Atlantic Corp
Atlantic Corp – case study | | | |
Question 1: Is the acquisition of Royal’s Linerboard mill and box plants a sound strategic move?
Yes. Atlantic corporation intends to increase its linerboard capacity, as it is a net buyer of linerboard. This acquisition of Royal by Atlantic Corporation would be a horizontal integration, which occurs when both the firm being taken over and the firm taking over are in the same industry and in the same stage of production.
The linerboard industry has very high fixed costs ( as plant and equipment are its main expense) due to which the operating leverage is very high. The acquisition of Royal could help Atlantic Corporation increase its output with increase in production capacity in turn generating higher profits.
The industry capacity for producing linerboard is very tight and the industry is operating at nearly 100% utilisation. Increasing capacity to produce linerboard takes a significant period of time (2-3 yrs minimum). Both these reasons coupled with the rising demand for linerboard has an impact on the prices for linerboard.
Linerboard prices are expected to increase significantly in the near future (from approx $270 per ton in 1983 to more than $420 per ton in 1986). If Atlantic were to reduce its purchases of linerboard from its competitors, it would be able to enhance its own profitability by benefiting from the anticipated appreciation of linerboard, and reducing its own cost of goods sold.
At an expected purchase price of $319mm (for the linerboard plant as well as box plants), the acquisition represents a more than 50% discount to the cost of setting up a similar plant. Moreover, the acquisition will provide Atlantic with an immediate source of linerboard, as compared to a 2-year gestation period if it were to build its own plant.
Another benefit for Atlantic Corporation is that the specific firm’s profits are heavily related to interest rate fluctuations and is consequently exposed to
Question 1: Is the acquisition of Royal’s Linerboard mill and box plants a sound strategic move?
Yes. Atlantic corporation intends to increase its linerboard capacity, as it is a net buyer of linerboard. This acquisition of Royal by Atlantic Corporation would be a horizontal integration, which occurs when both the firm being taken over and the firm taking over are in the same industry and in the same stage of production.
The linerboard industry has very high fixed costs ( as plant and equipment are its main expense) due to which the operating leverage is very high. The acquisition of Royal could help Atlantic Corporation increase its output with increase in production capacity in turn generating higher profits.
The industry capacity for producing linerboard is very tight and the industry is operating at nearly 100% utilisation. Increasing capacity to produce linerboard takes a significant period of time (2-3 yrs minimum). Both these reasons coupled with the rising demand for linerboard has an impact on the prices for linerboard.
Linerboard prices are expected to increase significantly in the near future (from approx $270 per ton in 1983 to more than $420 per ton in 1986). If Atlantic were to reduce its purchases of linerboard from its competitors, it would be able to enhance its own profitability by benefiting from the anticipated appreciation of linerboard, and reducing its own cost of goods sold.
At an expected purchase price of $319mm (for the linerboard plant as well as box plants), the acquisition represents a more than 50% discount to the cost of setting up a similar plant. Moreover, the acquisition will provide Atlantic with an immediate source of linerboard, as compared to a 2-year gestation period if it were to build its own plant.
Another benefit for Atlantic Corporation is that the specific firm’s profits are heavily related to interest rate fluctuations and is consequently exposed to