The American Superconductor company is one of the leading companies in the superconductor business in America. Some of the AMSC products are high temperature superconductor power cables, scheme set up aging Connecticut grid, devices that China for its power grid. These products are premeditated to develop the expenditure, effectiveness and consistency of systems that produce, provide and utilize electric power.
History about American Superconductors
Their products are solving the problems that we have today in electricity. The power grid of the company has attained well developed visibility since the Aug. 14 Northeast blackout. But lately, the company seems to have a problem with their managerial approach. The American Super conductor management and board of directors consider the pronouncement to give up a protected debt financing and to take up an equity financing policy under present market situation is in the best solution for their current problems. (Esposito, “2003”) The company has scampered policy for a $50 million protected debt financing and will as an alternative increase the money through a public stock offering. (Esposito, “2003”) The company will release the sum of shares to be traded from the company's treasury. The sum of the probable earnings and designation of underwriters in a Securities and Exchange Commission registration declaration was organized within two weeks. (Esposito, “2003”)
AMSC had notified shareholders in July 2003 that it anticipated to shut at the last part of the month on a secured debt financing parcel composed of a five-year term mortgage of up to $30 million from a few cluster of institutional investors, $10 million in secondary remarks and a $10 million bank credit provision. (Esposito, “2003”) The company kept the identity of the investors and banks privately.
The company's stock, closed at $12.20 to some extent, which was up 60 cents on the Nasdaq Stock Market, has increased 305 percent in 2003. The company stated that three factors main factors led to their decision of management change. The company has selected revenue impetus and is on the way toward accomplishing its target of $45 million to $50 million in profits the year 2003, which will double the revenue attained in the fiscal year of 2003. (Esposito, “2003”) The company’s product such as high temperature superconductor motors and generator business unit, which is operational on a substantial U.S. Navy contract, was lucrative in the first section which ended June 30, 2002. (Esposito, “2003”)
The reason why the company has changed its managerial strategy was mainly to correspond to the vast changing market. It was an unorthodox shift in their company but they thought it was the best way to maintain balance. They took in mind the debt and equity ratio which is an important in establishing a successful business. Debt and equity ratio is a degree of a company's financial influence determined by dividing its entire accountability by the total of its stockholders' equity. The main purpose of this ratio is to specify what part of equity and debt the company is utilizing to support its resources. High debt/equity ratio in general signifies that the company has been insistent in financing its increase with debt. The outcome of this process would create precarious revenue as an effect of the added interest expenditure. The AMSC experienced high debt/equity ration which led them to crash an 8.4% scale in the Windhill New Energy Global Innovation Index in the start of the year 2003. ("NEX Update," 2006) The report indicated that the AMSC hasn’t been meeting the demands of the market. This made the company to reassess its position in the market. ("NEX Update," 2006)
The company, like what AMSC executed before, could possibly produce more profit than it have without this external financing if a lot of debt is exercised to support augmented undertakings. ("Debt to Equity Ratio," 2007) If this were to boost profit by a larger amount than the debt cost, then the shareholders profit as more profit are being increase among the equal quantity of shareholders. ("Debt to Equity Ratio," 2007) However, the expenditure of this debt financing may overshadow the take back that the company produces on the debt through financial investments and business events and turn out to be too much for the business to manage. ("Debt to Equity Ratio," 2007) This problem can result into bankruptcy that would result in the shareholders with nothing to gain.
Because of this, the AMSC acted to control this problem that they are facing. Their solution to their problem was a debt for equity swap. In this process a business' creditors acquiesce to withdraw some or even all of its debt in replacement for some equity in the business. Debt for equity trade frequently happen when big companies move into severe financial difficulty, and frequently end up in these developments being possessed by their bankers. ("Debt to Equity Swapping," 2007) Since both the debt and the outstanding assets in their projects are too big that there is no benefit to the bankers to appeal the project into bankruptcy, and they would likely desire to manage the business as a going apprehension.
The American Superconductor company underwent equity financing because they concurred that it was the best way that they could do so that they could avoid severe problems such as bankruptcy. If they didn’t change their strategy then they could end up being shutdown which would be a great upset to the market especially to their employees. The company executed what was needed. In the consistent changing market, one needs to be flexible so that one could survive. The company adapted in such a way they could subsist. Debt to equity swap was much better than bankruptcy. More than 200 employees could have lost their jobs if the company did not make such leaping decision. If a great company such as AMSC encountered unsteady problems, then most likely, the smaller business in the market would be affected also.
In our market, making decision is one important factor to create stability. We should think before we act. The handling of AMSC to their marketing problem is one good example of rational decision making. We should carefully choose what should be done and not. In this world, everything depends on our choice.
Debt to Equity Ratio. (2007). Retrieved June 18, 2007, from http://www.investopedia.com/terms/d/debtequityratio.asp
Debt to Equity Swapping. (2007). Retrieved June 18, 2007, from http://en.wikipedia.org/wiki/Debt-for-equity_swap
NEX Update. (2006). Retrieved June 18, 2007, from http://www.newenergyfinance.com/Features/27MANEXUpdate.pdf
Esposito, A. (Aug 26, 2003). American Superconductor switch, Westboro company plans to raise money through a stock offering. Telegram & Gazette, Worcester, Mass, E 1.