Aurora Capital Group Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

BACKGROUND

Aurora capital, is a US private equity firm, founded in 1991 and had approximately $2 billion of assets under management. Douglas Dynamics is a leading manufacturer of snowplows and salt spreader. In 2004,Aurora raised its third institutional fund, for which it wanted to acquire Douglas Dynamics. Although the screening process of Aurora shows Douglas dynamics as a potential investment, but Aurora is still reluctant to invest in Douglas dynamics. The reason is that the business of Douglas Dynamics is a seasonal business and its sales are contingent upon the weather. The records of Douglas Dynamics show that in spite having a huge market share its earnings are highly intermittent.

Aurora wants a more persuasive evidence to determine whether Douglas is a perfect LBO candidate or not. It wants proper future cash flows which show that whether investing in Douglas will be a viable option or not.Mapes and Rosen baum have been delegated the job of analysis of Douglas. They have seen the historic records and were convinced by the profitability of the company but were unable to predict the future cash flows of the business due to unpredictable nature of the business.

FINANCIAL ANALYSES

After looking and analyzing the historic trend of financial position of the company, the management has projected the financial values of the company for the upcoming years. But since the business is very unpredictable, therefore those amounts are calculated on assumption basis. The financial values are calculated on the basis of financial plans made by the company. According to the management, these financial plans are made in such a manner that they could be flexible enough to manage the future inconsistencies in assumptions.

By taking those values, projected cash flows are maintained. There are 3 key assumptions, the growth rate remains same as projected, the growth rate falls, the growth rate rises. Keeping in mind these 3 assumptions, three separate cash flows are maintained under each assumption.

ASSUMPTION # 1

The growth rate will remain same if the weather will be the same as fore casted. The biggest unpredictability is in the weather forecasting, because it is an external factor which is completely uncontrollable. Since the business of Douglas is a seasonal business, it is completely dependent on the snowy weather, if the snowy period remains the same as fore casted the growth rate will remain same to some extent. The other factor that effects the growth rate is Douglas’ competitors. Since the customers of Douglas are extremely brand loyal therefore,this factor will no thave much effect on Douglas’ sales.

If this assumption appeared to be correct in future, then according to the projected cash flows, the company will be in profit and would be generating profits. The net projected cash flows under this scenario for 2004, 2005, 2006, 2007, and 2008 are $21.13 million, $28.87 million, $31.44 million, $33.63 million, and $35.69 respectively. The bid price of the project under this scenario would be $1055.88 million. The Cash flow made under this scenario is presented in exhibit 1.

ASSUMPTION # 2

The growth rate will start declining at a continuous rate if the actual period of snowy season is less than the period fore casted by the management. The growth rate will also decline if there is decline in quality of the product of Douglas, as the customers of Douglas will then move towards its competitors,as Douglas has maintained its Quality control department as well as inspection department.Aurora Capital Group Case Solution

Moreover, it purchases its raw material from a recognized and reputable supplier therefore,it is very unrealistic assumption that the quality of the products of Douglas will decline. However, seasonal inconsistencies could become hurdle in improvement of growth rate.Under this scenario, a projected cash flow is constructed which shows a continuous decline in annual sales of the company. the projected net cash flow under this scenario for 2004, 2005, 2006, 2007, and 2008 are $21.13 million, $13.97 million, $-0.92 million, $-14.88 million, and $-32.51million respectively. The bid price of the project under this scenario would be $1.455 million. The cash flow projected under this scenario is presented in exhibit 2

ASSUMPTION # 3

The growth rate will start increasing at an increasing rate if the actual period of snowy season ought to out to be more than the period predicted by management. This would result in an increase in demand for snowplows and would subsequently increase the growth rate of the company.Under. this scenario, a projected cash flow is constructed which shows heavy profits due to increase in sales. The projected net cash flow under this scenario for 2004, 2005, 2006, 2007, and 2008 are $21.13 million, $38.30 million, $52.65 million, $73.40 million, and $97.65 million respectively. The bid price of the project under this scenario would be $188.93 million. The cash flow projected under this scenario is presented in exhibit 3.......................

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