SSRN Inspection
UVA-F-1041 Syracuse Electric, Inc.
Username: TO ACCESS THIS DOCUMENT This is a protected document. The first two pages are available for everyone to see, but only faculty members who have verified faculty status with Darden Business Publishing are able to view this entire inspection copy.
Submit
VERIFIED FACULTY If you have verified faculty status with Darden Business Publishing, simply enter the same username that you use on the Darden Business Publishing Web site, and then click “Submit.” Please note that this is an inspection copy and is not for classroom use.
Faculty Register
UNVERIFIED FACULTY If you are teaching faculty and do not yet have verified faculty access with Darden Business Publishing, please click on the “Faculty Register” link and submit your information requesting verified faculty access.
Buy Case Now
OTHER USERS If you would like to read the full document, click on “Buy Case Now” to be redirected to the Darden Business Publishing Web site where you can purchase this and other Darden cases.
If you have any questions or need technical help, please contact Darden Business Publishing at 1-800-246-3367 or email
[email protected]
Document Id 0000-1402-8FB1-000090E6
The protectedpdf technology is © Copyright 2006 Vitrium Systems Inc. All Rights Reserved. Patents Pending.
UVA-F-1041
SYRACUSE ELECTRIC, INC. In April 1988, Amelia Hornblower retired from her position as chief financial officer (CFO) of Syracuse Electric, a leading manufacturer of a wide range of commodity-type electrical components, defense and aerospace electronic equipment, and consumer appliances. Amelia, the youngest of the Hornblower sisters who founded the firm in 1948, was the last to relinquish an operating position. In place of the Homblower sisters emerged a younger generation of well-trained managers, including Susan Chen, who became the company’s CFO when Amelia retired. In her first action as CFO, Ms. Chen solicited advisory financial studies from three large investment banks—Carlyle Savoy Ltd.; Danbury, Brickhouse, & Co.; Steinworth, Vader, Inc., and a large commercial bank, Hudson Guaranty. She specifically requested that each of them review Syracuse’s current financial structure and recommend a structure of long-term financing that would minimize Syracuse’s cost of debt and preferred stock yet be consistent with management’s other goals. Exhibit 1 presents the letter containing the advisory request. If Syracuse’s management accepted any of the proposals, the winning firm would be awarded the position of lead advisor and underwriter to execute the recommendation. The Company Syracuse Electric, Inc. competed in the electrical-equipment industry. The firm’s mix of business included commodity-type electrical components and generators (about 40 percent of sales and cash flow); consumer appliances and equipment (about 25 percent); defense electronics and avionics (20 percent); and a finance subsidiary that not only supported leases and credit sales of Syracuse’s own products, but also invested in commercial paper and securities of other companies (15 percent). Economic indicators and forecasts important to the electrical-equipment industry are provided in Exhibit 2, and comparative industry data are given in Exhibit 3. In the early 1980s, weak markets, excess capacity, and import competition caused domestic electrical-equipment companies’ growth to stagnate. To encourage growth and maintain profitability, companies were
This case was prepared by Robert F. Bruner at the Darden Graduate School of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 1993 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊
-2-
UVA-F-1041
forced to cut costs—most notably, labor costs—and dedicate assets to faster-growing business segments tangentially related to their industry, including electronics, medical products, and waste disposal. This strategy was beginning to pay off by the mid- to late- 1980s. Profits in the electricalequipment industry were especially strong; average operating margins improved from 12.6 percent in 1986 to 13.0 percent in 1987, and despite a 3.5 percent increase in average taxes, the average net profit margin only fell from 6.4 percent to 5.5 percent in 1987.1 Ms. Chen thought that there would be modest growth in nonresidential construction over the short term but that the increase would be followed by two years of decline. In addition, she expected foreign demand and replacement orders by utilities to begin to fade by mid-1988. As shown in Exhibits 4 and 5, annual sales in 1987 were over $1.6 billion and assets totaled $1.4 billion. In the fourth quarter of 1985, management began to restructure the company by divesting a number of non-strategic lines of business. As a result, the company realized a charge to earnings of $72 million before tax and $44 million after tax. The operations that were divested had sales in 1985 of $162 million and operating losses of $13.3 million. The divested businesses’ total assets were $137 million. In an effort to contain costs, Syracuse decreased labor from 22,312 employees in 1985 to 19,126 by year-end 1987. Management also limited capital expenditures to $34 million in 1987— half their 1985 level. In every division but one, capital expenditures were less than depreciation over the past two years. In April 1988, the company’s board was considering funneling funds toward a radar detection and screening project expected to require $75 million in capital and working-capital investments over the next 5 years ($15 million per year). Preliminary test results suggested that the project could improve radar detection accuracy by 50 percent; if this were true, Syracuse could corner the market for a number of years. If the project was indeed a success, heavy demand would require additional capital expenditures of between $25 and $40 million over a 3-year period and $10 million in working capital each year thereafter. If the project took longer to develop, further cash inflows would be necessary. Capital Position In April 1988, Syracuse Electric had a debt-to-equity ratio of 50 percent. The company had no bonds outstanding, but Ms. Chen guessed that the firm would be rated BBB. Management’s plan had been to repurchase stock on a gradual basis when the price was low. But after the stock market crash of October 19, 1987, when the company’s stock lost nearly 30 percent of its value, Syracuse repurchased $292 million worth of stock at between $33.25 and $40 per share. Until now Syracuse had been relatively unsophisticated in its use of the capital markets; $350 million of its long-term debt consisted of bank financing through a number of domestic sources at the floating prime-lending rate. The current portion of the debt totaled $10.2 million. The remaining $12.7 million of 1
Value Line Investment Survey, May 6, 1988, p. 1001.
