Arauco Case

9-705-474

REV: MARCH 25, 2009

RAMON CASADESUS-MASANELL JORGE TARZIJAN JORDAN MITCHELL

Arauco (A): Forward Integration or Horizontal Expansion?

In early March 2004, Alejandro Pérez, president and CEO of Chilean forestry company, Arauco, was about to present his recommendations to the board of directors as to whether the company should invest US$1 billion to construct a new state-of-the-art chemical pulp plant. The plant, part of a multiphase project called Nueva Aldea, would increase Arauco’s capacity by approximately 800,000 tons to 3.2 million tons, placing the company as the largest producer of market pulp, just ahead of Aracruz in Brazil. Two years earlier, Arauco’s board approved the first phase of the Nueva Aldea project for US$150 million, which consisted of building a sawmill, plywood mill, and energy complex. The second phase involved constructing a pulp mill following the inauguration of the new Valdivia plant on January 30, 2004. The Valdivia plant had a designed production capacity of 700,000 tons of pulp, with an operating life between 30 and 40 years and expected sales of USD $350 million per year.1 Pérez was concerned about the downward trend in market pulp prices over the last three years. In addition, major paper companies, the sole buyers of market pulp, were typically backwardintegrated into the production of pulp. Pérez was confident, however, that the board would trust his judgment given Arauco’s tremendous success in recent ventures into remanufactured wood products (such as cut stock, blanks, clear rips, and decking balusters), plywood, and fiberboard panels. Pérez anticipated the toughest question the board would pose: would shareholders be better served by a strong-willed forward integration move into paper manufacturing rather than the horizontal growth plan he was proposing? Furthermore, was a large resource commitment a good strategic move at this point?

History of Arauco and COPEC

Arauco was formed through a merger between...