Submitted by: Submitted by trippe
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Category: Business and Industry
Date Submitted: 11/08/2010 09:03 AM
Harvard Business Case
Four Deals
Redmay Tack Sellers
• Pros:
o This LBO would not need very much capital equity, because it is supplied by a small group of investors
o The selling stockholders are generally paid a premium above market price in an LBO
o The extra debt provides a tax deduction, thus increasing company value
o Increased efficiency as a result of managers becoming owners
o Redmay’s positive cash flows can be used to lower the risk of taking on more debt
• Cons:
o High risk because of the high amount of debt
• Decision:
o We think that Molly should go forward with the LBO. This will allow her to finance her new show barn business. Also, Redmay is a good candidate for this type of acquisition.
Argent Audio
• Pros:
o Argent has a successful niche market and is well known in the areas they serve
o The troubles of late 2004 seemed to be a problem in management and communication that can be addressed, as opposed to losing market share, or increased competition which is more of a fundamental problem.
o Financed growth through favorable lease terms
o Generous trade credit from suppliers
• Cons:
o There is no central warehouse or companywide inventory management system.
o Ballooning inventory accounts with a small amount of cash at the moment.
o There is a communication gap between the upper management and the store owners.
• Decision:
o We recommend potential buyers to consider the high amount of debt that would need to be supported, and would have to deal with a new management team. They would have to fix the problems of inventory and communication. Furthermore, Argent is not a good candidate for an LBO and should be purchased largely with cash/capital.
The Quixote and the Santa Rosa Plant
• Pros:
o Opening a new plant could increase capacity utilization across the two plants.
o There could also be a sharing of equipment, manpower, and know how between the two plants.
o Combination of administrative expenses/resources to...