Finance and Accounting - Mergers and Acquisitions - Essay Example

Finance and accounting Buffalo Wild Wings (BWLD) BWLD is a sports bar and casual dining restaurant franchise that was founded by James Disbrow in 1982 and operates in Canada and the United States. It currently has more than 700 franchises that offer dining services, feature poker and NTN Buzz time interactive trivia to its millions of clients. BWLD first went public on 1st January 2003 when, through an IPO, they offered 3 million shares at a price of $17 and a remarkable $50.02 was raised. Main underwriters SG Cowen Securities, Auto-Owners Insurance and RBC capital markets (Vachon & Heyborne, 2007). Its current CEO Sally Smith oversees great opportunities for the company to diversify and take advantage of the dynamic business environment. Letter to shareholders The CEO Sally Smith, a mother of two, is a graduate of the University of North Dakota and holds BSc in Accounting and business administration. She held the position of chief financial officer at Dahlberg Inc. for 11 years before she was hired by BWLD in 1994 as a CFO and promoted to CEO in 1996. The strategies that Buffalo Wild Wings put forward in 2013 accomplished its goals to remain a high-growth, category-leading concept. It has significantly funded new strategic plans, invests in growth and imperatively distributed its earnings to shareholders. Its gross margin over the period 2013 was 27.0% and the operating margin was 9.6%, percentages that are above industry average. The company’s net margin stood at 6.5%. The company is fuelling its growth by increasing demand for its products and services. BWLD’s gross margin is inching upward implying that the company is continuously beating competitors and acquiring domination in the restaurant industry. The company continues expanding through mergers and acquisitions and the dividends and its payout ratio upsurge. The risks and uncertainties involved in investing in the company are highlighted to caution investors against potential market failures and impending indecisions. The stock price increased by 52% and the company provided substantial value to its shareholders with a EPS $3.80, DEPS of $3.79. Revenue increased and was used to offer a salary increment to its directors. Apparently, its impressive stock performance acted as a momentous factor that fascinated investors. Mergers and acquisitions The 10k annual report reveals that the latest earnings that enable it to actively acquire a chain of restaurants that are small to reduce the acquisition cost. The buffalo wild wing company is in a position and determined to expand its base to targeted North American. This started as a result of diversification of the restaurant brand. The driving force behind the acquisition is the anticipated growth and the additional international franchising. The most known small restaurants that buffalo wild wing acquired include COSI. The restaurant had struggled into existence but due to its low market cap of roughly 48 dollars and a market share of less than a dollar. The restaurant is strategically positioned which provides Buffalo wild wing new market in the large market in the city. The restaurant provides a great opportunity for the buffalo executives to focus on expanding sales stores and utilizing franchise connections. The second restaurant to be acquired is famous Dave’s that operated to nearly 35 states. It is situated at buffalo wild wings headquarters. The company has a market cap of $75 and was therefore acquired with cash at hand and some other shares of Buffalo wild wings. The third acquired restaurant was Denny’s which was offered to give a good opportunity for the company. This enabled buffalo wild wings to focus on large crowd and the dinner too. The company offered a chance for buffalo wild wings to control a leading breakfast in United States. Over 1500 locations is what the company has in approximately eight countries hence the expansion and growth of the company. This too led to generation of profits that catered for the payment of dividends to shareholders and growth of the company. Buffalo wild wings made a win-win situation that immensely helped the company to increase the number of store sales while Denny’s restaurant company provided franchise connections too for its international growth. Bankruptcy For the stocks, probability by the Z-score for fund the score indicates the chances of a company to be in a financial risk as result of using the use of the debt. The Buffalo wild wings according to the online investment calculator reveal that probability of financial distress of the company being 1.26%. Companies with probability which is above 90 per cent have a good chance of entering to bankruptcy for subsequent years. This probability is 96.71 per cent lower than other sectors like service and is 95.98 per cent less than other restaurant industries. Its stock is 96.81 per cent higher than company itself. The SAP’s annual revenue approaches $1.2 billion which increased by 37 per cent. This resulted in increase in non IFRS operating currencies that are constant. A solid performance was the result of 51 per cent growth in non IFRS subscriptions revenue with constant currencies. His has lowered the financial risks associated with borrowing debts. A reduction in financial risk due to borrowing the debt led to an increase in retained earnings leading to an increase in earnings before interest and tax. This enables the shareholders to have a large share of dividends. Operations In December 2013, buffalo wild wings company was in a position to operate to a maximum of 434 company owned franchise which was an additional to restaurants found in North America with an international restaurant. Buffalo grew as a result of its brand to diversify in about 1700 locations that are geographically spread in North America. The operation led to grow at a rate of 20%. The growth and success of this was due to focus on trends in the company and even franchised store sales that are a clear indicator of continuous acceptance by the loyal prospect customers. The normal daily sales is too an indicator of buffalo wild wings company ability to increase its sales volumes across the region hence high generation of cash flows from the operations. It has a guest experience and a high quality operation throughout the North America. The operations that generate the income are from: sales by the company of restaurants which generates to a maximum of 94 per cent of the total revenue. Other sources of income by the company include food and a non-alcoholic beverage which contributes to about 78 per cent of restaurant sales, alcoholic beverages too contributes to about 21%. The menu highlights that the selling items are traditional ones followed by the boneless wings each with sales more than 21% of the total restaurant sales. The other key factor to the success of the company is the availability of international locations. Although there are some risks in the operation in the new markets due to either lack of experience, logical support or awareness of the brand, the company has focused opening procedures that sees this through. The factors should be taken in with cautions as they may lead to low cash flows, high operating costs. The company with its unwavering strategies was in a position to make profits by price increasing, reduction in food wastage. The long lived assets owned by the company was determined quarterly based on the estimated events to determine assets that were not recovered based on future cash flows. Assets generated the lowest cash flow level which is individual level. The company owns a goodwill which carries amount exceeds the reporting amount which indicates that there is no impairment in the company. Valuation of model part 1 assumptions made Investors have relevant information needed concerning the firm, capital markets do exist efficiently, a rational behavior by the investors, no taxes and floatation costs and the investment decisions by the investors are taken firmly and profits are certainly known. Other assumptions include that retained earnings are the only source of investments in the firm, no external financial requirement, constant cost of capital and rate of the return on investment and the operating life of the firm is endless. The cost of capital is greater than the growth rate which is constant. The growth rate is determined by the rate of return and growth rate. Valuation model part- 2 Analyst assessment a. The increase in the percentage debt increases the value of the firm. From Modegliani miller a levered firm will have a high value as compared to a non-levered firm although the financial risks also increase with an increase in debt. b. The higher the rate of WACC, the higher the cost of borrowing a debt or acquiring finance whiles the lower the WACC, the cheaper it is to finance the firm with funds. c. Firms are advised to have an internal finance generation to finance the acquisitions and mergers to reduce the financial risks that may be encountered. At some point, the value of a levered firm and that of unlevered firm depends on the financial risks associated to them. b. Mergent online Assessment- the mergent analysts take the financial statements and balance sheets and look at the financial ratios to assess the firm. The company’s financial ratios are categorized into liquidity ratios, gearing ratios, turnovers and return on investment ratios. The figures are computed and the results cross checked against other industries in the same level. The recommendations are made thereafter whether the company or the firm is good for investment or not. If it is good firm, a green light is given for investment while if it is not then one is not advised to invest. c. The guru says buffalo wild wing is one of the fast growing companies that need large volume of cash flows to fund the growth. The company therefore, needs to retain and invest all its cash flows and earnings for future growth. This will only make sense when it does not pay current dividends. Strong revenue generation, capital investments are required too to fund the future growth of the company. The company does not need to pay all its retained earnings to realize the growth. Its only logical for the company to pay the shareholders if it has a large market share and the firm is growing fast. Otherwise this may lead to a reduction in return on assets and reduction in return on capital employed. Conclusion From the above analysis, the buffalo wild wing firm is feasible for investment purpose. The company makes adequate profits from its operations that enables it to pay out for workers, to pay the dividends to shareholders and enables the firm to grow. The company has low financial risks like 1.26% which means that it is not vulnerable to bankruptcy. The firm is large enough to make mergers and acquisitions. This is due to the stability of the firm, the large market cap, large market shares and large capital makes it to acquire other small restaurant firms. This because of low acquisition cost incurred. With such financial healthy aspects grantees for investment as there exists low managerial and financial risks. References Vachon, D., & Heyborne, K. (2007). Mergers & acquisitions (2nd ed.). New York: Penguin Audio. Read More