Business Strategies of OMNI Services - Case Study Example

Case Study, Finance and Accounting OMNI Services Case Omni Services Inc Introduction Omni Services Inc is a company under the business of custom fabrication of plastic and polymers for the last 30 years. The company laundry business is multidivisional owning firms that manufacture, rent, and launder garments. The company was started as a small business by Martin. The company was received positively by its customers hence it grew spontaneously. Omni became a leading supplier of uniforms to more than 75000 people. The company manufactured and sold heavy duty, soil-resistant uniforms for service-station employees, route drivers and salespersons. Its businesses operated in many locations that comprised the larger percentage of its revenue. The main headquarter was placed at Kansas City. Other services included the provision of laundry and rental services, linen-supply services, and dust-control services. The company also provided executive garments for office and management personnel, shop towels, store floor mats, fender covers and linen role towels. Eleven of its twelve subsidiaries were located on the fringes of metropolitan areas. Their largest operation was first established in Culpeper, Virginia. It served the entire Washington D.C. area as well as other less populated areas surrounding D.C. the company enjoyed labor from employees who were more dependable due to their urban location. Strategic and financial value of OMNI deal The OMNI deal uses a market capitalization weighted approach to carry out investments in broad and diverse group of small-cap stocks. The company benefited most due to its relationship with its customers. Its brands remained on top due to strategic value creation in business. The company always delivered relevant brands on time. Consumers have more control to dictate how and when they want to interact with their money. One of its strategic and financial values is governance and organization. The insights into the economics of a company organization can be of great value (Pablo 2002). Due to the company understanding of the above it was able to provide an analysis for decisions on its organization. The company was able to carry out major decisions such as which markets to venture into and how to venture into those markets. The owners were able to understand how different structures of ownership or organization affect and influence both finance and governance. The other strategic and finance value is the corporate and managerial strategy (Pablo 2002). Per se, it taught the management the theoretical and practical approaches top strategic management. It guides on perspectives on leadership approaches or managerial processes that ensure optimal strategic action. The company was able to discover that the complexity and paradoxes of strategy formulation required more than raw financial data. Strategic and financial values call for learning to incorporate knowledge in all corners of the company. The deal for Leducq and Martin had several advantages and disadvantages. Per se, Textiles had a wide market for its services. It supplied linens to hotels, hospitals, and restaurants which was a very competitive, low profit business. Consequently, the company considered starting the uniform business and adopts the Omni business model. Omni, on the other hand, wanted to start the towel business but had little knowledge on the business. Martin wanted Leducq to purchase Omni shares. Leducq would benefit from the ownership of Omni business as one of the advantages. Omni, on the other hand, would also benefit from more capital by the purchase of shares by Leducq. The disadvantage of the deal is that both companies wanted to maintain their profits and take advantage of each other to market their own personal products. The deal was aimed at reducing competition but it ended up destroying the companies’ mutual relationship. Consequently, Textiles purchased 66% of Omni shares. The decision on which method is best to use is not valid because all the methods are not suited for all situations. Each stock is different from the other and above all industries differ under their unique properties. Omni stocks are best valued using the DCF method. Comparables does not suit the analysis because it ether looks at the market comparison for Omni and its competitors which will give a false fair value. Multiple valuations are also not suitable because it focuses on the use of EBITDA to yield an enterprise value. It will cause problems to Omni stock valuation due to the difficulty in finding comparables and timely comparison. The DCF method is the appropriate method for the Omni stocks. The valuation method will evaluate the attractiveness of Omni stocks as an investment opportunity. The method will employ Omni future free cash flow projections and discounts those cash flows (Pablo 2002). It uses the weighted average cost of capital valuation strategy to arrive at the present value. The present value is used to evaluate the potential for future investment. If cases where the value arrived through the DCF analysis are higher than the current cost of the investment, the opportunity may be a good one to grasp (Pablo 2002). However, there is a complexity in the calculations involved in the discounted cash flow model. Its prime purpose is to establish the money Leducq will receive from the investment and to adjust for the time value of money. Discounted cash flow models are powerful in delivering reliable results. The three methods present different advantages and disadvantages to Omni stock valuation analysis. Disadvantages Multiple method disadvantage Omni stock valuation because of its simplistic nature. A multiple distills a great deal of information into a single number or series of numbers hence will not give the true value (Pablo 2002). Comparable method will be at a disadvantage to Omni stock valuation due to the inexact match of comparison. Finding a decent sample for comparison will be very challenging hence, the method will give false comparison figures distorting the real value of Omni. DCF will disadvantage Omni stock valuation due to the sensitivity to modeling assumptions (Pablo 2002). Advantages Multiple methods will be at an advantage to Omni in that its valuation is about judgment. Multiple provides a framework for making value judgment (Pablo 2002). Comparable method will be at an advantage to Omni because the value obtained tend to be most reliable as an indicator of value of the company in cases where non-controlling investment scenario is being considered (Pablo 2002). The discounted cash flow method will present several advantages. One advantage is that it is a confident method in the projections and assumptions since it values individual cash streams directly. The method is not heavily influenced by temporary market indicators or non-economic factors (Pablo 2002). Conclusion The current price of the deal stands at $ 6,450,000. The objective of Leducq was to limit his obligation and the amount of securities required by the French government. He aimed at maximizing 1985 price establishments. Martin, on the other hand, wanted a floor price set below which the 1985 price would not drop. Per se, the current value of the stock is valid for purchase. Calculations The formula for discounted cash flow analysis is: DCF = CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 ...+ CFn/(1+r)n Where: CF1 = cash flow in period 1 CF2 = cash flow in period 2 CF3 = cash flow in period 3 CFn = cash flow in period n r = discount rate (also referred to as the required rate of return) Weighted average figure = E × re + D × (1 − t) × rd + P × rp (E+D+P) (E+D+P) (E+D+P) Where: E = Market value of equity D = Market value of debt P = Market value of preferred stock re = Cost of equity rd = Cost of debt rp = Cost of preferred stock t = Marginal tax rate References Pablo Fernandez, 2002. Valuation Methods and Shareholder Value Creation. 1 Edition. Academic Press.   Read More