Dow Chemical Case Essay Example

optical clarity, a soft feel, and principality. It is commonly used in garbage bags.
In terms of history, LDAP started centralization in the late sass, while HIDE was introduced in the mid-sass and LADLE in the sass.
Initially, LADLE was intended to replace LDAP due to cost advantages, but it failed to gain traction as customers were reluctant to invest in new equipment for LADLE production.
Given DOD Chemical's significant investments, products, and revenues tied to ethylene and polyethylene, the company has a vested interest in these plants and their production.
The profitability of the ethylene and polyethylene business relies on several factors. The three types of Polyethylene (LDAP, HIDE, LADLE) and the plastic products they manufacture are crucial drivers. Additionally, maintaining a low global operating rate is important for profitability.
The Polyethylene industry is stimulated by demand for innovative packaging, improving living standards, and expanding populations in emerging markets.The demand for Polyethylene in end user markets accounts for about 15% of Dhow's total sales and 35% of its operating profit. DOD Chemical, the global leader in ethylene and polyethylene production, seeks expansion opportunities in the South American market. In 1995, an opportunity emerged to enter Argentina's growing polyethylene market due to the country's economic liberalization within the trading bloc called Numerous. However, Argentine petrochemical producers now face tough competition from larger and more advanced Brazilian counterparts. To address this disadvantage, the Argentine government decided to privatize its largest government-controlled polyethylene plant, EBB (Petrochemical Bah Blanch) complex. DOD Chemical's vice president for business development in Latin America closely observes the rapid transformation occurring in Argentina.

The improved standard of living in the country and the

growth of the food and packaging industries, along with the introduction of Wall-Mart and other grocery chains, increased the demand for polyethylene in Argentina. This competition from imported products led local manufacturers to upgrade their presentations. With the expected growth in the polyethylene market, EBB became an attractive acquisition for DOD.

DOD saw the acquisition and bid process for EBB as an opportunity to become the leader in the Latin America polyethylene industry. The bid process was defined in three stages, with DOD using net present value as the basis for evaluation. The company's methodology focused on creating a cash flow model and conducting sensitivity analysis. Stage 1 involved taking control of EBB, which included an ethylene cracker and polyethylene plant, and upgrading them to be competitive internationally.

The DOD team developed separate cash flow models for the EBB ethylene cracker and the EBB polyethylene plant. Stage 2 then involved acquiring Polisher's two polyethylene plants.

The cash flows for Stage 2 of the project were projected using the same model as for the EBB polyethylene plant in Stage 1, considering the greater efficiency of the Polish plants in terms of their variable and fixed costs. Stage 3 involves constructing a new ethylene cracker and a polyethylene plant. The cash flow projections for the new ethylene cracker are provided, utilizing the same model as for the EBB cracker in Stage 1. The new cracker would be more efficient than the EBB cracker, with an improved ethane ratio, and fixed costs for the new cracker would represent only 6% of total costs. The best cash flow outcome for DOD in this acquisition was in stage three cash flow,

which includes building a new ethylene cracker and a new polyethylene plant. This is because the new cracker would be more efficient than the EBB cracker, with an improved ethane ratio, and fixed costs for the new cracker would account for only 6% of total costs. The new polyethylene plant would also be more efficient, and fixed costs would be reduced to 10% of total costs. Associated Critical Risks There are various economic, political, and currency risks associated with investing in an emerging market like Argentina.Among the risks to consider when investing in Argentina, political instability was a concern for DOD chemical despite the country's stable democratic government for 12 years and absence of expropriation in the previous 50 years. Currency risk and the potential impact of government policies were also challenging factors in investing. Argentina had faced eight major currency crises between the early 80s and 1991, followed by the Tequila crisis in 1995. However, the presence of the convertible law helped Argentina recover, leading to improved availability and cost of funds by November 1995. Vigilant and Mercer remained concerned about the possibility of future crises and how they would affect their project. The government's exchange rate policy was relevant to foreign investment considerations.The Men government made significant changes to laws and regulations regarding the criticism of capital, allowing for a free foreign exchange market with no limits. The absence of restrictions on the payment of foreign loans, as well as borrowing from non-resident companies or individuals, raised concerns for Vigilant and Mercer. They discussed how to manage the exchange rate risk if the Argentine convertibility law was to be discontinued.

When evaluating a project

like the DOD chemical acquisition of EBB, currency risk and government policies are important considerations that affect the cost of capital. Government policies promote the repatriation of capital in a stable currency, which enables unrestricted movement of cash flow by eliminating regulations and restrictions on borrowing.

Additionally, the convertibility law, implemented by the government, instills confidence in the financial and business communities. It helps stabilize the economy and strengthens the local currency during times of financial crisis. Taking these risks into account during project evaluation reduces investment risks.

The political climate also impacts the cost of capital for projects as investors are attracted to stable political environments, leading to increased cash flow.The discount rate adjustment strategy has advantages and disadvantages. It considers the time value of money and allows for the valuation of future revenue by discounting and adding together annual revenue. A higher discount rate results in a lower present value of cash flow. However, this strategy does not adjust for future cash flow and cannot specify a future date equivalent to a sum today. Additionally, it causes a reduction in the percentage of cash flow due to the high discount rate in the US.

On the other hand, the cash flow adjustment strategy has its benefits and drawbacks. It allows for the incorporation of expected operating strategies into the valuation, but it relies on terminal value assumptions rather than operating assumptions of the assets. Furthermore, when doing business in Argentina, a country risk premium would be added at a discount rate of 10%-15%, based on the 5-year history of yield spreads compared to the US from January 1990 to July 1995. The terminal growth rate is

3.3%.The primary risks associated with Argentina are currency and economic risks, rather than political instability or expropriation, as these risks are relatively low. The country's history reveals that the economy can be greatly impacted by economic fluctuations, as seen in events such as the Tequila crisis and banking and credit crises. Despite these risks, the Argentine market has consistently been profitable.

To determine the appropriate bid for EBB, we have considered various factors. We have maintained the US discount rate at 9% as it represents a middle ground. Privatizing EBB would likely result in higher yields and improved efficiency for the company. Therefore, the optimal course of action would be for DOD to submit a bid for EBB.

We propose bidding between $701 million and $766 million for a 51% stake in EBB. These figures correspond to 51% of the Net Asset Present (NAP) value, taking into account current operations of EBB, with Stage 1 being considered. Additionally, employing corporate funds would be advantageous for DOD, as it would result in a lower cost of capital.