American Home Products Case Study
1) How much business risk does AHP face? How much financial risk would AHP face at each of proposed level of debt? a) General risks: • Strategic risk from internal management structure change, due to Laporte was approaching retirement that will cause another big waive of change for the whole senior management team as well as the company’s strategy. • Market risk. Pharmacy had not reached the heavy competition yet during early 1980s, AHP was still the early adopter in the industry, however, the nature of the market will change very quickly follow by the globalization and fast developing of medical technology, efficiency of information communication and financial industry. The competitor will able to launch variously strategies, with wild coverage of products via extended channels in more regions/counties. • Because of debt free strategy, the company had limited investment in R&D. Even they can provide the “me to product” but the industry will change with more related regulation to be generated from government, that will require each pharmacy company spend longer time, more money to do the testing before launch to the market, “me to product” will slow down the process to catch the new market segmentation. • Brand risk, due to the company was only focus on the interest of shareholders; lack of CSR (corporate social responsibility) will be another risk. • Over centralized power in the leadership even $500 expense need approved by CEO. Not easy money system and not enough flexibility. b) Financial risks Debt free strategy
Case Study/American Home Products Corporation
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Will cause the lack of confident from institutional investors and individual investors due to the low leverage. Inflation! According the public information, the inflation rates from 1979 to 1981 was 11.22%, 13.58% and 10.35%, that means holding money equals losing money. 729m+593m+494 =1816 m which was the total cash AHP was holding, times the averagely discount rate of inflation 11.72%,
Case Study/American Home Products Corporation
1
• •
Will cause the lack of confident from institutional investors and individual investors due to the low leverage. Inflation! According the public information, the inflation rates from 1979 to 1981 was 11.22%, 13.58% and 10.35%, that means holding money equals losing money. 729m+593m+494 =1816 m which was the total cash AHP was holding, times the averagely discount rate of inflation 11.72%,