Goodyear Tire & Rubber Company: Follow-On Equity Issue
20 Pages Posted: 5 Apr 2010
Abstract
This case explains marketing process for follow-on equity offerings, the direct and indirect costs of issue, and the long-run performance of equity issuers. Students use analysts' projections from which to estimate the intrinsic value of the company's share—including the cost savings from the VEBA and financial improvements over the next several years. It is appropriate for use in corporate finance courses covering the topics of capital raising, equity financing, capital structure, costs of financing, funding alternatives, investment banking, and valuation. It presents the classic profile on an equity issuer—a firm whose stock price has risen to new heights in recent months. Will the issue lead to additional value that creates opportunities for shareholders, or is it a sign the firm is overvalued? The case explores the thinking of a prominent investment manager who had accumulated a large stake in Goodyear and who did not see the need for Goodyear to make an equity issue at this time. The company's position was that the high stock would allow it to further strengthen its balance sheet and pursue international growth opportunities. Students are asked to decide what the investor should do with respect to the current offer—buy, sell, or hold.
Excerpt
UVA-F-1596
Rev. Dec. 17, 2010
GOODYEAR TIRE & RUBBER COMPANY: FOLLOW-ON EQUITY ISSUE
In May 2007, Geoffrey Epperson, general partner of a large investment fund, was approached by an investment bank about his interest in an upcoming sale of equity by the Goodyear Tire & Rubber Company. Epperson had begun accumulating Goodyear's shares in early 2005 when the firm's stock price had hovered in the low to mid-teens, believing it was an attractive opportunity to build a position in a company with a strong brand name. By May 2007, his position had grown to nearly 10% of the company, making him one of its largest shareholders. As recently as January 2003, the firm had been “on the brink of death,” and the company had named a new chairman and CEO, Robert Keegan, to turn the situation around. At that time, the company faced some difficult challenges, including lackluster end-market demand, increased competition from lower-cost producers abroad, high material costs of rubber, and, perhaps its thorniest issue, high labor costs. Progress on each of these fronts would be required for Goodyear's business to improve. Still, the situation fit Epperson's investment philosophy. He said:
In the end we don't value a stock, we value a company. We are patient, conservative, contrarian investors who are willing to wait for value to surface. We look to capitalize on changes in corporate direction and strategy that increase a company's intrinsic value.
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Keywords: equity, SEO, equity issue, capital structure, financing, VEBA, fees, financing costs
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