan, the company would be able to enhance its value and maintain its customer trust. The offer from Desert Partners did not meet the real value of the company. Although they proposed to increase their offer to reach $50, there was no formal update to convince the shareholders about the proposal. Therefore, the best alternative was leveraging on the recapitalization and enhancing value through effective structures in business operations. The sufficient asset and liquidity position would ensure that the company continues to operate efficiently after the recapitalization of the company. Although there would be debt acquired to finance the recapitalization, it would be easier to service the loan and handle any other complications associated with the recapitalization (President and Fellows of Harvard College, 1996).
CEO’s Response to Desert Partners
As revealed in the case, there has been several attempts to takeover the company due to the steady income and considerable high profits. The company is a market leader in its niche, and has produced several benefits for people. The main benefits include lower production costs and positive market reputation. This is essential and ensures that the company continues to operate without complications. After becoming the CEO of the organization, Robert Day has done significant work to position the company well and ensure that it attains a positive reputation. The performance in stocks in the preceding years has also been positive, and has greatly impacted many people across the organization. In this regard, the company has been able to maintain its returns and generated huge profits. The CEO is working consistently to protect the company from any takeovers and ensure that its operations are independent of external influences (President and Fellows of Harvard College, 1996).
In the proposed offer from Desert Partners, Day must consider the diverse aspects related to shareholder value. The offer must be accepted when there will be maximum value for all partners. The offer must be rejected if it devalues the company and never meets its current position in the market. As argued earlier, it is clear that the takeover is hostile and never considers the actual value of the company. Although there is an intent to increase the price of the tender, there is no formal communication from Desert Partners. In this regard, the CEO should disregard the offer unless the company is able to revise its offer and formalize it. The current offer is hostile, coercive, and never meets the actual value of the firm. I strongly believe that the proposed recapitalization is the best response that will address all the arising issues related to the company. The offer will limit the company progress and will never offer shareholders the right value. It is essential for the CEO to focus on the recapitalization and provide shareholders with a security over their interests. There are also many changes that would arise from the recapitalization, including the installation of an incentive plan for senior managers. This would protect the form from any potential losses and ensure that customers, shareholders, and other stakeholders get value for their money (President and Fellows of Harvard College, 1996).
As Desert Partners, I would consider revising my offer and make it above $50. This will make it easier to convince the senior managers and shareholders to accept the offer. On the other hand, the company has a consistent income stream and potential for growth. Therefore, convincing the managers and shareholders to adopt a proper approach to the acquisition of shares would guarantee effectiveness in the company’s future. The financial benefits from the proposed restructuring are many, but it would be easier...