Scott Paper Case Analysis
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Case analysis for the Scott Paper company case from Harvard Business Review (Case #9-296-048)
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Scott Paper Case Analysis
- 1. A Tear in the Foundation Restructuring at Scott Paper Company
- 2. Agenda Key Issue Background Analysis and Alternatives Recommendation Conclusion
- 3. Key Issue A final restructuring plan is needed to address the following issues: 1. Which assets should be sold 2. Which should be grown 3. How many employees should be laid off 4. Timing of the restructure 5. How to “sell” employees on the plan 6. What effects will this have on share prices
- 4. Key Issue A final restructuring plan is needed to address the following issues: 1. Which assets should be sold Critical 2. Which should be grown 3. How many employees should be laid off 4. Timing of the restructure 5. How to “sell” employees on the plan 6. What effects will this have on share prices
- 5. Key Issue A final restructuring plan is needed to address the following issues: 1. Which assets should be sold Critical 2. Which should be grown 3. How many employees should be laid off 4. Timing of the restructure Implementation 5. How to “sell” employees on the plan 6. What effects will this have on share prices
- 6. Key Issue A final restructuring plan is needed to address the following issues: 1. Which assets should be sold Critical 2. Which should be grown 3. How many employees should be laid off 4. Timing of the restructure Implementation 5. How to “sell” employees on the plan Forecast 6. What effects will this have on share prices
- 7. Background
- 8. Early History Background Founded in 1879 Fully integrated paper company in 1920 Developed a wide variety of tissue products Acquired S.D. Warren in 1967
- 9. Later Life Background Grew to being the 8th largest paper company in the U.S. Second largest tissue producer in U.S. Largest Worldwide with 15% M.S. S.D. Warren accounted for 25% of sales
- 10. Troubled Times Background In 1993, Scotts posted annual losses of $277 M. Over 3000+ workers had been laid off Close to $1 B in restructuring costs S&P downgraded their public bonds Albert Dunlap was appointed as the first outside CEO to manage the companies turnaround
- 12. Paper Industry Analysis & Alternatives $131 B commoditized industry Extremely capital intensive Very cyclical industry, inline with the economy Scott’s was 3/4 in tissue and 1/4 in coated printing paper
- 13. Financials Analysis & Alternatives Restructuring costs of $490 M were announced Scott’s stock price had remained at $38 Steadily deteriorating earnings since 1988 Sales had dropped to their lowest in 4 years, where the industry had been growing
- 14. Financials Analysis & Alternatives Net cash flows from operations and investments declining (84% and 52% respectively) Since 1989, earnings from integration had declined well below earnings without ($193 difference in 1993) S.D. Warren’s products were projected to increase, which represented 58% of the paper industry Tissue industry facing downward pressure due to increased competition
- 15. Human Resources Analysis & Alternatives Over 12,500 unionized employees Poor relations throughout 1980s Potential $20.2 M in severance pay for 5600 employees 3 different CEOs in less than 14 years Dunlap first CEO hired outside the firm
- 16. Alternatives Analysis & Alternatives 1. Close down European Operations Unionized workers only in N.A. Allow for exploration into emerging countries (BRIC) W. Europe and N.A. accounted for 70% of the global tissue market Majority of costs still centralized in N.A.
- 17. Alternatives Analysis & Alternatives 2. Sell Forestry Division Very few years where integration has been beneficial for Scott Accounts for bulk of capital investments Majority of unionized workers Very sensitive area for labour relations
- 18. Alternatives Analysis & Alternatives 3. Sell S.D. Warren Current book value of $1.6 B Accounted for 25% of total sales More capital intensive than the rest of the business Potential earnings with the upturn in coated paper products
- 19. Recommendation
- 20. Sell Forestry Division Recommendation Exhibit 11 clearly shows no benefit to being integrated Highest paid workers in the industry Already set aside $490 M for restructuring which can be used for severance Lack of efficiencies across the globe More focus on core products: tissue and paper
- 21. Sell Forestry Division 296-048 Recommendation Exhibit 11 xxx Impact of Fiber Integration on Baseline Earnings, 1977-1993 Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Price of NSWK Pulp 390 340 435 535 545 480 415 525 400 470 600 730 830 810 570 550 425 Source: Company documents Earnings with Integration 27.8 35.3 49.6 22.4 38.2 44.6 89.2 146.7 132.1 172.3 215.1 270.8 226.3 212.6 147.1 178.7 125.9 Earnings without Integration (9.8) 73.9 52.2 11.7 47.2 111.0 180.5 196.4 258.1 293.6 271.7 262.7 189.4 229.9 274.2 290.7 318.1 Scott Paper Co
- 22. Sell Forestry Division 296-048 Recommendation Exhibit 11 xxx Impact of Fiber Integration on Baseline Earnings, 1977-1993 Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Price of NSWK Pulp 390 340 435 535 545 480 415 525 400 470 600 730 830 810 570 550 425 Source: Company documents Earnings with Integration 27.8 35.3 49.6 22.4 38.2 44.6 89.2 146.7 132.1 172.3 215.1 270.8 226.3 212.6 147.1 178.7 125.9 Earnings without Integration (9.8) 73.9 52.2 11.7 47.2 111.0 180.5 196.4 258.1 293.6 271.7 262.7 189.4 229.9 274.2 290.7 318.1 Scott Paper Co
- 23. Sell Forestry Division 296-048 Recommendation Exhibit 11 xxx Impact of Fiber Integration on Baseline Earnings, 1977-1993 Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Price of NSWK Pulp 390 340 435 535 545 480 415 525 400 470 600 730 830 810 570 550 425 Source: Company documents Earnings with Integration 27.8 35.3 49.6 22.4 38.2 44.6 89.2 146.7 132.1 172.3 215.1 270.8 226.3 212.6 147.1 178.7 125.9 Earnings without Integration (9.8) 73.9 52.2 11.7 47.2 111.0 180.5 196.4 258.1 293.6 271.7 262.7 189.4 229.9 274.2 290.7 318.1 Scott Paper Co
- 24. Sell Forestry Division 296-048 Recommendation Exhibit 11 xxx Impact of Fiber Integration on Baseline Earnings, 1977-1993 Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Price of NSWK Pulp 390 340 435 535 545 480 415 525 400 470 600 730 830 810 570 550 425 Source: Company documents Earnings with Integration 27.8 35.3 49.6 22.4 38.2 44.6 89.2 146.7 132.1 172.3 215.1 270.8 226.3 212.6 147.1 178.7 125.9 Earnings without Integration (9.8) 73.9 52.2 11.7 47.2 111.0 180.5 196.4 258.1 293.6 271.7 262.7 189.4 229.9 274.2 290.7 318.1 Scott Paper Co
- 25. Sell Forestry Division 296-048 Recommendation Exhibit 11 xxx Impact of Fiber Integration on Baseline Earnings, 1977-1993 Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Price of NSWK Pulp 390 340 435 535 545 480 415 525 400 470 600 730 830 810 570 550 425 Source: Company documents Earnings with Integration 27.8 35.3 49.6 22.4 38.2 44.6 89.2 146.7 132.1 172.3 215.1 270.8 226.3 212.6 147.1 178.7 125.9 Earnings without Integration (9.8) 73.9 52.2 11.7 47.2 111.0 180.5 196.4 258.1 293.6 271.7 262.7 189.4 229.9 274.2 290.7 318.1 Scott Paper Co
- 26. Sell Forestry Division 296-048 Scott Paper Co Recommendation Exhibit 11 xxx Impact of Fiber Integration on Baseline Earnings, 1977-1993 Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Price of NSWK Pulp 390 340 435 535 545 480 415 525 400 470 600 730 830 810 570 550 425 Source: Company documents Earnings with Integration 27.8 35.3 49.6 22.4 38.2 44.6 89.2 146.7 132.1 172.3 215.1 270.8 226.3 212.6 147.1 178.7 125.9 Earnings without Integration (9.8) 73.9 52.2 11.7 47.2 111.0 180.5 196.4 258.1 293.6 271.7 262.7 189.4 229.9 274.2 290.7 318.1 $432 difference
- 27. Conclusion
- 28. Wrapping It Up Conclusion Critical: Sell downstream business and focus on upstream business. Implementation: Restructuring to be done in 3 years. Inform employees that it is not job cuts, rather product focus Forecasting: Without the burden of forestry business, stock prices can be expected to go up with higher earnings