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

Introduction:

Aurora Capital Group is undertaking a potential acquisition of Douglas Dynamics, currently a subsidiary of AK Steel Corporation. Douglas Dynamics is operating under snow plows and spreaders. The major revenues are coming from snowplows business and it has a great market reputation. Aurora is under decision to whether it should acquire the company or not, what should be the price and what the tenor of investment is because it is under consideration to sell the company after some time as their investment tenor is 1.5 years to 11 years.

Analysis:

Analyses are based on the best possible assumptions from the market analysis and company related available data. It is divided into three parts and those are given below.

Under analysis and sale assumptions given in the case, the results are generated through many of the assumptions. The assumption is that the tax rate is 35%, the required rate of return of Aurora is 15%, inflation rate is 2%, the cost of debt is 10% and the debt increases constantly every year by 0.3 million.

Base Case:

Under base case analysis the sales forecast is given and using the above assumption the calculations are done.Under the format defined the free cash flow values are shown in the appendix 1. The free cash flows for 2004, 2005, 2006, 2007 and 2008 are $23.17, $21.04, $23.44, $24.77 and $26.33 million respectively.This shows an average growth of 3% in the free cash flows and it is expected that the growth will continue in the future. The free cash flow of the company with the base case growth rate and no change in the economy is $194.5 million.

Aurora can pay a maximum amount as above specified NPV through free cash flows. The maximum bid price must be of the NPV but it must try to acquire it at the prices less than the above specified to create a value for its shareholders.

Aurora should watch the investment for two years as if the cash flows are as per the assumptions, then it must sell the company after 3 to 5 years and if the returns are more than estimated then it should hold the company for 2 to 5 more years and if the returns are less than estimated then it must sell it as soon as it is possible.

Aurora Capital Group- Douglas Dynamics Case Solution

Recession:

Recession in the industry is the period in which the demand for the product has significantly reduced due to seasonal factor or availability of good substitutes in another market.The growth in sales from the 2% negative and it is expected that it will continue in the future years.

The company is operating under seasonal business, therefore there are chances of recession in the industry. The growth does incorporate the effect of 2% inflation rate.

The free cash flows are declining at the rate of 6% per annum and making the value of a company is $105.4 million with free cash flow investment appraisal method.Aurora can pay $105.4 million, the maximum amount for the acquisition. It must wait for the economic conditions to recover and then sell the company at a higher premium price (Appendix 2).

Peak:

In peak the economy gets developed and the sales increase due to increase in the purchasing power of the individuals in the economy.The growth rate is 12%, including the effect of 2% inflation rate.

At the peak the demands are high in the industry because of changes in the economy or in the industry.Cash inflows are increasing with a rate of 12% annual average growth rate.The growth is estimated to continue for the period of perpetuity.

The net present value in the peak economic or industry condition is $768 million. If Aurora believes that the company will perform in this manner then it can pay a maximum amount of $768 million for the proposed acquisition.

Aurora must sell it in 2 years as the growth may not sustain for the lifetime, there fore it is advisable to sell the company as it feels that the growth is about to decline in the industry or the company specific. The growth cannot be assumed for the higher period.

Recommendation:

The peak and recessions are two sensitivity analysis of the base case economy and the base case estimates of the company.If the economy becomes stronger then Aurora can have higher returns, but the returns can be negative in case of recession in the industry and the economy..........................

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