KENNECOTT COPPER CORPORATION
KENNECOTT COPPER CORPORATION CASE REPORT
1. Analyze the economic rationale of the Carborundum acquisition. Under what conditions an acquisition would be expected to add to shareholder value in general? Do any of these reasons apply to Carborundum acquisition?
Prior to the consideration of Carborundum as an acquisition target, Kennecott, a copper company, pursued an acquisition of Peabody, a coal company, for $285 million in cash in 1968. There are two main rationales behind the acquisition of Peabody by Kennecott. First, to stabilize the high volatility in Kennecott’s profitability due to sharp changes in copper prices and increasing competition from copper producers in Chile, Zambia, Peru, and Zaire, LDCs whose reliance on copper exports for their foreign exchange earnings forces them to flood the world’s copper market in spite of times of low profitability. Secondly, Kennecott hoped to diversify its operations.
The acquisition of Peabody did not go as planned. The fact that the FTC intervened by filing an antitrust law against the Kennecott-Peabody transaction had led Kennecott to ultimately seek another target, Carborundum.
Since the FTC’s antitrust law required Kennecott to divest Peabody, Kennecott would receive cash or near-cash of $600 million from the Peabody sale. Kennecott’s 33.2 million common shares had a market value of about $900 million by the end of May 1977, $600 million from the Peabody sales. The large cash fall from the divestiture of Peabody and Kennecott’s problems of copper prices dropping sharply, world inventories at all-time highs, and their shares at severely depressed market prices made Kennecott a potential target for any acquisition-minded firm with roughly $300 million or more of available funds. According to Exhibit 3 of the case, as of December 31, 1976, 26 U.S. nonfinancial firms could have easily financed a takeover of Kennecott.
Kennecott’s use of Peabody’s proceeds was not limited to acquiring Carborundum
1. Analyze the economic rationale of the Carborundum acquisition. Under what conditions an acquisition would be expected to add to shareholder value in general? Do any of these reasons apply to Carborundum acquisition?
Prior to the consideration of Carborundum as an acquisition target, Kennecott, a copper company, pursued an acquisition of Peabody, a coal company, for $285 million in cash in 1968. There are two main rationales behind the acquisition of Peabody by Kennecott. First, to stabilize the high volatility in Kennecott’s profitability due to sharp changes in copper prices and increasing competition from copper producers in Chile, Zambia, Peru, and Zaire, LDCs whose reliance on copper exports for their foreign exchange earnings forces them to flood the world’s copper market in spite of times of low profitability. Secondly, Kennecott hoped to diversify its operations.
The acquisition of Peabody did not go as planned. The fact that the FTC intervened by filing an antitrust law against the Kennecott-Peabody transaction had led Kennecott to ultimately seek another target, Carborundum.
Since the FTC’s antitrust law required Kennecott to divest Peabody, Kennecott would receive cash or near-cash of $600 million from the Peabody sale. Kennecott’s 33.2 million common shares had a market value of about $900 million by the end of May 1977, $600 million from the Peabody sales. The large cash fall from the divestiture of Peabody and Kennecott’s problems of copper prices dropping sharply, world inventories at all-time highs, and their shares at severely depressed market prices made Kennecott a potential target for any acquisition-minded firm with roughly $300 million or more of available funds. According to Exhibit 3 of the case, as of December 31, 1976, 26 U.S. nonfinancial firms could have easily financed a takeover of Kennecott.
Kennecott’s use of Peabody’s proceeds was not limited to acquiring Carborundum