International Business Finance - Martin Smiths Background in Banking and Economies - Case Study Example

Martin Smith: Case Study of the Background of the case study Faced with this scenario, there was a necessity of the carry out thorough market/industry feasibility study to overview the three potential companies for the buyout. Newport Partners are entitled to buy failing companies and try to make money out of them. The overview of the Buyout industry revealed that opportunities are diminishing hence, Newport Company has to consider the opportunities very carefully before making an offer (Haim Levy, 2004, p. 187). The education background of Martin Smith is really encouraging to make a wise choice. Having a strong background in banking and economies presents him with vast knowledge to understand and analyse the economic and financial positions of the companies under investigation. The companies under consideration are Rustica Industries, Yellow Cattle Bank (YCB) and Wildflower Corporation. It was difficult to choose one of the opportunities among the three (Felda Hardymon, 2002, p. 2). First, the three companies did not spend much money in their operations and secondly, the companies were efficient in their annual spending. The third challenge is that it would be too expensive to buyout a company. According to the case study, the initial plan was not to buy a big company but rather a small one and develop it. The decision criteria to be used are investing in the company purchased, minimizing the operation costs and relocating the company to a cheaper area to reducing the administration costs (Gerry Johnson, 2011, p. 234). Overview of the three Companies In order to make a good choice, the performance, financial position and the management of the three companies was considered .The following are performance overview carried out on Rustica, Yellow Cattle Bank (YCB) and Wildflower Corporation Companies. a. Rustica Industries The company in the industry leader that have achieved promising revenue growth rates. The company increased its market share, developed new markets and products, diversified revenue stream while enjoying numerous opportunities to improve its profit. Secondly, there is a strong management team which has managed the organization successfully from the current owners (Travnichek, 2009, p. 312). Lastly, the organization has opportunities to penetrate new markets. The organization constituted of five different division enjoys 65% of the industrial sales in the U.S. The divisions are: Foodservices, Healthcare, Commercial products, International products, and Commercial products. The table below shows the Rustica’s performance in the market (The information was retrieved from the Industries annual report 2005) per divisions (Felda Hardymon, 2002, p. 8): DIVISIONS NET SALES EBITDA Earnings Food services 41% 46% Healthcare 17% 18% Commercial Products 26% 36% International Products 13% 9% Commercial Products 3% N/A The Net sales was US$136.2million while Earnings before Interest Tax and Depreciation (EBITDA) was US$ 22.1million. The Company is the largest manufacturer of Wire Shelving Industry leading with 65%, followed by Wonco 11%, TVV 6%, Total Bin 5%, Top Metal 4% and others represents 5%. The company have been increasing its industrial share from 1997 to 2001 despite the premium pricing being into practice (Felda Hardymon, 2002, p. 9). The industrial share were as follows: 1997: 56%, 1998: 57%, 1999: 58%, 2000: 59% and 2001: 60%. The table below shows the financial overview of the Rustica Industry in 2000 and 2001. Financial Items 2000 2001 Industrial share 60% 62% EBITDA US$16.5 million US $ 20.6% Gross Profit US $ 53.3 US $ 61.2 Revenue Growth 9.0% 9.4% Net Sales US $ 122.9 US $ 133.9 Overview of the Company’s opportunities The organization enjoys several opportunities for instance (Hofmann, 2007, p. 54): There are cost reduction opportunities under the distribution and manufacturing sectors The firm currently operates with the capacity utilization of 65-70%. There are opportunities to increase sales margin that is likely to improve general profitability Low production costs that provide chances to increase market penetration through price sensitive products Likewise, each division offers specific opportunities as summarized below (Prof Richard Pike, 2002, p. 321): Divisions Summarised opportunities Food service Division Generates 41% of total sales and 46% EBITDA. It Is considered to be the cornerstone of the Rustica Industry Supply variety of quality products like food preparation cabinets, wire shelving, storage system and dish dollies. The network has 95 independent manufacturer’s representatives Enjoys a huge end user base of 70% commercial and 30% non-commercial. Has over 2000 shares in the domestic markets. The restaurants are frequently refurbished and remodeled to improve sales and positioning. There are new products launched in the market to increase sales of the company. Healthcare division Generates 17% of total sales and 18% of the EBITDA Have specialty products besides core products. Enjoys a customer base of at least 3,000 healthcare centers. Produces specific products to meet specific healthcare needs Maximising efficiency of healthcare operations and staff. The management believe this division can caplitalise in increased efficiency, strategic alliances and increased market penetration. Reduced operational costs Commercial Products Division Generates 26% of total sales and 39% of EBITDA. Serves the domestic industries with exceptional to healthcare and foodservice industries including: industrial materials, Supermarkets, Electronics, Security storage and work benches Fast growing because of new products and market development efforts. Increased revenue contribution from supermarkets and electronic markets. Revenue growth is anticipated to continue due to enhanced productivity. Consumer Product Division Generates 3% of the total company sales. The firm refocuses on new product development. Reduced manufacturing costs Increased outsourcing to penetration and profitability. International Division Contributes 13% of the total sales and 9% of the total EBITDA. Expansion of the market including Asia, Western Europe and Canada. Increased market penetration. Increase the number of international distributors. b. Yellowstone Cattle Bank The common provides payment processing services to mid banks. The firm’s market base have grown to at least 40,500. The company is viewed to have numerous investment opportunities namely (Haim Levy, 2004, p. 485): It is an emerging fast growing markets There are profit improvement opportunities There is has been a strong management team since started Products are low priced with insignificant interests charged The company is considered to be fast growing in the industry; this can be seen in its operating income over years as well as financial overview as shown below: Year Operating Income 1997 $ 0 1998 $ 2,000 1999 $ 4,000 2000 $ 6,000 2001 $ 8,000 2002 $ 10,000 2003 $ 12,000 Overview of the company cost-savings Opportunities: The current switch services and backend services will cut operational costs There are plans to integrate backend services c. Wildflower Inc. The company’s corporate image has been stable for a long time within the mature industry. There is a positive relationship between paint store channels and growing mass merchant (Wildflower Landscape, 2005, p. 34). Secondly, the company enjoys a strong growth in the consumer segments. Third, the company has a strong cash flow incurring minimal capital expenses. There are new acquisitions opportunities in the industry as well as expansion in the international opportunities (Hofmann, 2007, p. 74). The firm enjoys an experienced team of management. Due to the maturity of the industry, the company is not affected by economic downfalls while the demands are expected to escalate as buildings age. Sales of the company are expected to grow between 25% and 30% per annum resulting from the growing consumer segments. The company employees a pull through strategy to attract professionals. The major opportunities and strengths enjoyed by the company are (Felda Hardymon, 2002, p. 14): Professionals do not consider price as a determinant factor while buying high quality goods Professionals usually pay more on quality products because of long useful life, improve ease of application, better paint finish and reduced job time. The company focuses to increase its mass market segments through opening new stores and increasing the sales growth to 3-5% per annum. Improved brand recognition through innovative products for consumer segments and leverage brand (this would increase sales by to 50% from the current 27%). Improve the The company control a 21.4% market share with a total sales of US$ 192 million. Wildflower Inc. had the following EBITDA and Net Revenue as shown below (in millions): YEAR EBITDA Net Revenue 2002 $5.00 $40.0 2003 $10.0 $50.0 2004 $15.0 $60.0 2005 $20.0 $70.0 2006 $25.0 $80.0 2007 $30.0 $90.0 After considering all the above analysis of the three companies, Smith should choose Rustica as the potential investment opportunity. It is a young and diversified which has a lot of potential in future growth. Secondly, Wildflower Inc. operates in a mature industry which is not likely to expand in the future. By investing in Rustica Industries, Newport Company will enjoy the following advantages (Pogue, 2010, p. 93): i. 65% of market share ii. The management team have vast experience to solve the common ‘resource problem’. iii. The buyout price is 145 million dollars iv. Enjoy 25% sales of long term products (5 years) v. The company has a success in paying its debts vi. There Is an opportunities in the manufacture of plastics and wires at a lower costs vii. Possibility of winning back the company’s reputation viii. There is an opportunity to access loans from bank due to good relationship. ix. Diversity of the company x. Potentiality in developing new products xi. There is increased gross profit and net sales xii. There is share increase in the industry xiii. There is an opportunity to reduce the operational costs xiv. The company enjoys huge profits from food products xv. The profit earned from the healthcare division increases annually xvi. There is a possibility to produce special products xvii. Opportunities for efficiency maximization xviii. The commercial division is expanding at a fastest rate xix. There is probability of international market interests Some of the disadvantages that are likely to rise concern are: a) The company is currently faced with a debt of $100 million which Newport will inherit upon buyout b) There company can make limited products considering the nature of the industry hence if more stocks are made the turn over rates shall be low c) There is no competition in the plastic and wire industries, this might hinder full market exploitation d) There is a problem on how to generate funds for expansion e) No barriers for market entry f) There is much focus on the market instead of operations and resource allocation g) Consumer products consumes a lot of resources to manufacture h) Marketing and distribution of international products have proved to be difficult References List Felda Hardymon, J. L. A. K. L., 2002. Martin Smith : Case study. Boston,MA: Havard Business School Publishing. Gaylon E. Greer, P. T. K., 2003. Investment Analysis for Real Estate Decisions. Washington: Dearborn Real Estate. Gerry Johnson, R. W., 2011. Exploring Strategy Text & Cases Plus MyStrategyLab and The Strategy Experience Simulation. 9 edition ed. New York: Financial Times/ Prentice Hall. Haim Levy, M. S., 2004. Capital Investment and Financial Decisions. ISBN 0131158821 ed. New Jersey: Prentice Hall. Hofmann, K. P., 2007. Psychology of Decision Making in Economics, Business and Finance. London ,UK: Nova Publishers. Pogue, M., 2010. Corporate Investment Decisions: Principles and Practice. New Jersey: Wiley Publishers. Prof Richard Pike, M. B. N., 2002. Corporate Finance and Investment: Decisions and Strategies. 4 edition ed. s.l.:Financial Times/ Prentice Hall. Travnichek, R. J., 2009. Nudge: Improving Decisions About Health, Wealth,. Journal of Financial Counseling and Planning , Volume 22, (Issue 1 ). Wildflower Landscape, I., 2005. annual report 2005. New York: s.n. Read More