Sealed Alarm Corporation’s Leveraged Rationalization (Team 1) 5. Was the constraint imposed on capital expenditures under the bank lending agreement good or bad for the company? Do you think managers will be able to successfully renegotiate this covenant? Having a limitation on the Investment in fixed assets when the company was planning a drastic change of their manufacturing system could be very harmful.
Even though Dungy and Cruickshank tried to look on the bright side and consider this an expenditure proportioning opportunity, our team believes that this covenant was not DOD for the company, and had the new manufacturing system not showed results so quickly, the company would have run into trouble. Therefore, our team does not agree with the answer Team 3 gave to this question. On the other hand, regarding the possibility of renegotiating this covenant, our team agrees that It Is difficult to assess.
The company took a high risk and turned out to be successful by the end of the year, so In this situation, they would be able to renegotiate It. However, this brilliant result is not easy to be seen from the beginning, so it is best to remain skeptical about a renegotiation before positive results appear. 6. Would such an increase in leverage be good for all companies? Why or why not? Leverage depends on the Industry and the company’s policy. In most cases, especially for software companies such as Microsoft, they would tend to leverage less and save cash in hand that equals to their one year’s expenses (salary, overhead, etc. . Because such industries where rapid changes could occur, over leveraging would be riskier, whereas manufacturing companies would tend to leverage more compared to software companies. However, the market and stakeholders should know what the Meany’s policy is regarding the amount of leverage. 7. Why did Dormer Dungy, the CEO, feel it was necessary to change the company’s priorities and incentive structure following the recap? Another important aspect of recap was motivation of the organization.
In order to strengthen and motivate the organization, Dungy emphasized change of priorities and Incentives not Just In verbal but also In action. They based the bonus plan for managers on EBITDA, Inventory turns, receivables and working capital Instead of PEPS. It caused that managers focus on cash flow from operation which gives better understanding about performance. They also placed more focus and emphasis on stock ownership for employees after recap because Dungy felt that it improves company performance.
Before the recap, the stock was stagnant and after the recap Dungy thought that there is a conviction that the stock will go up and It is possible 8. Why did Sealed Air’s investor base turnover completely after the recap? Is this something managers should be concerned about? The main investor base of Sealed Air are institutional investors such as mutual fund, pension fund which focus on sustainable return and long term investment. However, after Sealed Air chose to lever up, the financial structure of the company was totally changed from the very strong company to the weak company.
This made the institutional investors had to sell the stock because it was against the fund’s policy. Moreover, it could affected the manager performance if they use market cap for evaluation. In addition, we also agree with team in the point that Seal Air should be concerned about its new type of investors, speculators, because they Just interested in short term return. This might lead to the Volatility of the market stock price as well as pressure to the company to make to profit in short term.
