Sealed Air Corporation's Leveraged Recapitalization (a), Sealed Air Corporation's Leveraged Recapitalization (B), Teaching Note-Sealed Air Corporation's Leveraged Recapitalization (A)&(B)
HARVARD BUSINESS SCHOOL PUBLISHING
Posted: 16 Oct 1996
Date Written: May 10, 1994
SUBJECT AREAS: Leveraged recapitalization, capital structure, compensation, internal control, performance evaluation.
CASE SETTING: 1989, Packaging materials and systems industry.
Situation: Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency and product quality, the company borrowed almost 90% of the market value of its common stock and paid it out as a special dividend to shareholders. Management purposefully and successfully used the leveraged recapitalization as a watershed event, creating a crisis that disrupted the status quo and promoted internal change. Internal changes included establishing a new objective, changing compensation systems, and reorganizing manufacturing and capital budgeting processes.
Pedagogy: The case provides an exciting, controversial context in which to explore how financing decisions affect organizational structure, management decision-making and firm value. It can be used as an introductory finance case in which the students apply basic cash flow forecasting techniques to explore alternative dividend and capital structure decisions (a supporting EXCEL spreadsheet is available directly from the case author). For more advanced finance classes, the concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of high leverage can be analyzed. In organizational behavior classes, the case can be used as a vehicle to discuss the difficulty of promoting internal change and the desirability of Sealed Air's approach to forcing quick change on the organization. In all contexts, the case generates a lively class discussion in which students struggle with conflicting views about the desirability of high leverage, how leverage affects short and long run performance and techniques for managing organizational change.
JEL Classification: G32, G35, L93
Suggested Citation: Suggested Citation