Seal air corporation
Sealed Air Corporation’s Leveraged Racialization (Team 1)
5. Was the constraint imposed on capital expenditures under the bank lending agreement good or bad for the company? Do you think managers will be able to successfully renegotiate this covenant?
Having a limitation on the investment in fixed assets when the company was planning a drastic change of their manufacturing system could be very harmful. Even though Dunphy and Cruiskshank tried to look on the bright side and consider this an expenditure prioritizing opportunity, our team believes that this covenant was not good for the company, and had the new manufacturing system not showed results so quickly, the company would have run into trouble. Therefore, our team does not agree with the answer Team 3 gave to this question. On the other hand, regarding the possibility of renegotiating this covenant, our team agrees that it is difficult to assess. The company took a high risk and turned out to be successful by the end of the year, so in this situation, they would be able to renegotiate it. However, this brilliant result is not easy to be seen from the beginning, so it is best to remain skeptical about a renegotiation before positive results appear.
6. Would such an increase in leverage be good for all companies? Why or why not?
Leverage depends on the industry and the company’s policy. In most cases, especially for software companies such as Microsoft, they would tend to leverage less and save cash in hand that equals to their one year’s expenses (salary, overhead, etc.). Because such industries where rapid changes could occur, over leveraging would be riskier, whereas manufacturing companies would tend to leverage more compared to software companies. However, the market and stakeholders should know what the company’s policy is regarding the amount of leverage.
7. Why did Dermot Dunphy, the CEO, feel it was necessary to change the company’s priorities and incentive structure following the
5. Was the constraint imposed on capital expenditures under the bank lending agreement good or bad for the company? Do you think managers will be able to successfully renegotiate this covenant?
Having a limitation on the investment in fixed assets when the company was planning a drastic change of their manufacturing system could be very harmful. Even though Dunphy and Cruiskshank tried to look on the bright side and consider this an expenditure prioritizing opportunity, our team believes that this covenant was not good for the company, and had the new manufacturing system not showed results so quickly, the company would have run into trouble. Therefore, our team does not agree with the answer Team 3 gave to this question. On the other hand, regarding the possibility of renegotiating this covenant, our team agrees that it is difficult to assess. The company took a high risk and turned out to be successful by the end of the year, so in this situation, they would be able to renegotiate it. However, this brilliant result is not easy to be seen from the beginning, so it is best to remain skeptical about a renegotiation before positive results appear.
6. Would such an increase in leverage be good for all companies? Why or why not?
Leverage depends on the industry and the company’s policy. In most cases, especially for software companies such as Microsoft, they would tend to leverage less and save cash in hand that equals to their one year’s expenses (salary, overhead, etc.). Because such industries where rapid changes could occur, over leveraging would be riskier, whereas manufacturing companies would tend to leverage more compared to software companies. However, the market and stakeholders should know what the company’s policy is regarding the amount of leverage.
7. Why did Dermot Dunphy, the CEO, feel it was necessary to change the company’s priorities and incentive structure following the