Case Notes/Answers
Sealed Air Corps Leveraged Recapitalization (A), by
Karen Wruck, Brian Barry
Discussion Questions:
1. Why did Sealed Air undertake a leveraged recapitalization? Do you think that it was a good
idea? For whom?
2. How much value was created? Where did it come from?
3. Is pursuing a program of manufacturing excellence such as World Class Manufacturing
(WCM) inconsistent with “levering up”?
4. Why did Dermot Dunphy, the CEO, feel it was necessary to change the company’s priorities
and incentive structure following the recap?
5. Why did Sealed Air’s investor base turnover completely after the recap? Is this something
managers should be concerned about?
6. 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?
7. Would such an increase in leverage be good for all companies? Why or why not?
Study Questions
The following study questions can be used if the instructor is assigning the Jensen (1986) article in
addition to the case.
1. What is free cash flow? How can it create organizational problems?
2. In their introductory finance textbook, Brealey and Myers define financial slack as having
funds “so that financing is quickly available when good investment opportunities arise.”
What is the difference between free cash flow and financial slack? †
3. What are the organizational advantages and disadvantages of leverage?
, 5-295-143
REV: APRIL 23, 1998
TEACHING NOTE
Sealed Air Corporation's Leveraged
Recapitalization (A) & (B)
Overview
Situation
Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency
and product quality, the company borrowed almost 90% of the market value of its common stock and
paid it out as a special dividend to shareholders. Management purposefully and successfully used
the leveraged recapitalization as a watershed event, creating a crisis that disrupted the status quo and
promoted internal change. Internal changes included establishing a new objective, changing
compensation systems, and reorganizing manufacturing and capital budgeting processes.
Pedagogy
The case provides an exciting, controversial context in which to explore how financing decisions
affect organizational structure, management decision-making and firm value. It can be used as an
introductory finance case in which the students apply basic cash flow forecasting techniques to
explore alternative dividend and capital structure decisions. For more advanced finance classes, the
concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of
high leverage can be analyzed. In organizational behavior classes, the case can be used as a vehicle to
discuss the difficulty of promoting internal change and the desirability of Sealed Air’s approach to
forcing quick change on the organization. In all contexts, the case generates a lively class discussion
in which students struggle with conflicting views about the desirability of high leverage, how
leverage affects short and long run performance and techniques for managing organizational change.
Sealed Air Corps Leveraged Recapitalization (A), by
Karen Wruck, Brian Barry
Discussion Questions:
1. Why did Sealed Air undertake a leveraged recapitalization? Do you think that it was a good
idea? For whom?
2. How much value was created? Where did it come from?
3. Is pursuing a program of manufacturing excellence such as World Class Manufacturing
(WCM) inconsistent with “levering up”?
4. Why did Dermot Dunphy, the CEO, feel it was necessary to change the company’s priorities
and incentive structure following the recap?
5. Why did Sealed Air’s investor base turnover completely after the recap? Is this something
managers should be concerned about?
6. 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?
7. Would such an increase in leverage be good for all companies? Why or why not?
Study Questions
The following study questions can be used if the instructor is assigning the Jensen (1986) article in
addition to the case.
1. What is free cash flow? How can it create organizational problems?
2. In their introductory finance textbook, Brealey and Myers define financial slack as having
funds “so that financing is quickly available when good investment opportunities arise.”
What is the difference between free cash flow and financial slack? †
3. What are the organizational advantages and disadvantages of leverage?
, 5-295-143
REV: APRIL 23, 1998
TEACHING NOTE
Sealed Air Corporation's Leveraged
Recapitalization (A) & (B)
Overview
Situation
Less than a year after Sealed Air embarked on a program to improve manufacturing efficiency
and product quality, the company borrowed almost 90% of the market value of its common stock and
paid it out as a special dividend to shareholders. Management purposefully and successfully used
the leveraged recapitalization as a watershed event, creating a crisis that disrupted the status quo and
promoted internal change. Internal changes included establishing a new objective, changing
compensation systems, and reorganizing manufacturing and capital budgeting processes.
Pedagogy
The case provides an exciting, controversial context in which to explore how financing decisions
affect organizational structure, management decision-making and firm value. It can be used as an
introductory finance case in which the students apply basic cash flow forecasting techniques to
explore alternative dividend and capital structure decisions. For more advanced finance classes, the
concept of free cash flow, its effect on stock market prices and firm value, and the disciplinary role of
high leverage can be analyzed. In organizational behavior classes, the case can be used as a vehicle to
discuss the difficulty of promoting internal change and the desirability of Sealed Air’s approach to
forcing quick change on the organization. In all contexts, the case generates a lively class discussion
in which students struggle with conflicting views about the desirability of high leverage, how
leverage affects short and long run performance and techniques for managing organizational change.
