Should the Company Be Purchased by the Managers?

1.  Should the company be purchased by the managers?  Looking at Porter’s 5 forces:

The John Case company is the market leader in the desk calendar business, with the next closest competitor lagging significantly behind in market share.  The threat of new entrants is low due to the capital requirements combined with low profit margins, little product differentiation as well it is a small niche part of the calendar business.  The threat of substitute product is also low since this is a low cost item which are considered a staple and companies typically include the minimal amount in their normal office supply expenditure.   The bargaining power of the customers is not a major factor, again as this is not a product which customers shop around for or cost compare, they just order them once a year with their other items.  The bargaining power of suppliers is not a major concern as they are the manufacturer and their suppliers can be interchangeable for the raw materials required.  The competitive environment is not a barrier since this is a niche market and major each player is not willing to risk a price war to gain market share, so everyone seems to move along with limited growth year over year with modest profits.  

The managers of John Case Company see a company with high cash reserves, stable growth, no debt and higher than average profits compared to the competition.  They also see an opportunity for acquisitions to foster accelerated growth for the company.   The financial projections appear strong and, provide adequate funds to support the required debt under a $20m purchase price.  

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Now that the managers have decided to purchase the company, we need to consider the valuation and whether the seller’s asking price of $20m is reasonable or not.    With various methods of looking at this value, we see that the book value is at 2x and EBITDA multiple is at 7, with a ROE of 20%.  These all appear reasonable in a low risk, stable company.  When we compare the PER with the competition, we see that this amount is in line.  From the projected cash flows, we also see a valuation which supports th $20m purchase price.