American Chemical Corporation: The Case Of The American Chemical Corporation

Background and Strategic Issues

In June 1979 American Chemical Corporation, a large diversified chemical company, acquired Universal Paper Corporation. When working on the deal structure, both the federal government and Universal’s management team created various legal constraints, arguing that if the acquisition would take place, American Chemical Corporation would become the largest sodium chlorate producer, violating U.S. antitrust laws and the Clayton Act. With that being said, American Chemical Corporation agreed to reduce its capacity to produce sodium chlorate by selling one of its plants in Collinsville, Alabama. Later that year, Dixon Corporation, a large chemical producer decided to acquire the Collinsville plant for $12 million dollars.

There are several factors that Dixon needs to evaluate before buying the plant. First of all there are large diversified chemical firms competing in the sodium chlorate industry, which could easily compete on economies of scale and scope. There are also two companies expanding their sodium chlorate operations by constructing large plants in Georgia and Mississippi. Secondly, by funding this project with 100% debt capital, Dixon’s book debt-to-total capital ratio will increase to 47%. This in turn will increase Dixon’s debt ratio above its target of 35%, which increases the business and financial risk, especially for the shareholders. Thirdly, it is also important to highlight that as part of the deal, Dixon will have to pay an additional $2.25 million for the installation of the new laminated technologies. Even though this new technology would decrease plant costs and reduce power needs, it is nonetheless an additional cost.

Finding the Beta

For the cost of equity, we first needed to f...

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...Corporation and Louisiana Paper Company were planning to enter the sodium chlorate industry. Their plants were expected to have 40,000 and 35,000 ton capacities respectively and be located in Gainsville, Georgia and Greenville, Mississippi. The Collinsville, Alabama plant that we are looking to purchase has a 40,000 ton capacity. When looking at the capacity of our plant compared to others, there isn’t much of a difference. In terms of location, the Gainsville, George plant is far away from us, and thus should not eat away too much market share. While the Greenville, Mississippi plant is close to us, their capacity is much smaller and thus may lose market share to us as demand increases. Moreover, we already have relationships with current chemical buyers, especially the buyers from the Collinsville Plant, giving us a leg up against competitors entering the market.