Investment finance

DIY or IPO case instructions

This is an exercise for which you will need, at minimum, basic Excel and MS Word skills. Cases are complex, challenging, and realistic. They are the closest you will get to being in an actual business decision-making role until you are employed in one. They are an excuse for exploring problems and asking questions. The most important aspects of a case may be hidden. Assume nothing, verify everything, question the answers and answer the questions.

Effective decision-making and communication are the cornerstones of a successful career in business. In finance, effective decision making and communication are demonstrated by: the accurate assessment of a business scenario; the identification of the relevant information and necessary decision points; the selection of the appropriate tools with which to guide decision-making; the utilization of those tools effectively; the evaluation of alternative courses of action; and the recommendation of an actionable decision that is clearly and concisely supported by the data and analytics.

Your write-up should be composed and submitted in Excel and should include:

1. A concise 1-paragraph executive summary that identifies the problem, its importance, alternative solutions and recommendations while avoiding unnecessary summarization of material from the business scenario. It should not be a summary of what you have read about the case.

2. An organize analysis that is presented clearly and concisely

3. It should effectively present the data necessary to perform the analysis

4. It should evaluate alternative courses of action

5. Finally, we are a field that aids in decision-making. You should recommend an actionable decision that has strong factual support within the context of the case and does not reflect solely or primarily an opinion.

The write-up in all case submissions should be written as if you are employed in the role of consultant to, or subordinate of, a senior financial manager. The case write-ups are to be no more than four (4) written pages including the executive summary and no more than 6 pages of accompanying exhibits (appendices). The document submitted for grading should be a single file in MS Word with any and all necessary exhibits, appendices, etc incorporated into the Word document at the end of the write-up not provided as additional individual files. Supporting calculations should be provided in a separate MS Excel spreadsheet file with clear labeling and documentation in that file including the separation of differing calculations into different labeled worksheets within the file. Any and all materials submitted should be of professional quality which means, among other things, you should not insert picture format files (jpg, bmp, etc) of items that are more appropriately created in a spreadsheet or word-processing program.

Professional, written documents will contain correct American English grammar, word choice and spelling, and make coherent and persuasive arguments. Learning to write clearly, concisely and informatively is an exceptionally valuable skill that you should undertake to master as soon as possible. I will not be mandating margins, typesize, indentation, etc. You should turn in a professional product. You wouldn’t turn in a report to your boss with ¼ inch margins, ¾ line spacing and 8 pt type, don’t turn one in to me. Generally, professional written reports will have at least 1 inch margins, use 12 or 10 pt type and use 1.5 line spacing or double spacing. They will be capable of being printed clearly on standard size 8 ½ x 11 inch paper.

It is a central goal of this class that the individual case write-ups should be well-developed writing samples that you can then provide to prospective employers upon request. It has become extremely commonplace for finance employers to request a writing sample and this is your opportunity to generate several such samples.

NEXT PAGE FOLLOWSS THE CASE STUDY

DIY or IPO

It was time to stop. Sarah Newell had taken the company her family built and placed it on a firm financial footing though it hadn’t been easy. Newell Manufacturing & Design had started out as a smallfamily firm selling DIY tools and materials at trade shows and through its mail order catalog. However, as the face of retail had changed, Newell M&D had failed to keep pace and Sarah had spent the better part of her life getting the firm back on track. Now, with a stable growth forecast for the catalog side of the business and a manufacturing operation that created DIY kits, tools, and instructional materials for sale through the catalog and to other DIY retailers, Sarah was ready to move on to the next challenge.

An opportunity to exit the family business had recently developed. Sarah had been approached by Esteban Armijo, a California entrepreneur, whose private equity fund specialized in buying up groups of small companies and combining them into one larger company ripe for a public offering. Esteban wanted to know if Sarah was willing and interested in selling the company or either of its divisions. At a recent charity fundraiser, Esteban spoke to Sarah by the hors d’oeuvres and said, “Sarah, aren’t you ready for the next big challenge? You’ve turned a tiny, unsuccessful family business into a multi-million dollar player in the DIY industry. Why don’t you let me buy the firm? I’ll combine it with some of my other firms and take the conglomerate public. Tell you what, I’ll drop by on Mon and we can grab lunch at that great lobster roll food truck outside your office and talk about it. Have a price in mind and I’ll have my checkbook.” Sarah knew she was ready for a change and that the recent success and steady growth of the company meant it was probably time to sell but she needed to figure out what the firm was worth. In addition, she had personally started the manufacturing division and was convinced it could be even more than just half of a small DIY mail order firm. Should she sell the whole firm as one piece or break it up and sell each division? Should she keep the manufacturing division? She knew Armijo was mostly interested in the catalog business for its mailing list. His current project needed a mail-order front-end to fit the model of a successful DIY IPO. How much would he be willing to pay to get this last piece? Since his interest was in taking the resulting conglomerate public, he would be valuing the mail order business as the crown jewel of an almost imminent public offering. Sarah wanted to get as much as she could for the whole firm or its divisions but she also didn’t want to make Armijo walk. For the right price, she knew Armijo would write a check that day. For the wrong price, Sarah was back to square one looking for another suitor. Sarah was also confident that recent investments in ajust-in-time system for both businesses and the new facility for the manufacturing firm meant no new investments in working capital or property, plant and equipment. After years of investing in the firm, it was nice to know she wouldn’t need to invest any more for at least a decade.

Newell Manufacturing & Design

Newell Manufacturing & Design was a 40-year old firm started by Sarah’s parents after they retired from their careers in public school teaching and a national home improvement retail business. The firm had been started in their garage. Sarah’s mother brought the high school project know-how and expertise and Sarah’s father brought decades of industry experience in purchasing and sourcing materials and tools. Together, they made a great team and, during the economic boom in the 90’s, the firm had grown quickly to several million dollars a year in revenue. Unfortunately, the economic downturn affected their

business and catalog sales for DIY dropped dramatically right after the Newells had purchased a catalog distribution center using debt. The resulting struggles to keep the firm afloat, feed the family, and put Sarah and her sister through college had kept the family one step ahead of bankruptcy for the next decade. As a result of this, the firm was run in a very fiscally conservative manner with virtually no debt other than that resulting from short-term trade credit and a line of credit used to finance large lumber purchases which was always immediately paid off. Sarah feels strongly that, if she stays in the business, the firm will stay debt free. Exhibit 1 contains current and pro forma financial information for Newell Manufacturing & Design. Newell Manufacturing & Design benefits from a cross-selling relationship between Newell Manufacturing and Newell Design. It also benefits from cost reduction through economies of scale in the support functions (SG&A) and in materials sourcing (COGS). In terms of both assets and sales, the two divisions were almost exactly equal in size.

Newell Design

Newell Design is a DIY mail-order business with a retail presence in both print and on-line which sellsDo-It-Yourself materials, tools and kits ranging across the spectrum of small to medium size projects. Its education project products are well-known and respected across the country and command premium pricing. Their first big hit, Erupting Volcano, is still a best-seller and their recent on-line sales entry into club-based “hacker” clubs had enabled them to position themselves for very solid growth in the future. Exhibit 2 contains estimated income statement and pro forma income statement information for Newell Design as a stand-alone company. Sarah believes the projected growth rate from 2018 to 2019 represents a steady state for Newell Design indefinitely. Newell Design currently has a mailing list of just over 3 million households and Sarah believes that will grow at the same rate as sales for Newell Design (stand-alone estimate) over the projected period and beyond.

Newell Manufacturing

Newell Manufacturing had been started by Sarah to use excess space in the distribution center and to support Newell Design’s need for quality kits but had grown well beyond its humble beginnings. As the DIY industry rebounded from the economic swamp of the financial crises, DIY groups, including an alternative to Boy Scouts known as Hacker Scouts, were on the rise. These groups want high quality tools and ready-made project kits and Newell Manufacturing already produced such kits across a broad spectrum of project categories.

Sarah had positioned Newell Manufacturing in the wholesale DIY kit market by creating an infrastructure so that other DIY firms could buy Newell Manufacturing kits and use their own packaging. This allowed other firms to create, in effect, their own branded kits that Newell manufactured and supplied. As a result, Newell Manufacturing is a business in its own right independent of Newell Design. To complete that transformation, several years ago, Newell

Manufacturing had moved out of the distribution center and into its own production facility near Newell Design.

Currently, Newell Manufacturing has only a small presence in the electronics DIY kit industry, however, the recently announced bankruptcy of a national retail electronics parts supplier along with Newell Manufacturing’s strong relationship with hacker clubs means they are positioned for strong growth in this area. Sarah believes that Newell Manufacturing, if guided properly, can achieve a 10% growth rate from 2019 indefinitely and that she has the skill to continue its positioning as a major wholesale manufacturer in the DIY industry. Exhibit 3 contains estimated stand-alone financial information for Newell Manufacturing.

Lobster rolls: you get the check

As Sarah contemplated her meeting with Armijo, she wondered how much her firm is worth. She knew Treasury securities were yielding about 3% and that the market was expected to return about 10% over the forecast period. Her friend, Kathy Graham, had provided her with some data on recent company M&A sales in the mail order and light industrial manufacturing industries (see Exhibits 4 & 5) and it was time to put her finance degree to work. She believed Armijo was ready to do the deal, she just needed the right price and, since this was the last piece he needed, she knew he’d pay a reasonable premium to get it.

Should she sell all of her company to Armijo? Or just the Design division? If she kept the Manufacturing division would she be in a position to take it public in 2019 when she wants to retire? Or sell it outright then?

Exhibit 1

Newell Manufacturing and Distribution

Actual Projected Projected Projected Projected Projected Projected2013 2014 2015 2016 2017 2018 2019

Revenue 68,746,619 73,803,109 78,430,891 84,247,626 89,647,575 94,946,207 102,333,745 COGS (48,846,294) (52,353,429) (55,493,362) (59,456,619) (63,325,929) (66,844,371) (73,581,621) SG&A (9,551,463) (11,859,136) (12,787,156) (13,370,204) (13,538,769) (14,511,032) (17,161,114) Depr (1,704,278) (1,784,496) (1,838,031) (1,927,334) (1,985,154) (2,044,709) (2,163,132) EBIT 8,644,584 7,806,048 8,312,342 9,493,469 10,797,723 11,546,095 9,427,878 Interest (24,116) (24,598) (24,598) (24,844) (25,341) (25,595) (26,106) EBT 8,620,468 7,781,450 8,287,744 9,468,625 10,772,382 11,520,500 9,401,772 Taxes (2,844,754) (2,567,878) (2,734,955) (3,124,646) (3,554,886) (3,801,765) (3,102,585) Net Income 5,775,714 5,213,572 5,552,789 6,343,979 7,217,496 7,718,735 6,299,187

Exhibit 2

Newell DesignMail Order Division (Stand Alone Estimate)

Actual Projected Projected Projected Projected Projected Projected2013 2014 2015 2016 2017 2018 2019

Revenue 36,458,124 39,739,355 43,315,897 47,214,328 51,463,617 55,580,707 60,582,970 COGS (25,520,687) (28,214,942) (30,321,128) (33,050,030) (36,539,168) (38,906,495) (43,619,739) SG&A (7,656,206) (9,537,445) (10,395,815) (10,859,295) (11,321,996) (12,227,755) (13,934,083) Depr (124,897) (126,146) (129,930) (133,828) (137,843) (141,978) (146,238) EBIT 3,156,334 1,860,822 2,469,024 3,171,175 3,464,610 4,304,479 2,882,910 Interest (12,058) (12,299) (12,299) (12,422) (12,671) (12,797) (13,053) EBT 3,144,276 1,848,523 2,456,725 3,158,753 3,451,939 4,291,682 2,869,857 Taxes (723,184) (314,249) (417,643) (726,513) (793,946) (1,287,504) (660,067) Net Income 2,421,092 1,534,274 2,039,082 2,432,240 2,657,993 3,004,178 2,209,790

Exhibit 3

Newell ManufacturingManufacturing Division (Stand Alone Estimate)

Actual Projected Projected Projected Projected Projected Projected2013 2014 2015 2016 2017 2018 2019

Revenue 31,587,624 33,167,005 34,162,015 35,870,116 36,946,220 38,054,606 40,337,883 COGS (24,322,470) (25,206,924) (26,304,752) (27,619,989) (28,079,127) (29,302,047) (31,463,548) SG&A (1,895,257) (2,321,690) (2,391,341) (2,510,908) (2,216,773) (2,283,276) (3,227,031) Depr (1,579,381) (1,658,350) (1,708,101) (1,793,506) (1,847,311) (1,902,730) (2,016,894) EBIT 3,790,515 3,980,041 3,757,822 3,945,713 4,803,009 4,566,553 3,630,409 Interest (12,058) (12,299) (12,299) (12,422) (12,671) (12,797) (13,053) EBT 3,778,457 3,967,741 3,745,523 3,933,291 4,790,338 4,553,755 3,617,356 Taxes (869,045) (912,581) (861,470) (904,657) (1,580,812) (1,502,739) (831,992) Net Income 2,909,412 3,055,161 2,884,052 3,028,634 3,209,526 3,051,016 2,785,364

Exhibit 4

Comparable Companies: Balance Sheet Information

Comparable Publicly Traded Industry Equity (Book Value) Total Assets (Book Value) Leverage (Book Value of Debt/Book Value of Total Assets) Type of Debt Financing Debt Rating Borrowing RateTax RateComp A No Mail Order 52,575,000 70,100,000 0.25 Bank Loans NM 0.070 0.23Comp B Yes Mail Order 64,698,000 78,900,000 0.18 Bonds AAA 0.050 0.33Comp C Yes Mail Order 47,724,000 73,800,000 0.35 Bonds AA 0.070 0.17Comp D Yes Mail Order 4,380,000 6,000,000 0.27 Bank Loans NM 0.070 0.10Comp E No Light Industrial 35,816,000 36,300,000 0.01 Bank Loans NM 0.050 0.23Comp F No Mail Order 14,560,000 16,800,000 0.13 Bank Loans NM 0.060 0.10Comp G No Light Industrial 71,920,000 93,000,000 0.23 Bank Loans NM 0.070 0.33Comp H Yes Light Industrial 21,168,000 44,100,000 0.52 Bonds A 0.090 0.17Comp I Yes Light Industrial 17,266,667 35,000,000 0.51 Bonds AA 0.090 0.17Comp J Yes Light Industrial 21,312,000 44,400,000 0.52 Bonds BBB 0.090 0.17Comp K No Mail Order 30,165,333 40,400,000 0.25 Bank Loans NM 0.070 0.17Comp L Yes Light Industrial 28,333,333 62,500,000 0.55 Bonds BB 0.090 0.23Comp M No Mail Order 355,000 500,000 0.29 Bank Loans NM 0.070 0.10Comp N Yes Mail Order 53,013,333 56,800,000 0.07 Bank Loans NM 0.050 0.17Comp O No Light Industrial 29,397,333 68,900,000 0.57 Bank Loans NM 0.100 0.17Comp P Yes Light Industrial 35,960,000 89,900,000 0.60 Bonds BB 0.090 0.23Comp Q No Light Industrial 45,540,000 49,500,000 0.08 Bank Loans NM 0.050 0.23Comp R No Light Industrial 60,720,000 75,900,000 0.20 Bank Loans NM 0.060 0.33Comp S Yes Light Industrial 850,667 2,200,000 0.61 Bonds BB 0.100 0.10Comp T No Light Industrial 43,642,667 66,800,000 0.35 Bank Loans NM 0.080 0.23

Exhibit 5

Comparable Companies: M&A Transaction Information

Comparable Publicly Traded Industry Sales Earnings Tax Rate Mailing List Equity Value Market Equity Beta Purchase Price Equity AcquiredComp A No Mail Order 49,265,106 3,250,073 0.23 2,998,236 58,501,310 0.78 65,813,973 100%Comp B Yes Mail Order 84,977,080 4,557,093 0.33 2,216,751 86,584,769 0.82 97,407,865 100%Comp C Yes Mail Order 103,057,083 2,156,118 0.17 600,685 66,839,660 1.63 76,865,609 100%Comp D Yes Mail Order 4,383,587 202,837 0.10 1,049,951 5,070,930 0.80 6,338,662 51%Comp E No Light Industrial 31,091,337 3,072,156 0.23 NM 36,865,870 0.60 41,474,104 100%Comp F No Mail Order 14,174,614 522,716 0.10 2,305,260 16,726,914 0.68 17,981,432 100%Comp G No Light Industrial 113,878,870 5,276,200 0.33 NM 73,866,795 1.40 92,333,493 100%Comp H Yes Light Industrial 34,452,427 1,532,519 0.17 NM 24,520,301 1.83 29,424,361 100%Comp I Yes Light Industrial 31,047,473 1,577,728 0.17 NM 22,088,191 1.80 25,953,624 100%Comp J Yes Light Industrial 44,436,122 2,028,943 0.17 NM 26,376,259 2.20 29,673,292 62%Comp K No Mail Order 42,426,295 1,291,279 0.17 3,831,840 33,573,245 1.10 41,127,226 74%Comp L Yes Light Industrial 66,124,663 2,806,150 0.23 NM 33,673,805 2.44 37,883,030 53%Comp M No Mail Order 733,376 19,785 0.10 4,559,472 395,695 1.50 435,265 63%Comp N Yes Mail Order 94,232,896 2,240,688 0.17 3,822,646 67,220,636 1.07 73,270,493 21%Comp O No Light Industrial 51,594,809 1,802,199 0.17 NM 30,637,383 2.17 32,935,186 56%Comp P Yes Light Industrial 83,557,902 3,274,486 0.23 NM 45,842,800 2.49 48,134,940 10%Comp Q No Light Industrial 26,023,383 2,890,555 0.23 NM 46,248,888 0.43 46,711,377 35%Comp R No Light Industrial 60,571,726 4,744,719 0.33 NM 61,681,347 0.82 62,914,974 28%Comp S Yes Light Industrial 1,617,119 60,597 0.10 NM 969,554 2.42 979,249 7%Comp T No Light Industrial 51,217,243 2,683,468 0.23 NM 45,618,962 1.13 47,899,910 45%