Missouri Can Company Case Analysis
Missouri Can Company Case Analysis
The Missouri Can Company (MCC), is a company with an extended and unsteady past. Throughout the years MCC has been a competitor in numerous industries with wavering success. The company’s lack of success was attributed to a frequent turnover of CEOs in the past decade where numerous strategies had been employed. Consequently, the ever-changing strategies led the company in many different directions and impacted the arching goal of obtaining a competitive advantage along the way.
Currently, the newest CEO of the Missouri Can Company developed a strategy that focused on the reduction of business ventures that did not align with performance goals or the company’s long-term strategy. As a result of MCC’s new strategy, the company established a goal of raising $600-$700 million through the sale of identified assets. Under the new strategy, if an operation was found to fall short of the strategic objectives it was to be sold and the funds were to be reinvested into areas that enabled profitable growth, increased return on equity and improved the company’s financial standings.
According to Martin (2017), the BCG matrix helps firms identify which products best align with opportunities for market-share growth. Through the adoption of the new strategy, MCC also remained keyed in on maintaining a well-rounded BCG matrix, where its four main businesses were identified as financial services, energy, packaging, and forest products. The company's new strategy now focused on creating competitive advantages as a result of enhanced productivity, market focus, and innovation. In efforts to further refine MCC’s strategy and competitive advantages, each one of the company's four identified business segments must be reviewed for adherence with the new strategic goals.
Financial Services The MCC Financial Services division is an average sized successful insurance business that offers underwriting in life, real estate and property and casualty insurance. The firm holds a strong position in the Financial Services segment despite the tight competition. Outside consultants predict that the business will continue to do well in the years to come. However, one area of concern that consultants identified was that MCC invested more capital per dollar of sales than the majority of its competitors. Consultants suggested that this issue could be resolved by increasing division annual sales by 15% and increasing return on assets to between 15%-18%.
The consultants identified a plan to carry out the needed changes which consisted of making a series of investments into the business by initially spending $250M per year, then gradually increasing that amount to $300M in 5-7 years and following those years with an annual maintenance amount of $100M. The plan that the consultants identified predicted that the series of investments would double the committed assets by 5 years.
Given this information, MCC must decide on whether or not this investment plan aligns with their new strategic plans.Recommendations MCC was presented an investment plan by outside consultants that must be analyzed and reviewed before the company can commit to an action. The company has two pending options, those choices being to make the needed investments or sell the financial services business for $1B and reinvest the net proceeds into other areas of the firm.
According to Gallo (2014), Net Present Value (NPV) analysis is the most beneficial tool for determining whether or not a project or investment should be pursued as it considers the time value of money for future cash flows. The first option of making the suggested investment when reviewed using NPV analysis of the future cash flows determined that even though in year 6 the cash flows turned from a negative to positive value $200M the NPV was still largely negative -$574M (See Appendix A).
However, across the next 5 years into year 11 the cash flows remain positive and NPV in year 11 transitions into a positive $16.6M and remains positive for years to come (See Appendix A). Taking this timeline into consideration it can be said that it will take MCC 11 years for their investments to pay off in comparison to today’s dollars (See Appendix A). The second option of selling the financial services business for $1B when reviewed it was determined that 40% or $400M would be slated for debt holder repayment and the firm would only realize $600M in net proceeds (See Appendix A).
When weighing the two options that are presented to MCC the first option of taking the investment would be the suggested choice due to the long-term profitability of the choice as it continues to produce a profit after year 11 until an unknown point in time. MCC should make the needed investments in the financial services business now versus later.
Energy
The MCC Energy division is involved in exploration, development, production of oil and gas, operating natural gas pipeline systems and production and sales of propane and butane. In recent years, MCC acquired Atlas Energy which gave the company a solid foundation in the energy business as the firm’s pipeline operations produced a solid cash flow at a low risk. In light of the success that MCC had realized with the acquisition of Atlas Energy, the company was seeking new opportunities to further its pipeline operations. When outside consultants reviewed MCC they also recognized the success that had been gained in the pipeline business and suggested that the company needed to increase pipeline capacity into Florida due to the ever-growing population of the state.
The suggested Florida pipeline expansion project was estimated at costing MCC $50M per year for the next 4 years. In addition to the pipeline operations that MCC was involved in they also had an active presence in the exploration and production industry of oil and gas. Outside consultants suggested that MCC not be involved in these operations due to the company's small size and inability to compete in the long term with the industry giants which could afford to take losses on dry holes.
Given this information, MCC must decide on whether or not the Florida pipeline investment and continued operations in exploration and production align with their new strategic plans.Recommendations MCC has been presented an analysis by outside consultants that must be analyzed and reviewed before the company can commit to an action. The company has two ventures to analyze and make decisions on, the first being the investment in the Florida pipeline expansion project and the second being the continued operations in exploration and production. The Florida pipeline project has two pending options the first being to invest in the project and the second being to not invest in the project. When an NPV analysis was performed on the future cash flows of the Florida pipeline project it was found that the project produced an NPV of positive $27M in year 5 after the start of the project (See Appendix B).
According to Maverick (n.d.), investments with a quick payback period are considered low risk and have the potential to provide the greatest value for firms. The positive NPV at year 5 of the Florida pipeline project proves that after 4 consecutive years of investing $50M, the years following the investments will generate low-risk profit for the company (See Appendix B). The decision to continue exploration and production operations also has two pending options the first being to keep a presence in exploration and production operations and the second being to divest in the operations, sell the division and reinvest the net proceeds elsewhere in the business.
When an NPV analysis was performed on the future cash flows of the exploration and production operations division it was found that this activity would not produce a profit in the next 10 years as the NPV at year 10 was found to be a negative -$1.7B (See Appendix B). The second option of selling the exploration and production division for $1.56B when reviewed it was determined that 40% or $624M would be slated for debt holder repayment and the firm would only realize $936M in net proceeds (See Appendix B).
When weighing the options that are presented to MCC the suggested choice would be to immediately invest in the Florida pipeline project as it produces profit just after investment ends in year 4 and immediately divest and sell the exploration and production division for $1.56B as keeping it does not produce a profit in the foreseeable future. MCC should also consider investing the exploration and production division net proceeds into other pipeline activities to further expand their presence in this segment.
Packaging
The MCC Packaging division operates in three major markets the food and beverage, specialty packaging and international. In recent time, the business has adopted a new strategy that focuses on the market versus product orientation. As a result of this new strategy, the company has recognized that substantial investments would be required every time a new packaging technology is demanded by its customers. The company also recognized that the short- and long-term success of the packaging business was dependent on the success of new products, emphasis on cost reductions by customers, the longevity of the metal can design and consumer bargaining power. All of these factors created a lot of uncertainty and made it difficult for MCC to accurately forecast.
Ultimately, these factors made it hard for MCC to generate a long-term competitive advantage in the market. Outside consultants suggested that MCC’s profitability would not increase throughout the next 10 years but would actually decrease by 50%. Given this information, MCC must decide on whether or not the packaging business aligns with their new strategic plans. RecommendationsMCC has been presented an analysis by outside consultants that must be analyzed and reviewed before the company can commit to an action.
The company has two pending options, those choices being to continue the packaging business or sell the packaging business for $1.2B and reinvest the net proceeds into other areas of the firm. The first option of continuing the packaging business when reviewed using NPV analysis of the future cash flows determined that the outside consultants were correct when suggesting that the packaging business would lose profitability over the next 10 years as the NPV of cash flows across the 10-year span shows a steady decline and in year 11 NPV turns into a negative value of -$58M (See Appendix C).
Additionally, in year 5 the NPV analysis shows that the packaging business peaks its value at $366M (See Appendix C). The second option of selling the financial services business for $1.2B when reviewed it was determined that 40% or $480M would be slated for debt holder repayment and the firm would only realize $720M in net proceeds (See Appendix C).
According to Ward (n.d), when using NPV analysis to drive a decision the largest positive or smallest negative number determines the best economic choice. When weighing the two options that are presented to MCC, the suggested choice for the company would be to continue its packaging business operations into year 5 and sell at year 6 due to diminishing NPV beginning in year 6 (See Appendix C).
However, if the company decided to continue its packaging business it must sell before the end of year 10 as the business turns unprofitable after this point.Forest Products The MCC Forest business is a moderately sized producer of bleached folding carton board where it is ranked 6th in the United States in total production. Despite the company’s position in the market it struggles to compete with sales against its largest competitors.
The Forest business is comprised of two segments paperboard and timber, where the timber is used in the production of the paperboard products. When consultants reviewed the company’s plants it was identified that the plants were using near-obsolete technology, failing to keep up with preventative maintenance and lacked proper training. As a result of the consultant's findings, they were hesitant to believe that the plants could produce the company's stated 430K ton per year.
Additionally, the consultants suggested that the plants' value was currently overstated by $200M which would continue to decline at a rate of $8M per year for the next 5 years and much more rapidly thereafter. The consultants also had concerns about rapidly diminishing ROI over the next 5 years, which would ultimately force the company into a position to close the plants. When the timber segment of the Forest business was reviewed it was seen as a valued asset as long as the company was still engaged in the paperboard business. However, consultants suggested that if the company exited the paperboard business it should also sell its timber reserves due to its size in relation to other competitors, as scales of economies would stifle the companies returns.
Given this information, MCC must decide on whether or not the Forest business aligns with their new strategic plans.RecommendationsMCC has been presented an analysis by outside consultants that must be analyzed and reviewed before the company can commit to an action. The company has two pending options, those choices being to continue the Forest business or sell the Forest business for $900M and reinvest the net proceeds into other areas of the firm.
The first option of continuing the Forest business when reviewed using NPV analysis of the future cash flows it was determined the company remained on a steady decline in relation to NPV throughout the next 10 years with the 10-year NPV being a negative -$454M (See Appendix D).
The second option of selling the Forest business which consists of the paperboard business $600M and timber reserves $300M for $900M when reviewed it was determined that 40% or $360M would be slated for debt holder repayment and the firm would only realize $540M in net proceeds (See Appendix D). When weighing the two options that are presented to MCC, the suggested choice for the company would be to divest in the Forest business operations immediately which would sell off the company’s paperboard plants and timber reserves and generate $540M that could be further invested into the company
.Recommendation Uncertainties
Some of the uncertainties involved in making recommendations to MCC about their four main business areas involve the NPV calculation, business partnerships and the valuation of the company’s assets. The recommendations suggested to MCC in reference to the firms four business areas financial services, energy, packaging, and forest products were all based on the NPV of the estimated future cash flows of the operations and the stated cost of capital being 10%.
According to Gallant (n.d.), one of the greatest disadvantages to using NPV calculations is its overall sensitivity to the calculated discount rate. In MCC’s case if the company were able to acquire a lower cost of capital it would likely affect the recommendations given as the NPV values and timeline for events would shift. The uncertainties involved with using NPV calculation could be countered by acquiring fixed long-term financing at a set rate, as this would provide a constant value for the calculations to be based off. An additional uncertainty involved with making recommendations to MCC involves the stability of partnerships within the energy business.
The majority of the firm’s future energy business growth projects involve partnerships with big-name companies like Shell and Mobil, MCC must maintain these partnerships to ensure that it can continue to capitalize on joint ventures. The uncertainties involved with business partnerships can be managed by ensuring that MCC remains involved in the decision-making process for all activities associated with their vested interests.The valuation of the company’s assets also presents uncertainties to the recommendations given to MCC. In many cases, the company's assets were stated to be either overvalued or undervalued when compared to the estimates that outside consultants suggested. The company should have a good grasp on the value of its assets as without this knowledge it makes capital budgeting and investments difficult to forecast. The uncertainties involved in the valuation of MCC's assets can be mitigated by hiring an outside agency to perform an audit and place a value on each of the company's business assets.
Conclusions
In conclusion, MCC’s newest CEO has adopted a new business strategy that focuses on ensuring that all business operations are meeting performance goals and fit into the company's long-term strategy. As a result, the firms four business areas of financial services, energy, packaging, and forest products were evaluated and recommendations were given on whether or not those business areas were aligned with the new business strategy.
The financial services business was found to need investments and recommendations were given to make the needed investments. The needed investments should allow the financial services business to provide long-term growth for MCC. The energy business was presented with an investment opportunity in a pipeline project and recommendations were given to pursue the project. Additionally, it was recommended that MCC divest in their exploration and production operations and sell the division due to the high risks and low returns that were projected. The company taking on the pipeline project and divesting in the exploration and production operations puts MCC in a position where they can possibly take on more pipeline projects that would add additional long-term growth to the company.
The packaging business was found to produce diminishing returns after 5 years and considered a loss after 10 years of continuous operation. As a result, the recommendation of selling the packaging business after 5 years of continuous operation was given as the ideal solution; however, the company could continue operations for 10 years but would absolutely need to sell before the end of year 10. The recommendations given in reference to the packaging business allow the company to maximize its returns on the business before divesting in the segment.
The forest business to include the company's timber reserves were found to not meet the company's performance goals and long-term strategy. The recommendation to divest and sell the forest business was given to MCC. Additionally, the suggestion to reinvest the net proceeds from the forest business sale was given.
Overall, there were some uncertainties associated with the recommendations given to MCC, however, most can be mitigated through the continuous monitoring of their cost of capital, business partnerships, and asset valuations. In the end, MCC should take the recommendations given to them and seek further opportunities within their financial services and energy business areas as these two areas are the most promising based on the projected future cash flows.
References
- Gallant, C. (n.d.). Investopedia. Retrieved from What are the disadvantages of using net present value as an investment criterion?: https://www.investopedia.com/ask/answers/06/npvdisadvantages.aspGallo, A. (2014, November 19).
- A Refresher on Net Present Value. Retrieved from Harvard Business Review: https://hbr.org/2014/11/a-refresher-on-net-present-valueMartin, M. (2017, May 12). What Is a BCG Matrix? Retrieved from Business News Daily: https://www.businessnewsdaily.com/5693-bcg-matrix.html
- Maverick, J. (n.d.). What are some of the limitations and drawbacks of using a payback period for analysis? Retrieved from Investopedia: https://www.investopedia.com/ask/answers/062915/what-are-some-limitations-and-drawbacks-using-payback-period-analysis.asp
- Ward, R. (n.d.). NPV Review. Retrieved from CCIM Institute: https://www.ccim.com/cire-magazine/articles/npv-review/?gmSsoPc=11
- Running head: MISSOURI CAN COMPANY CASE ANALYSIS 1MISSOURI CAN COMPANY CASE ANALYSISAppendix AMissouri Can Company Cash Flow Analysis – Financial Services Business[image: ]Appendix B
- Missouri Can Company Cash Flow Analysis – Energy Business: Florida Pipeline Project & Exploration & Production Operation[image: ]Appendix C
- Missouri Can Company Cash Flow Analysis – Packaging Business[image: ]Appendix D
- Missouri Can Company Cash Flow Analysis – Forest Business: Paperboard & Timber[image: ]
