Finance and Accounting

Here are descriptions of two companies; Imagine you are Gordon White (James Hansons partner). Your job is to decide which of the possible acquisition targets you recommend the Hanson Trust acquire; you can recommend both, one or none. Company ACompany A makes dental crowns. It is one of the largest dental laboratories in the US. The industry has sales of approximately $5bn. Company A has sales of $440m. Its major competitors have sales of $550m, $352m, $281m, $225m and $180m. There are fifteen mid-tier firms each with sales of around $80m and about 120 employees. Finally there are a very large number of small firms, typically employing around three to four people with sales of about $450k. The majority these small of laboratories are in small towns and serve a small number of local dentists. They are far less profitable than Company A.Company As materials costs and direct labor come to $45m. Salaries and benefits, advertising, R&D, utilities, rent and depreciation come to $145m. The company has long term debt of $400m on which it pays interest at 15%, and $100m in short term debt with interest rate of 10%. Its effective tax rate is 30%.The FDA regulates the materials that may be used in manufacturing crowns and bridges. Larger firms in the industry are certified by the National Board for Certification of Dental Laboratories (CDL) which requires laboratories to employ certified dental technicians in supervisory positions, document facility compliance with accepted health and safety standards, and maintain high levels of training and practice in infection control. With new digital imaging and related technological innovations, firms are coming under increasing downward pricing pressure from companies with the resources to make significant investments in new technology. A shakeout appears on the cards for many. Use the average cost of the companys debt as your discount rate. Company BCompany B is a national wholesale distributor of canned and packaged goods to small grocery stores. It operates a network of trucks from more than 50 distribution hubs in 15 states. It buys product from a relatively small number of manufactures such as Heinz and Del Monte, and General Foods and distributes more than 95,000 products to 6,500 supermarkets and convenience stores from Maine to Hawaii. Industry sales are $177bn. Company B, the second largest firm in the industry, has 17% market share. The other major firms have 25%, 12%, 7% and 5%. The remaining 34% is made up of a large number of small regional distribution companies.
The companys gross profit is $5.4bn. Its operating costs are $4.2bn. It has $500m in short term debt borrowed at 10% and $100m in long term debt on which it pays interest at 15%. The companys effective tax rate is 30%. Recently the farm to table movement has been growing in popularity. In response, many food retail companies are looking to source some products locally. This reduces the importance of a nationwide logistics capability. Use the average cost of the companys debt as your discount rate.

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