Three Options Available for Investment to Westport Company - Case Study Example

Student Name: Tutor: Title: Martin Smith Case Study Course: Martin Smith Case Study Table of contents Executive summary 2 Introduction 3 Recommended company 3 Choices evaluation 4 Key learning points 8 References 10 Executive summary This report is a summary of a presentation of three options available for investment to Westport Company. Rustica Industries, Wildflower Inc. and Yellowstone Cattle Bank are all priced differently and have differing prospects of growth upon acquisition. The report commences with a brief introduction of the case and the challenge posed to Smith Martin. The following section elaborates the choice of Wildflower Inc. and the analysis followed prior to this choice. The report concludes with key learning points from this case study. Introduction Smith Martin has a tough duty of determining investing choices for Westport partnership. The three companies in the case present challenging prospects of investment. Rustica Industries is priced highly at $145 Million considering capital valuation and international involvement. Yellowstone Cattle Bank is placed in fast-growing industry but increased competition but prospect of growth. Wildflower Inc. has a strong brand name with high prospect of growth in a fragmented market. This report presents the recommended choice of company and individual analysis of the other options. Recommended company It is important to consider the cost of acquisition in the buyout, the stability of management, and prospects of growth before making any decision on which company to choose. All the three choices show strengths as well as weaknesses but further scrutiny reveals the underlying threats as well as opportunities for growth with regard to the trend in the buyout industry. Rustica Industries has a lofty history with the best experienced management team at its helm. Yellowstone Cattle Bank (YCB) was in a fast growing market with prospects of growth while Wildflower Inc. showed a strong brand identity. Considering the trends in the industry and the current positions of the companies, Wildflower Inc. presents the best choice that Mr. Smith has to recommend to Westport partners. It clearly stated that at an increasing rate buyout funds were moving further away from mega-buyouts that had been common in the industry and instead pursuing niche strategies. Changing strategies comprised of investing in small-company segment that is less-efficient, establishing a specialty focus, coming up with operating expertise to assist the companies upon acquisition, and later diversification geographically into broader areas of private equity like mezzanine financing and venture capital (Baker & English, 2011). Considering this trend in the buyout industry, Wildflower Inc. offers Westport with the best chance. Rustica Industries it is a typical mega-buyout that will require a colossal amount to finance. It will force Westport to get further into debt financing. Regardless of Rustica Industries having an experienced management team there is no guarantee that the changes in its industry will change the fortunes of the company. Despite YCB being in the fastest growing industry, few attributes makes it attractive for a buyout. Rustica Industries is prices at $145 Million, YCB at $75 million and Wildflower Inc. at $88 million. Although YCB is the lowest priced company among the three, Wildflower Inc. presents higher prospects of growth in the fragmented market. There is already a deal to buy a small manufacturer at $4 million. The individual analysis of all the three options is required in order to understand why Wildflower Inc. is the best option. Choices evaluation Rustica Industries Despite its numerous strengths, the choice of Rustica Industries will present many challenges to Westport and the partners have to consider the long-term effect on the stability of their company. Its valuation presents a company that is highly priced and with a stable management team. The purchase price of Rustica Industries is estimated to be around $145 million and has to be facilitated by $100 million worth of debt as well as subordinated debt. Since the company has been such stable in performance over time, Beech sees no problem in acquiring the company through debt financing. Smith is right to worry about the low capacity utilization of the firm and its apparent saturation of the market. This presents a problem to diversification and growth after acquisition. Smith also ponders on the challenge of financing since it is huge sum of money that is involved in case of Rustica buyout. Westport has to spend a colossal amount of money if it has to facilitate Rustica Industries buyout. Rustica Industries has a 65% share of the United States industrial sales which is six times larger as compared to its closest competitor. The company is secure as a market leader in its industry (Ryan, 2007). The company possesses the capacity of creating new products to meet the needs of the target customer base as well as identify new market for the existing products. Moreover the company has established a reputation for quality and wide variety of products. The company has an extensive distribution channels as well as broad range of business segments. In reality Rustica Industries is a market leader and financing its buyout will require huge sum money that will render Westport into further debt obligations. The acquisition rationale places Rustica Industries on the upper side. The company is an industry leader and has attained superior rates of revenue growth. This translates to increased share in the current markets and development of new markets and products. The company has the advantage of diverse of revenue hence diversification of risk in case of a financial depression. The acquisition criterion also reveals that the company has opportunities for profit improvement. The company presents one of the strong management teams among the three options. The management has managed the business successfully and independently from the owners. There are chances of penetration into significant new markets as well as high-growth product areas. Net sales have increases steadily over a three-year-period from 1999, growth has been commendable and gross profit has increased over the time. Rustica industries established itself as having the best and strong management team that has been there for a long time. However, Rustica Industries will need more money for a leverage buyout and there are no clear prospects of its current run being sustainable. The company represents a mega-buyout which is not in line with the current trend in the buyout industry (Mard, Hitchner & Hyden, 2010). In terms of prospect of growth, Wildflower Inc. and YCB represent better options. Rustica Industries Company seems unattractive considering its apparent saturation of the market as well as low capacity saturation. It is not a guarantee that Westport will recover its buyout price of the company and inspire further growth. Yellowstone Cattle Bank Yellowstone Cattle Bank (YCB) is credited as an emerging leader in a market that is fast growing. YCB has opportunities for improving its profit and boast of having a strong management team since its inception. Minority interest that are attractively priced are available at the company. YCB has come out as a fastest growing operation in its interest. The growth of the company has been inconstant but net income has increased steadily over a four-year period since 1998. The total merchants have also increased over the four-year-period from 1998-2001. The market continues to show signs of rapid growth and YCB is projected to grow with it. Yellowstone Cattle Bank is reputed to have a fast-growing market with prospects of profit improvement. YCB has several cost saving opportunities that make it attractive. The company currently outsources switch services and backed services. The company has plans to integrate backed services and build switch services by 2002 and 2003 respectively. This company has work to do in building its own backed and switch services and this cost more money. Prospects of diversification are minimal despite merchant growth. The company has already shown inconsistency in growth when its growth rate dropped from 87.3% in 2000 to 46% in 2001. The company is obviously on a downward trend. Wildflower Inc. Wildflower Inc. shows a stable premier brand in an industry that is mature. The company has also the advantage of having stable relationships in both the growing mass merchants as well as specialty paint store channels. Wildflower Inc. shows a strong growth potential in the consumer segment dubbed ‘do-it-yourself’. The acquisition rationale further reveals that Wildflower Inc. has strong opportunities of expansion internationally. The fragmented market presented in the industry has many acquisition opportunities that can be used to grow the company. The rationale further shows that Wildflower Inc. has a strong cash flow that has minimal capital requirements hence will not force Westport to sink deeper into debt financing. The management team at the company is experienced and can be trusted to handle the affairs of the company. This is versatile industry and mass merchants are expanding sales. It is advantageous that Wildflower Inc. shows a strong brand identity hence it can gain market share without the threat of being swallowed by other market players. The company has its weaknesses that can be dealt with over time. There is the threat of increased competition but the company has an opportunity through acquisition of the fragmented market. The company has an elaborate business strategy that outlines future stability and prospects of growth (Hitchner, 2011). The company anticipates expansion in the mass merchant segment as well as improved brand recognition with the consumer customers. The company plans leverage brand in order to increase roller sales to 50% of sales from the current 27%. The company further target improvement of the manufacturing productivity. As stated earlier, Wildflower presents the best opportunity for Westport among the three choices. It cannot be considered as a mega-buyout but has prospects of growth in the segmented market through further acquisition. Key learning points This has been a learning opportunity for me about the buyout industry in America and things to consider in case of a buyout. The long term prospects of growth presents a better chance for acquisition as opposed to the current stability in a saturated market. On face value, Rustica Industries would appear as the best option to go for regarding its market share, experienced management team and valuation assets. Nevertheless, the price quoted for its buyout is prohibiting for Westport that will faced to get into more debt financing. Different views were expressed by group members and I learnt a lot about capital valuation and financing. I came to learn that a fast growing industry does not necessarily translate to good fortunes to all individual companies within the industry. The case of YCB being in a fast-growing industry did not mean the same prospects for the company. The American leverage buyout industry was moving away from mega-buyouts and considering niche markets. This trend put Wildflower Inc. in a better position for a buyout considering its fragmented market and prospect of growth through acquisition. It was challenging to decipher the underlying weaknesses in the three options available since the strengths seemed obvious. The analysis of the three options gave me a clear glimpse into the leverage buyout industries. All the three companies presented wonderful prospects of potential buyouts but we had only to settle on one choice. I have realized a strong brand is important to a company in new market penetration. Wildflower Inc. presents prospects of growth considering its strong brand and the fragmented market. A background in finance and economics is important when someone is considering a career in the buyout industry. Beech and Smith presents two people who have different backgrounds and viewpoints but they are able to work together in the same industry. From this case I have further learn that diversity is not disunity. Close scrutiny of investment option is needed before anyone seeks money to finance the deal. Through the group I gained interpersonal skills that will help me interact easily with other people in my future career. I learnt to appreciate other people’s opinion and listen to divergent views through the group discussions. I had to reschedule my programme to accommodate times for group meetings. I improved my time management skills. The Martin Smith case study gave me an opportunity of seeing in reality what we had learnt theoretical in class. I gathered a lot of information on how to scrutinize a deal and determine the one with high prospects of growth. The task of picking up a company that is less-efficient but has prospects of growth was very challenging but were able to settle on Wildflower Inc. this case was an eye-opener and a learning experience for me. I treasured every moment that I dedicated in the group meetings since I had a lot to learn from the case and the other group members. This case was a wonderful learning experience and I look forward to working in groups again. References Baker, K.H., & English, P., 2011, Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects, John Wiley & Sons, London. Hitchner, J.R. (2011). Financial Valuation: Applications and Models, John Wiley & Sons, London. Mard M.J., Hitchner, J.R., & Hyden, S.D., 2010, Valuation for Financial Reporting: Fair Value, Business Combinations, Intangible Assets, Goodwill and Impairment Analysis, John Wiley & Sons. Ryan, B., 2007, Corporate Finance and Valuation, Cengage Learning EMEA, London. Read More