Canadian Pacific Ltd: Unlocking Shareholder Value in a Conglomerate
(6 pages of text)
In January 2001, the chief executive officer (CEO) of Canadian Pacific Limited (CPL) was contemplating the future of his firm. CPL was one of Canada’s oldest conglomerates with operations in railways, shipping, natural resources and hotels. Its stock market capitalization of CDN$13.5 billion reflected a conglomerate discount, estimated at 12 to 35 per cent of the value. In order to eliminate this conglomerate discount and maximize shareholder value, the CEO weighed the pros and cons of asset divestitures or spinoffs. Would it make sense to keep some of the related business together to preserve economies of scale and scope and to maintain synergies? What would be the tax implications of each option? There were numerous operational and legal implications to consider. Knowing he had to make a decision quickly, the CEO looked for the option that would unlock the most value for CPL’s shareholders.
This case can be used in an undergraduate business or MBA program in a variety of contexts including an advanced course on corporate finance, a course on investment banking or a course on valuation. The case provides an introduction to the topic of corporate divestitures and spinoffs. It provides students the opportunity to practise sum-of-the-parts valuation using trading multiples of comparable companies to derive the implied market valuation. This valuation can be contrasted with the actual price of the company's shares to measure conglomerate discount. The case highlights how financial strategy can add shareholder value to a company through asset restructuring. It also examines how taxes affect corporate decisions.
Canada, Large, 2001
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