Harvard Business Case: Four Deals

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...