Polaroid Corporations Essay

In deep March 1996, Ralph Norwood was faced with the task of restructuring Polaroids neat coordinate. In the past, Polaroid had a monopoly in the instant-photography segment. However, with upcoming threats in the emerging digital photography industry and Polaroid experiencing recent losings in their trade sh ar delinquent to Kodaks competition, Gary T. DiCamillo, recently appointed chief executive officer of Polaroid, headed a restructuring plan to stimulate the unassail able-bodieds performance.The firms spic-and-span plan has goals such as to precipitously exploit the existing Polaroid brand, introduce reaping extensions, and enter newborn emerging markets such as Russia in order to apprehend Polaroids upcoming. In addition to the plan, DiCamillo has include certain core objectives that Norwood would need to postulate in his recommendation. These economic values include goals of value creation, financing flexibleness, and staying with the investing funds-grade rati ng for links. His plan would put up to afford Polaroid small(a) costs and move bother to large(p) low selection debt policies.Norwood would need to access the right best system with these restrictions that is to say that even if the more or less optimal capital structure was to suck up Polaroids bond rating under BBB-rated, Norwood would need to settle for some midway ground. Financing Requirements Polaroid faces several business chances in March of 1996 that forget affect its financial policy. The social club essential consider immaterial risk exposure, demand variability, and the ability to climb up new products in time and postulate in a developing, innovative market.Polaroid is cool it essentially a one-product line follow, filiation 90% of its revenues from photographic products. Polaroid must in like manner consider the threat that digital visualise technologies pose towards the companionships futurity. With the exit up development of these new t echnologies, it is discharge that Polaroid will non hold back a monopoly in these markets. In addition, Polaroid experiences business risk with their change magnitude revenues coming from developing countries. or so 9% of Polaroids gross revenue in 1995 came from Russia.Exhibit 2 (Information on world-wide Revenues) shows the percent of total international sales is on the rise, while U. S sales be on the decline. Even though, Polaroid does have international lines of credit and probably new(prenominal) strategies to reduce currency risk, their business in these developing international markets does pose increasing market risk. The business risk from competitors and international markets does signify that Polaroid will need special funding to keep up. The company must maintain a strong and pliable balance sheet to accommodate for future financing demand.A nonher area of partake is Polaroids dinero reportage ratios. tour Polaroid has a relatively low debt ratios that are comfortably in the AA-BBB range, the company is fight to maintain safe earnings coverage multiples on its interest payments. The publishing is magnify in the future as market candor grows thus increasing WACC. Without go earnings, Polaroid will not be able devise interest payments on the excess debt required to balance the companys optimal capital structure.The use of debt and the resulting additional financial risk is a last that Norwood must ultimately make. Norwood is in addition refer with developing a long border financial strategy for Polaroid that will enable the company to grow gibe to DiCamillos plan. Virtually all of Polaroids debt is maturing deep down the next six years. The major components are listed below. $150 million in notes at 7. 25%. which advance on January 15, 1997 $cc million in notes at 8%, which mature on March 15, 1997. Employee demarcation Option Plan Loan with schedule semiannual principal payments through and through 1997. sideline ra te has varied over time, plainly is very low due to measure benefits to employee stock ownership plan lenders. $140 million in convertible subordinated debentures at 8%, which mature in cc1. They are convertible to commonality product line at $32. 50 per contend. They are not redeemable until September 30, 1998 unless the stock price exceeds $48. 75 for 20 of 30 consecutive trading days. Norwood wants to restructure Polaroids debt and legality to maximize the companys future potential.During this restructuring, Norwood wants to keep the cost of capital low, create value, and preserve Polaroids investment grade in order to allot for future borrowing at investment grade status. Polaroids Current station The on-line(prenominal) capital structure is not appropriate for Polaroid, and it will inhibit the companys ability to meet future financial demands. After analyzing Polaroids current debt maturity structure, the group concluded an ultimate downgrade of the companys BBB bond rating by the end of 1996 according to the coverage ratios.The cost of debt drastically increases when a company enters the non-investment-grade status, while the switch amongst investment-grade ratings is relatively marginal. Exhibit 1 shows the maximum tot up of debt Polaroid could have for each credit rating. Polaroids current investment-grade rating must be maintained to keep costs low and protect the Polaroid brand name. To maintain this rating, Polaroid needs to stop repurchasing stock and have an number of equity in 1996 to avoid a downgrade to junk status.Polaroid needs to make these changes to its capital structure to have flexibility and preserve its bond rating. Any die hard needs can be funded through debt financing. Our Recommendation We recommend issuing $200 million in equity initially to pay off the $150M and $37. 7M debts. This will not only allow the firm access to much needed capital, but will also decrease the supplement ratio and minimize financing risk. Als o, the ESOP political platform will be temporarily hang up to reduce leverage. Currently, Polaroids D/E is far too high at . 4. This additional equity brings it to a more manageable . 22. By analyzing the coverage ratios, we predicted that if equity was not issued by 1996, the company would escape its BBB rating. Our recommendation first and fore around considers the deliverance of Polaroids BBB status. The advantage to a new equity issuance is that it will run needed capital without damaging the companys financial statements. This will depart flexibility for further borrowing in the future and make it easier for Polaroid to maintain its debt rating.Furthermore, when capital is needed in 1998, we will issue $425M in 5-year bonds. This gives Polaroid the lowest WACC and maximum leverage while maintaining BBB status. At this point the ESOP program will resume with the company re-levering. With a somewhat flat return key curve, longer term bonds are not significantly cheaper to outweigh the flexibility that 5-year bonds offer. If earnings improve in 5 years, a capital structure with more leverage may be preferable. Having 5-year bonds gives Polaroid this flexibility.Exhibits 2 and 3 show that a capital structure with a D/E surrounded by . 22 and . 26 is optimal. Given the consistent growth in market equity capital, additional borrowing and possible share repurchases will be necessary in the future to stay in this range. This strategy would open the door for Polaroid to find the optimal capital structure while simmer down adhering to the values of the new CEO. The objective would be to choose the option with the lowest weight average cost of capital, thus creating the most value, maintaining a minimum of a BBB rating, and also allowing flexibility.