Deluxe Corporation

Case Details

Case #: #31

Case Title: Deluxe Corporation

Case Topic(s): Debt Financing, Bond Ratings & Optimal Capital Structure

Objectives

1. Survey the determinants of corporate bond ratings, including profitability and coverage ratios, as well as capitalization ratios as a measure of credit quality.

2. Explore the practical challenges involved in determining the optimal mix of debt and equity. In particular, the case requires assessment of the trade-offs between the benefits of the debt tax-shield and the costs of financial distress.

3. Consider the concepts of debt capacity and financial flexibility. (In this case, we consider “flexibility” as the ability to access capital without falling below the company’s target bond credit rating.)

Questions / Problems / Issues and an Outline (Suggested, but not required.)

1. What is the nature of Deluxe Corporation’s (Deluxe) business? Describe the firm’s strategy and the risks the firm faces as a result of its strategy.

The nature of the Deluxe Corporation’s business is paper check printing.

In the late 1990’s, the firm’s strategy was to reduce expenses. They did this by divesting 20 non-core businesses, closing 49 plants, reducing its labor force by 8,000 employees, outsource IT and focus on improving manufacturing efficiencies.

Currently (2000’s), the Deluxe Corporation (DC) strategy has been to spin-off technology related subsidiaries. They spun-off eFunds and iDLX Technology Partners thru an initial public offering (IPO). Management believe there was more value in these companies are separate entities, and that these companies did not have valuable synergies.

The current strategy is very risky. iDLX Technology Partners offered technology related consulting services to financial service companies while eFunds offered electronic payment products and services. The CEO admits that the paper check business is dying, but spun-off a company that seems to be replacing it in eFunds. People...