Portfolio Planning at Ciba-Geigy and the Newport Investment Proposal

CASE WRITE-UP

Name:         Anuj Kumar Yadav                                                Roll#: 1610006

Section: IIM V                                                        Date: 15thMar 2017

Case title: Portfolio Planning at Ciba-Geigy and the Newport Investment proposal

Question.1: Should Ciba-Geigy make the Newport Investment? If so, which option and why?

Answer: Ciba-Geigy has 3 options as far as the Newport issue is concerned. This Newport plant produces pigments that are used as coloring agents in plastics, coatings, and inks. Ciba had achieved steady growth in its pigments business, making pigments a strong performer within the industrial divisions.

Option1: Close the plant and switch to the manufacturing plant in Alabama or Louisiana or existing plant in Europe. This might be a good option considering all the trouble the Newport facility is causing. There are drawbacks to this option. Doing this transaction may prove to be equal as costly as reorganizing the facility. While the company would be ridding themselves of the environmental troubles that had been plaguing the facility, by relocating and being absent in the pigments industry for period of time, this would allow competitors such as BASF and HOECHST to get ahead in Ciba absence. Another one is that it has already established a name for itself in the Delaware & second-largest employer. Also by closing the site, some consumers may interpret this the wrong way.

Option 2: While it is expensive, it’s still $40 million less than a full investment. One limitation of this is that it violates portfolio guidelines for investment. The portfolio tells ways how this large diversified company can be run, and investing $100 million into this Newport facility is not one of the them. Another drawback is that such a large amount of money would be placed into a core business. Core businesses compete in market industries where there is less chance of growth While it is not a high growth market, it is a steady growth market. In 1994 (Ciba) market share was close to 20% and revenues reached Sfr 1.1 billion. The positive side of this investment is that it would cut emissions up to 80% and save $2-3 million per annum in materials costs, as well as reduce energy costs by at least 30%. No entry barriers for it to worry about. If It stays in Delaware, clients may not continue purchasing from Ciba once product prices increase to cover upgrades

Option 3: which I think is best for the company, to make full investment of $140 million dollars, bringing it up to state-of-the-art standards for productivity, safety, and environmental friendliness. Limitations and advantage hold true for this final option as well. Client base could be lost due to price increase. If they are already prepared to spend $100 million on a limited investment, putting another $40 million to fully invest in the company and turn it into what it should be in the first place, instead of outdated facility. The proposed improvements would be a necessary step in Ciba’s successful domination of the pigments industry. Schutz analysis showed he would maintain positive cash flow throughout the five-year investment period. At the very worst, Pigment RONA would only dip to 6% and that only during the two worst years. The investment payback period, would be about three years.