CASE STUDY ANALYSIS:
Access Temple 2 ESP Business Student
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Statement of the Problem
In this case, International Airlines is facing danger of being acquired by one corporate raider, Roland Crane, who is known as ruthless and not focused on the long-term goal to manage company. IA once was a successful company. But now, its price of stock has reduced from $28 to $14 within a year; in addition, it hasn’t recovered from stock market crisis in 2001.To avoid hostile takeover from succeed, the senior executives of IA have different plans and cannot make an unanimity.
Suggestion of Possible Solutions
George Harris, the CEO of IA, plans to push the Employee Stock Ownership Plan (ESOP). This plan is to borrow from bank and buy the company’s stocks, and then give it to employees as incentives. Once the employees hold more than 50 percent of shares of stocks, Crane cannot takeover.
Patrick Fitzgerald (COO) has negotiates with Worldwide Airlines about a merger with them and combining into one big company which would make it financially unfeasible for Crane to takeover the company. The problem is that the executives in both companies cannot reach an agreement on either the restructuring of the new organization or the company’s long-term objectives.
Paula Bergman (President of IA) wants to do a management buyout and keep AI as a privately company. In this plan, the company’s existing managers acquire the majority part of this company from private shareholders. However, she needs to solve the financial problem.
Evaluation of Possible Solutions
In ESOP, employees hold the shares until they retire from company. Also, old employees can get more shares than new employees depending on their performance. Employees are encouraged to work hard for the responsibility of running company. They also are guaranteed for the retirement by company. However, since the company is controlled by employees, there are also risks. When the company is facing a bad situation, employees can just sell the stocks and walk away which will worsen the problem. On the other hand, if the company goes bankrupt, the employees will lose both job and their value in stocks.
A merger is a strategy by combining two companies into one new company. After this deal, they share the stocks, assets, competencies and markets. Thus, the new company is more competitive in markets and create more value. Horizontal merger is one of the efficient ways to gain advantages over competitors. However, mergers are not the best choice all the time. Those leaders who from two original company always can’t make an agreement on the culture of company in the future. Also, how to divide assets and balance the power from two executive managers is complex.
In a MBO, the company’s management team purchases the assets and operation of the business they manage. The most obvious advantage is that they are the people who know the company best, so they can arrange everything efficiently after the buyout. They also have the inside news to seize the opportunity to buy this company. But how to adapt the transformation from manager into owner is a challenge for them. Furthermore, they take on the high risk of a large debt from the significant loan required to complete the buyout which is stressful.
Selection of Solution
In this case, I would recommend IA run the ESOP. There are several reasons.
First of all, compare with another two plans, ESOP is a feasible plan to avoid hostile takeover for its practicability and its low risk. As I mentioned, it is hard to deal with the merger plan because of less of consistent in long-term goal between two company’s managers. MBO is a high-risk plan for managers. They would be in a stressful debt from buyout plan. Actually, Paula Bergman did face the problem in financial. Also, since not all the managers can adapt the transformation from manager into owner, IA may also face series of problems by this changing.
Second, it is a beneficent plan for shareholders. In ESOP, IA would buy the stocks from private shareholders in a price which is higher than its market price. Investors can get more profits from this stocks. Compare with mergers which come with risk because of the uncertain future of company, ESOP is more stable to shareholders.
Third, employees are the biggest winner in this plan. The stocks would finally belong to employees as salary or bonuses. They can hold it until they retired. They also can sell it whenever they are not confidence in company. After their retirement, they give it back to IA for cash which is a guarantee for their retired life. Besides, they will really be encouraged and have enthusiasm in work which is a good thing to IA.
Above all, the key point is to avoid acquired by corporate raider. In this specific case, the best solution is ESOP which has more advantages than another two plans. I would suggest managers to consider this plan.