SmithCo Diversification Discussion

SmithCo Revenue Gross Margin Operating Margin Net margin Earnings Debt/Equity Market Cap P/E Industry life cycle stage Strategic fits Forecast annual growth for next five years $30,500,000,000 70% 50% 30% $9,150,000,000 0.05 $164,700,000,000 18 Late maturity -3%

General Technologies $20,300,000,000 65% 55% 28% $5,684,000,000 0.60 $130,732,000,000 23 Growth none 17%

Ronstadt, Inc. $7,000,000 72% 52% 32% $2,240,000 0.08 $44,800,000 20 Early maturity supply chain 11%

JR Manufacturing

Rio Blanco

NewAge $985,000,000 60% 30% 2% $19,700,000 2.00 $197,000,000 10 early growth marketing, sales 45%

$60,800,000,000 $22,600,000,000 45% 68% 38% 58% 24% 35% $14,592,000,000 $7,910,000,000 0.00 0.35 $233,472,000,000 $189,840,000,000 16 24 early maturity growth manufacturing distribution, marketing 8% 15%

SmithCo just completed its most profitable year in its history, yet faces a strategic crisis. SmithCo is the leader of a dying industry, projected to grow only at about 3% annually for the next five years. SmithCo has been brilliantly managed for the short and medium term, but top management has failed to plan for the end of life transition for the industry. Now it is apparent that SmithCo has to act, and fast. The good news is that SmithCo has plenty of free cash flow to fund a transition strategy, and can expect profit margins to hold up on its current business for most of the coming five year period. After that point, however, SmithCos current business is expected to decline at a rate of approximately 20% annually.

A number of interesting acquisition targets are being explored. Your have been asked to help evaluate the candidates for acquisition. Please review the data above and prepare your observations and suggestions regarding SmithCo diversification. What is the case for and against each candidate?

Evaluate the following industry data and answer the following questions: - Which strategic group has the largest market share? - Which strategic group has the highest rate of growth? - What is the net margin of each strategic group (most recent year)? - What is the net margin of the industry (most recent year)?

Company Aardvark Beaver Cheetah Dingo Ewok Fox

Strategic Group A B C C B A

2007 Revenue 150 13 11 9 17 70 270

$ Millions 2007 Net Profit 6 2 0.75 1.25 3 2 15

2006 Revenue 120 10 7 3 10 80 230

2006 Net Profit 6 1 1 0.9 2 3.5 14.4

Fribble has asset turns of 2.5, asset/equity leverage of 2, and an ROE of 5.0%. What is Fribble's return on sales percentage? Kibble has a return on sales of 10%, asset turns of 2, and leverage of 1. What is Kibble's return on equity?

Imagine two companies with the same ROE. One is a differentiator; one is a cost leader. Describe how their DuPont chains would be different and explain the reasons why. Construct a simple example to illustrate.

What action would have a positive effect on ROE? - Stock buyback - Bond payoff What actions would have a negative effect on ROE? - Issuing stock - Paying off debt - Buying back stock - Issuing bonds

How would borrowing money affect the asset turns ratio? How would borrowing money affect the return on sales ratio? How would borrowing money affect the leverage ratio? How would selling stock affect the asset turns ratio? How would selling stock affect the return on sales ratio?

Amounts in $M Revenue COGS Gross Income SG&A Operating Income Tax Net Income

Fribble Kibble 100 120 62 63.6 38 56.4 21 36 17 20.4 5.95 7.14 11.05 13.26

Which company is more profitable?

Based on the data in the income statement, if you had to characterize the generic business strategy of each company, what would you say?

ss strategy of

Be sure that you understand: Factors that affect fixed and variable costs Cost-volume-profit interactions How to calculate contribution margin The factors that affect contribution margin