Founded in 1883 as Bean Spray Pump Company in California, John Bean invented the pump used to spray insecticides on fruit orchards in the area.

They incorporated in 1928 and during the 40s, 50s & 60s, the Company grew into what would be called a classic conglomerate. By the early 70s, their businesses had expanded into:

Food Machinery

Industrial Chemicals ( including mineral rights in Wyoming and Idaho for Shale and Trona Ore )

Agricultural Chemicals (insecticides & pesticides)

Petroleum Equipment, Outdoor Power Equipment, Fiber & Film Operations, Power Transmission, Construction & Defense Equipment

A new CEO, Bob Malott, took over the Company in 1972. In his opinion, FMC was in too many businesses and the investment community found it difficult to evaluate or compare us to other companies because of our diversity which kept the stock price flat over a number of years.

As a result of this, the Company developed a new corporate strategy. All of the Operations, based on their business strengths or weaknesses, were grouped into three areas: Invest and Grow, Maintain for Cash Flow or Divest.

Over the next 10 years a number of major businesses which did not fit into the first 2 categories because of weak market share or high production costs were divested.

As a result of eliminating businesses which were a drain on operations, the Company started to accumulate a serious amount of excess cash. Their consultants warned them that if they didnt do something, they would be ripe for a hostile takeover. In effect, a predator company could finance part of the acquisition with FMCs excess cash.

As a first step, in 1984/85, they purchased 20% of their outstanding stock for $450 million. However, this was only a temporary measure and in 1986, they recapitalized the Corporation.

In essence, they borrowed $4.0 billion and gave it to the shareholders as a mega dividend with the understanding there would be no foreseeable future dividends.

The structure of the recapitalization was a 5 for 1 stock split and a subsequent buyback. No shares were repurchased from the Officers & Directors, 2 shs. were brought back from the Thrift Plan participants and 4 shs. from outside owners.

The Companys balance sheet before and after the recapitalization is shown below:

($ in Billions)

	Assets	Liabilities	O/E
Before	$2.5	$0.5	$2.0
Borrowings	+4.0	+4.0
Stock Buyback	-4.0		-4.0
After	$2.5	$4.5	$-2.0

The recapitalization resulted in providing the Company with financial protection from a takeover:

With $4.5 billion of debt on the balance sheet, they were no longer attractive to a potential predator.

The stock split, although not changing shareholder control, did shift ownership from 80% outside/20% inside to a 60% outside/40% inside thus putting more control into friendly hands (Management & the Thrift Plan).

The excess cash flows as well as the absence of future dividends would be used to service the newly acquired debt going forward.

1. The $4.0 billion of borrowed funds is variable rate debt tied to Prime and LIBOR rates. They are concerned that if interest rates go up, it will increase debt service costs. They dont want to take that risk and ask you to look into Interest Rate Swaps, a financial derivative that will hedge the risk by converting variable rates to fixed. Explain how they work and how they are accounted for and reported in the financial statements.