Midwest Petro-Chemical was formed in 1960 by James Fletcher. What the company did is buying chemicals from oil and chemical enterprises in bulk, blend them, repackage into small quantities and then sell. In other words, Midwest selected a size and content attributes of chemicals that were perceived important by its customers, and uniquely satisfied their needs. Thus, Midwest had a differentiation strategy as a competitive advantage. In order to compete with such strategy, compensation plan to reward managers should be carefully established.
The most consistent plan to this strategy is a one type of long-term plans called performance shares. It implies an award given to a manager in terms of shares for achieving some long-term goal. This can partly explain why senior managers of Midwest own about 85. 28% of company’s stock. Probably, they were received shares for meeting specified increase in earnings for a particular period of time. Problem is that actions made by managers to increase earnings or other financial indicators, could not contribute to the whole firm, thus not goal congruent. Nevertheless, this compensation plan has some positive sides.
Managers are concerned with stock price and no cash is paid, until they sell shares. Even Midwest is prospering showing growth in profitability ratios; company is performing not very well among firms operating in the same field of industry. From the table below, we can notice that Midwest is far from the benchmark. Increase in year-to-year ratios could be beneficial only for managers as a measurement of their performance, because they receive bonuses for good financial results. By conducting such financial analysis Midwest is able to see its current situation. Now we can say that the company is behind industry’s dynamics.
However, such analysis may not present a clear picture, and say whether company is doing well or bad. Some problems can arise in comparing various companies even operating in one industry. These firms have different unrelated businesses, so that they can refer to more than one industry. Also different accounting methods used, fiscal years ended, or extraordinary items can mislead. Tom Williams as an experienced banker thinks like a creditor. He would like to use these financial ratios as an external decision maker. Tom would like to see how is profitable the firm, and how it is solvent in comparison to companies in the same industry.
However this will bring only overall Midwest performance not providing any value of the firm. Thus, it is not case when you decide on loan request. Based on my calculations and analysis of strengths and weaknesses of different approaches for business valuation, I came to conclusion that discounted cash flow method is most appropriate in this case. This method shows Midwest’s ability to generate consistent income, and this determines its worth in the marketplace. However, it shows market price of shares of $18. 20, which is lower then $21-$24 recent trade price. We can expect objection or disagreement form managers.
But we should not forget that this is the only start point for negotiating a price. Thus, probably more than 20% premium should paid for a slowly, but steady growing company. A lot of intangible assets like employees, customer and supplier relations, or other assets that are often represented as a goodwill account could not be measured accurately. So, premium and finally price of the Midwest should be negotiated with Georgia Chemical. James Fletcher founder and biggest 41. 8% owner of Midwest is not in favor of selling his company. Thus, his word can be very strong in negotiating the price.
However, other directors of the board are considered selling the whole company. Everything was depended on how much Atlanta company is willing to pay for Midwest. The one reason for willingness of directors to sell their stock is, probably, they expected prices for shares to decline. They are very stock price sensitive, because of high ownership they had in this company. So, Midwest should propose very high price in order to persuade Mr. Fletcher to sell its company. Since, Georgia chemicals would low the price it should still stay high. It is not so easy for James to sell his child.
