Authors:
Philip Larson

Kennecott Copper Corporation

I prepared my answers by myself before discussing the case with anyone else. I only consulted other members of this class and this work is my own.

1) Why did Kennecott buy Peabody? Was the acquisition successful in achieving its goals? Does the experience with Peabody have any bearing on the Carborundum acquisition?

Kennecott purchased Peabody for two primary reasons, 1) to moderate the wide swings in Kennecott’s profitability created by sharp changes in copper prices and sales, and 2) to provide Kennecott with significant future investment opportunities outside the copper industry.

The acquisition was not successful in achieving these goals. Kennecott’s profits in the years following the acquisition were more erratic than they had been prior to the acquisition, partially due to Peabody’s unexpectedly poor earnings. In particular, rather than using Peabody to smooth out profits, Kennecott contributed $532M to Peapody’s capital and allowed it to keep all of its net income. Moreover, the Peapody acquisition did not help Kennecott achieve its second goal of providing future investment opportunities outside the copper industry. Kennecott was forced to divest the acquisition just 6 years after the acquisition took place, removing any long-term investment prospects owning Peapody might provide. Therefore, the Peapody acquisition was not successful in achieving either of its primary goals. Additionally, the acquisition and sale was not very profitable. Kennecott invested $285M in cash, assumed liabilities of $36.5M, and put in $582M in additional capital (~$900M) and received cash and notes worth only $960M at divestiture.

This experience does have a bearing on the Carborundum acquisition. First, Kennecott learned about the threat posed by