Ans1. The acquisition of Royal's linerboard mill and box plant by Atlantic Corporation sounds strategic move. Atlantic Corporation purchased 150,000 tons of linerboard each year from its competitors for production. Also, 70% of the Atlantic Corporation operating profits came from their forest products. The sales of the forest products were directly linked to the interest rate fluctuations, whereas the linerboard industry sales tended to respond less quickly and less directly to the overall economy.
Thus acquiring Royal's linerboard mill and box plants will reduce Atlantic Corporation's reliance on the economy growth and will mitigate its overall risk. Therefore purchasing an existing linerboard mill, made more economical sense. Since Royal's Monticello mill was ranked as the fourth best in the country and also produced 661,000 tons of linerboard (which was way above the capacity of 150,000 tons required by the Atlantic Corporation for production), it would help Atlantic Corporation to achieve its strategic goal by increasing its firm-wide linerboard capacity.
The outlook for the linerboard industry was very profitable. The demand for the linerboard and boxes was dependent on the total amount of goods being shipped in the nation. Thus it was dependent on the changes in the level of the industrial production. However it is less directly and less quickly proportional to the shifts in economic growth. The linerboard sales were predicted to rise by nearly 7%, as the industrial production increased.
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The current capacity of linerboard industry would only increase by 1-2% and the increasing demand for the linerboard would result in a 16% (as compared to year 1985) price hike for the linerboard products. The projected linerboard prices for the year 1986 were $420 which would result in high profitable sales, because of the fixed operating costs involved in the linerboard industry. The boxes market scenario in the year 1984 projected an increase in demand of the linerboard and boxes.
Thus the limited number of linerboard mills and high level of fixed costs in the linerboard industry ensured high profits for the linerboard industry. Atlantic Corporation is classified as one the nation's largest "forest products" firm which responded pretty quickly to changes in the overall economy mainly the interest rate fluctuations. On the contrary, linerboard industry's performance is also tied to that of economy but less directly to economic shifts; and Atlantic Corp. also had its operations in this industry but not quite dominating and strong. Hence, if Atlantic Corp.
is able to take over the Royal Board's Monticello paper mill, it will increase it linerboard capacity which would turn out to be lucrative for the firm since it was expected that 1984 would be a healthy year for the linerboard industry where in the industry would operate at nearly 100% utilization because of the strong demand and limited supply. The linerboard and box sales were predicted to rise 7% as real GNP and consequently industrial production was strengthening with this prediction. The existing linerboard mill of Atlantic produced 780 tons per day of linerboard that represented only 1.
8% of domestic capacity and also Atlantic was the only major paper producer that was a net buyer of linerboard. In a market which was too tight, linerboard could become unavailable or extremely expensive, and in such a scenario it was required by Atlantic to remedy its linerboard shortage else the raw material prices could mitigate its box division's profits. And Monticello being the fourth best paper mill in the country could help Atlantic greatly in boosting its linerboard capacity and subsequent market performance. The industry then seemed to be fraught with the dearth of sufficient linerboard production.
And Royal paper's profit then had been growing consistently and the conversion of Monticello to 100% linerboard production bettered its prospects. Royal's chairman had announced a master plan to modernize the Monticello Mill which would increase its linerboard capacity from 661,000 tons per annum to 747,000 tons per year. In such a situation, if Atlantic could buy Monticello and 16 box plants(located all over US when combined Royal's box plants), the chances become high that it could do better than the industry average by strengthening its linerboard production and marking its presence in most major US markets.
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