Goodyear

Goodyear

Goodyear largest tire producer in world

Goodyear known as a fierce competitor- The Gorilla Spent $1.5 billion modernizing over 1975-1986.

Before 1983 about 10% of sales from Aerospace division

Basic Industry Conditions 1980-1988

• Mature or declining industry
• Overcapacity
• Price wars
• Shrinking margins

Robert Mercer new CEO in December 1982

• Acquired Celeron (natural gas transmission) for $825 million in stock in February 1983

• Start $1.5 billion pipeline in November 1983

• Failed bids for helicopter firms in 12/83 and 7/85

Results of diversification program

• Stock market did not like diversification moves

• Sold gas transmission part of Celeron in 8/85. Spent proceeds on oil and gas properties!

• Stock price from $32.75 in 10/86 to $48.25 by late 11/86

• 10/28/86-James Goldsmith announces holds 11.5%

• Goldsmith offers to buy all shares at $49 per share

Goodyear’s Reaction

• Repurchases Goldsmith’s shares @ $49.50 ($621 million total)

• Repurchases 40 million shares from public @ $50

• Everything but tire assets and $1.4 billion dollar pipeline sold by August 1987

• $4 billion credit facility/term loan arranged

• Debt from $1.1 billion 1985 to $2.8 billion 1986 to $3.6 billion by end of 1987

• Management and organization consolidated

• Smaller board and staggered elections

• Capital expenditures cut

Total 1985-$1623m, 1986-$1131m, 1987-$666m Tires 1985-$438m, 1986- 532m, 1987-406m,

1988-500 mil

∙ EPS up from $1.16 in 1986 to $12.73 in 1987

• Stock price up to $76 in October of 87 What is the source of this value gain?

-Tax shield effect of more debt (positive NPV project)?

-Transfer of wealth from debt to equity (existing debt becomes riskier)?

-Signal effect of stock repurchase (managers think stock is undervalued)?

-Management incentives to work hard (agency costs of equity financing)?

Highlights of income statements