One of America’s largest forest products/paper firms with sales of $6.5Billion in 1983 and a net income of $105 million. The case study revolves around Atlantic Corporation’s intention to add linerboard capacity. In order to achieve this goal, they started looking at viable solutions, including purchasing and acquiring mill and box plants instead of through construction and fabrication of new plants and equipment. This included the possible acquisition of Royal Paper’s “crown jewels”, that is, the Monticello mill and the corrugated box plants.
Is the acquisition of Royal’s linerboard mill and box plants a sound strategic move?
One of the solutions was to offer a purchase of Royal Paper’s company assets, including a linerboard mill and box plant. This is a sound strategic move as Atlantic Corporation purchases 150,000 tons of linerboard from its competitors each year which could lead to problems such as lack of supply and increased cost prices. Construction of a new linerboard mill would be time consuming and the opportunity cost of lost revenue from this may exceed the benefits when the mill becomes operational. For Atlantic Corporation, it may face two scenarios: linerboard becoming unavailable or linerboard prices increase. Both these two scenarios will be detrimental to the company’s performance and should be avoided.
As linerboard’s industry sales is less responsive to market movements, signifying that it is less risky, the acquisition of Royal Paper’s mill and box plants will reduce the company’s reliance on economic growth and reduce the overall risk of the company. Considering that Royal’s Monicello mill was ranked 4th in the country and able to produce 661,000 tonnes per year and the ability for expansion for the future, this not only makes the acquisition a sound strategic move but it exemplifies management’s ability to forecast and account for adverse future problems and derive solutions.