Padgett Paper Products Case Study
Padgett Paper Products
Andrew Lahr
Baker College
1/26/2018
Background
Padgett Paper Products is a publicly traded company that manufactures a variety of stationery products including notebooks, loose-leaf binders, forms, and filler paper for students and record keeping purposes. The major connection with most of the owners was in the form of a quarterly dividend check. Padgett’s customers consisted mostly of about 5,000 wholesalers and retailers in the United States and Canada. A consolidation began talking place in the company in the late 1970s caused by a high inflation rate that made it difficult for them to finance their current assets. Due to the inflation rate and the depression many of Padgett’s competitors were acquired by national corporations with better financial resources. Padgett’s management decided to start acquiring smaller companies themselves to help their situation. In April 1996 Padgett made the acquisition of its competitor, Tri-State Tablet Company. Carlson Trust Company, Padgett’s bank, has had a long-term banking relationship with Padgett Paper Product's. Padgett has performed more or less through seasonal transactions with Carlson Trust with smaller short-term loans and tax payments. Libris, who is in charge of Padgett’s account at their company's bank, must revise Padgett's debt structure and come up with a better plan for their acquisition of Tri-State Tablet Company.
Capital Raising Strategies
Padgett Paper Products financial policy is rather conservative. They seem to not be as concerned about growing the company as they are receiving their dividends. Dividends per share are 50% of earnings per share in 1993 and that percentage increases until 1996. They acquire smaller companies that fit into their product and marketing needs to increase revenue as well as maintain level production to reduce unit costs. Their main strategy is to take advantage of seasonal sales needs for the back to school time period. They are dependent on short term borrowing to obtain the cash they need for the back to school sales and acquisitions of smaller companies. From 1993 through 1996 Padgett Paper Products experienced increased net sales every year. With this their cost of goods sold also increased every year causing their profit after taxes to be rather low compared to the amount of net sales they made. They also experience a big dip in sales growth from 1995-1996 as well as a decreasing gross profit margin every year. These numbers prove my point that they are not as concerned with growing sales and profit as they are with receiving their dividend.
Ethics
It seems that ethical issues always arise in the business world. It is the responsibility of the company to make sure they are using ethical business practices and procedures. When a company’s financial situation gets a little sticky or deadlines are set ethical issues are more likely to arise. Libris wanted to have new terms worked out with Padgett to restructure their debt before the auditors finished their fieldwork so that the new terms would not be reflected on the financial statements for the 1997 fiscal year. This may have caused Libris to rush his plan and be more concerned with the auditor’s report than the restructuring. Libris rushing almost negatively affected the relationship with Padgett Paper Products and the Carlson Trust Company just to save him the embarrassment of his superiors picking on him. Compromising the relationship between two companies in order to make oneself look better is a major ethical issue. The embarrassment he would have faced would be better than compromising the relationship between Padgett Paper Products and Carlson Trust Company. Another ethical issue that arises is the owners need for dividends regardless of how profitable the company is in that certain period. Despite sales, profits, expenses, and other figures rising and/or falling, in any given year, dividends per share always remain constant. The owners cannot keep taking their dividend at a constant if they want the company to be able to grow, have their debt paid off, and maintain their working relationship with Carlson Trust Company. Owners, CEOs, etc. can tend to get greedy when they are at the top but it is their responsibility to ensure their shareholders that their company is growing and remaining profitable. I found an article that detailed a few business owners who failed their companies by not ensuring growth and profitability. Dov Charney, owner of American Apparel, drove his company to the brink of bankruptcy in 2011 while he made $11.6 million that same year. Richard Shulze, founder of Best Buy, initially failed to let best buy grow into the e-commerce market quickly and watched Amazon nearly put him out of business. The decisions by Charney and Shulze were unethical and caused harm to their companies just like the Owners of Padgett Paper Products could do.