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- 1. Case Champ, Final 12 November 2010
- 2. Silver Sales Company Introduction Key character: Mr. Silver What is his problem: His stock in SSC is worthless Who is his problem: Mr. Ring The aim of the case: Help Mr. Silver to cash in on his share in the SSC and benefit
- 3. Silver Sales Company SSC Exclusive distributor 2 lines of business Demand for products and services is inelastic Personal contacts in water industry Superior quality of the flow meters
- 4. Silver Sales Company Looking deeper… We estimatevalue of SSC based on the expected future cashflow So, we need to calculate cashflows. Two possibilities: Believe Dimetrius (Leave data as it is) Believe Silver (25% adjustment of net sales)
- 5. Silver Sales Company How critical was the exclusive SSC license for the estimated value of the company? Very little value!!! •Mr. Ring controls both the manufacturer and the distributer •He chooses to maximize SSC growth in favor of Ring’s company •He does this not to share profits of the business structure with Silver •Anyone else who buys stocks from Silver will run into the same problem •Ring has a hidden motive…
- 6. Silver Sales Company Cash-flow forecast according to Dimetrius (2002-2005) 2002 2003 2004 2005 Sales 4000 4800 5600 6800 COGS 2400 3200 3700 4400 Gross Profit 1600 1600 1900 2400 SG&A 1300 1400 1400 1400 Income from Operations 300 200 500 1000 Interest expense 70 68 66 60 Income before Tax 230 132 434 940 Tax 92 52,8 173,6 376 Net income 138 79,2 260,4 564 Cash flow 125,45 65,45 195,64 385,22
- 7. Silver Sales Company Cash-flow forecast according to Mr. Silver (2002-2005) 2002 2003 2004 2005 Sales 5000 6000 7000 8500 COGS 3125 4000 4625 5500 Gross Profit 1875 2000 2375 3000 SG&A 1400 1400 1500 1500 Income from Operations 475 600 875 1500 Interest expense 61 87 104 105 Income before Tax 414 513 771 1395 Tax 165,6 205,2 308,4 558 Net income 248,4 307,8 462,6 837 Cash flow 225,82 254,38 347,56 571,68
- 8. Silver Sales Company Estimated SSC value (Dimetrius) 2002 2003 2004 2005 All the rest Cashflow 225,8182 254,3802 347,5582 571,6823 1370,9849 WACC 10,00% Estimated Value 2770,42 2002 2003 2004 2005 All the rest Cashflow 125,4545 65,45455 195,6424 385,2196 923,81779 WACC 10,00% Estimated Value 1695,59 Estimated SSC value (Silver)
- 9. Silver Sales Company So where is the problem? Mr. Ring – 62% of shares “Coocked” financial statements Unfair transfer prices Ring prevents SSC from growing Ring Manufacturing SSC
- 10. Silver Sales Company How long could SSC grow without new cash? Methodologyof estimation: Calculate forecasted balance sheets Assets Calculate based on turnover in previous years Liabilities+Equity Equity Increases by the amount of profits Liabilities Loans – value stays the same (as Dimetrius refused to acquire a new line of credit)
- 11. Silver Sales Company How long could SSC grow without new cash? As an outcome of calculations capital of the company falls short of the estimated assets (by $78000) in 2002 allready Liabilities + Equity Assets
- 12. Silver Sales Company So, Mr. Silver’s problem is… Silver Sales Co. short-fall of cash Leave as it is… Cash short-fall (year 2002) Additional capital
- 13. Silver Sales Company So, Mr. Silver’s problem is… Silver Sales Co. short-fall of cash Leave as it is… Cash short-fall (year 2002) Additional capital Change in equityCredit Dimetrius says no!
- 14. Silver Sales Company How fast could SSC grow with new cash infusion? According to Dimetrius 2002 2003 2004 2005 Net Sales 4000 4800 5600 6800 Growth of sales, % 20,59 20,00 16,67 21,43 0,00 10,00 20,00 30,00 40,00 50,00 60,00 2002 2003 2004 2005 2006 Growth of sales, %
- 15. Silver Sales Company How fast could SSC grow with new cash infusion? According to Mr. Silver +25% adjustment of Net Sales 2002 2003 2004 2005 Net Sales 5000 6000 7000 8500 Growth of sales, % 50,74 20,00 16,67 21,43 0,00 10,00 20,00 30,00 40,00 50,00 60,00 2002 2003 2004 2005 2006 Growth of sales, %
- 16. Silver Sales Company Change in equity Ring gives additional capital U.K. company involvement
- 17. Silver Sales Company So, would the U.K. company be willing to buy Silver’s 31 per cent of the company knowing about Ring? Not likely!!! 1. Negativeequity 2. Ring controls both companies • He maximizes profits of Ring Co. through transfer prices • So, he makes SSC an innatractive investment • Mostof SSC profits go on paying off negative equity 3. Ring, who is a major share holder, is not willing to let SSC expand 4. Ring’s policy on SSC will lead to the shortfall of financing.
- 18. Silver Sales Company So, would Ring be willing to reduce his equity in SSC to less than 50%? Ring – conservative manager: Growth opportunities Total control He won’t reduce his share. Besides, Ring has a hidden motive. We suggest that only an ultimatum can work to benefit from Silver’s stock
- 19. Silver Sales Company Ring’s hidden motive Logic! 1. Why Ring doesn’t want SSC to grow? 2. SSC has a perpetual exclusive license 3. Ring cannot go about sharing part of the control and profits with Silver 4. Ring aims to be in total control of his distributor 5. He wants SSC to go bankrupt to set up a new distributor where he is a sole owner 6. He is close to his aim
- 20. Silver Sales Company Force Ring to allow for SSC development Ultimatum! What Silver has in hand for negotiations: 1. Silver’s connections in the industry 2.Uncompetitive prices of the firm 3. Silver can cope with Miller 4.Threat of moving to another company
- 21. Silver Sales Company •Ring doesn’t care about the improvement •The only influence is threat to make things worse for him •The aim is to force Ring to allow for SSC development •If this achieved, U.K. company will buy Silver’s stocks How to structure a deal with U.K. company that Ring would accept?
- 23. Silver Sales Company Silver’s stock at SSC is worthless Most likely Ring tries to ruine the company to set up his own Silver needs to take action ASAP!!! Company is close to bankruptcy His best option is ultimatum He needs to force Ring allow for SSC development. In this case UK will be ready to buy Silver’s share Summary
- 24. Silver Sales Company Thank you!