The CEO of Merit Corporation reviewed the company’s business records. Business had been brisk for the last two years, and the board of directors wants to dramatically expand the company's production capacity. They have asked the CEO to present them with some options for expansion. The plan would require $4 billion in capital in excess cash that the firm has built up. Merit Corp has maintained its status as a private company, reinvesting profits and borrowing from banks when necessary. It seems unlikely to the CEO that following their usual strategy would work to expand at the company's desired pace. There are two options for the company to consider.
OPTION ONE. Merit could approach JPMorgan Chase, a bank they've used before with seasonal credit lines and medium-term loans. The CEO doesn't believe Chase would likely to extend a oan that large, but could gather a group of banks together to make the large loan like this. However, the banks would undoubtedly demand that merit limit further borrowing and provide Chase with periodic financial disclosures so they can monitor Merit's financial condition as they expand their operation.
OPTION TWO. Merit could convert to public ownership, issuing stock to the public in the primary market. The CERO thinks that the company's excellent financial performance in recent years, and that stock could command a high market price and many investors would want to participate in any stock offering by Merit. Becoming a private company would also allow them foir the first time, to offer their employees compensation in the form of stock or stock options, creating a stronger incentive to help the company succeed. On the other hand, the CEO knew public companies face extensive disclosure requirements and other regulations that that they haven't has as a private firm. Also, with stock trading in the secondary market, they don't know who might und up with a large chunk of their stock.
a. What are the pros and cons of Option 1? What are the most positive aspects of this options and what are the biggest drawbacks?
b. Do the same for option two.
c. What option should the CEO present to the board and why?