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Stone Container Corporation A Case Solution
To summarize, if the company wants to stay safe from any kind of default, it should reorganize the debt levels within the company on a priority basis. For a very good time, the company was in a situation where it never needed any kind of loan or it repaid any debt issued within a limited time period, but conditions have nosedived now due to excessive acquisitions taking place in a very short amount of time. Its important that senior management should identify and thoroughly comprehend the situation, they should first try to settle down the loans or try to streamline them and consequently go about issuing $300 Mn in convertible bonds. This would permit the company to come out of the enormous pressure of excessive debt levels and their undue interest payments and resultantly this will lead Stone Corporation to its previous splendor of financial steadiness. Hence, these important decisions should be taken in a quick manner and the expertise of senior leadership should be used to help the company come back on the track and follow the cycle of the paper industry.
Following questions are answered in this case study solution:
What was the basis of Stone Container’s successful growth during its first fifty years? What was its product market strategy? What was its financial strategy?
How did Roger Stone’s management of the company compare to that of his predecessors? In general, would you judge his leadership to have been successful? Why or why not
How sensitive are Stone Container's earnings and cash flow to the paper and linerboard pricing cycle? Estimate the effect on earnings and cash flow of a $50 per ton industry-wide increase in prices. Assume Stone Container's sales volume approximates its 1992 production level of 7.5 million tons per year, and costs, other than interest expense, remain the same. Also assume a 35% tax rate.
What would be the effect of a $100 per ton industry-wide increase under the same assumptions given above (in Q3)?
What should be Stone Container's financial priorities for 1993? What must be accomplished if Stone is to relieve the financial pressures afflicting it?
Of the various financing alternatives described at the end of the case, which would be in the best interest of Stone's shareholders? Which would be in the best interests of its high-yield debt (i.e., junk bond) holders? Of its bank creditors?
Which of the financing alternatives would you recommend Stone Container pursue in 1993? If you recommend more than one, which do you view as most important and why? Which would you do first, and which later?
Case Study Questions Answers
1. What was the basis of Stone Container’s successful growth during its first fifty years? What was its product market strategy? What was its financial strategy?
During the first fifty years, the basis of the growth of the company was basically by acquiring other companies frequently. The IPO of the company was initiated back in 1947. Furthermore, the company also grew by expanding across the borders internationally, there were a number of plants set up geographically. Moreover, the quality of the products was quite splendid, and products were quite cost-effective as well, with a very limited amount of capital tied up in the stock. In terms of the product market strategy, the company tried to extend its product lines and there was the introduction of more specified or focused products. The company introduced a substitute for average old containers, and new containers were introduced with better packaging and labelling on the exterior to show more nutritional information and also for better carriage of the product. The expansion was mainly made into containers that were originally made from Kraft’s “linerboard”. In terms of the financially strategy, before 1979, the acquisitions that were carried out to introduce variety in the product line and to expand the presence of the company worldwide such acquisitions were mainly paid for through a mixture of cash outlay and by taking up debts, which were repaid before time. The structure of the capital could be defined as very “conversative” and getting rid of the loans way before time. The senior members had the policy that the company will not be taking out loans that withstand for a very long tenure. Secondly, the company also tried to maintain the ownership within the family as much as they could and offered limited number of shares to the public and the ownership of the family members within the company was held at 57%.
2. How did Roger Stone’s management of the company compare to that of his predecessors? In general, would you judge his leadership to have been successful? Why or why not
The Roger’s management of the company, as compared to the predecessors, could be defined as quite “leveraged” or highly focused towards debt. The growth during his tenure was mainly driven by acquiring other companies on regular basis and by extending the capacity of the company. The strategy was basically that extension could be done by purchasing excess capacity from troubled producers. This had allowed companies to save costs and also to expand at a much faster pace. The capacity was enlarged by up to five times. The company experienced exceptional growth under his term, the high debts that were taken were usually repaid quite early because of rising product prices and by recent IPO taking place. And after some time, the debts had risen to a very high level mainly after acquiring Bathtrust, Roger wanted to finance that loan via “high yield” debt, but because of the detrimental situation of liquidity within the market, it restricted Roger to follow this. The company then had to raise the cash by selling off some of the assets, there were huge charges paid for the refinance of the running finance streams, and the company also had to raise cash through shares. And up to this point, there was about $400 million of loans amassed by the company. Also, because of the additional equity offered by Roger, the ownership of the family had reduced to only 30% in the later years of the 80s. Hence, during his earlier leadership years, his planning and decisions were quite successful because of excellent industry conditions, but as the conditions got worse, and the company started taking additional debts, it became quite difficult for Roger to take good decisions as the company was finding it hard to repay the debt that were outstanding. And the company was relying unduly on the junk bonds., which had caused a lot of uncertainty and apprehension. Also, it is possible that Roger was not provided with good advice, as he had turned down the offer from Cascade to acquire the company more than two times its market value.
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