Aracruz Cellulose Case Summary

Aracruz’s USD 2.13 billion loss

Introduction

Aracruz cellulose is Brazil’s largest eucalyptus pulp maker. It was the biggest producer of bleached eucalyptus pulp, which was the only product it produced. It was a steady performer in terms of output, production, revenues and profits. It enjoyed a key status in the word markets. It had a 26% of the global market share. It enjoyed an enviable reputation and was rated highly by the global rating agencies like the Moody’s, etc. It’s market capitalization was USD 7.1 billion. Its new revenue was USD 1.7 billion. It was the first Brazilian company to come with an ADR in the NYSE. It had an annual capacity of 3.3 million tonnes over three production sites. It had enough resources like 593,000

Firstly, the fact that as per Agency Theory, (which describes the relationship between Principal and Agents) the actions taken by the top officials were objectionable. According to this theory a Principal (in this case All shareholders of the company) appoint an Agent (the management of the company) to manage the affairs of the company and to represent and protect its interests. There is also a possibility that some of the key persons responsible to take decision acted selfishly for growth in their own remuneration by resorting to short-term gains and ignoring long-term impact of their

Aracruz’s losses in the fourth quarter of 2008 were R$2.98 billion. Until this time, in all the previous quarters the company kept itself out of the red. Though the business showed declining profits in its core business, the gains in the derivatives more than compensated for it. It saved its day for some time, all the while exposing it to even larger risks which eventually took shape when the effects of the financial crisis unfolded and all events turned negative for the company. It tried to have discussions with its bankers to fund the losses. Eventually, it was taken over by its smaller competitor Votorantim Cellulose ePapel. Fibria was formed after VCP took over