CASE ANALYSIS: DIY OR IPO: NEWELL DESIGN AND MANUFACTURING Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Case Analysis: DIY or IPO: Newell Design and Manufacturing Case Solution

Initial Financial Position Combined

The initial financial position and its valuation suggest (appendix 6) that the company is earning high revenue and profits as the company has almost 69 million of revenue while having almost 6 million of net profits. On the other hand, the valuation of the company suggests that the company will be able to earn almost 132 million of free cash Flows (FCF) and almost 107 million of Discounted Cash Flows (DCF) over its foreseeable useful and profitable life.

Should the company be sold to Ajmiro?

The company as a whole should not be sold to the entrepreneur Ajmiro as, both of the company’s departments are making revenue and generating suitable returns. However, one of them is not making too much revenue or profit but still the division is contributing something towards the company. Since, the division is giving cost advantage to the company by making synergies among the COGS and SG&A i.e. the department is giving cost advantage by minimizing the procurement and administrative cost.

Furthermore, the division is also generating revenues as the division contributed almost 36.5 million to the total revenue and it also provide almost 2.5 million of net profit for the business. However, it has been expected by Sarah that the business will be able to add more revenue and ultimately profits in future. As it has been also expected from the projections that the business will have almost 60 million in revenue and 2.2 million in net profits,however, the profits are not acceptable with this high revenue and this is due to increased cost and uncertain market conditions.

Therefore, Sarah is no indifferent as, she can sell this division to Ajmiro or she can continue this division with company but it can be seen that the second option is more feasible since, it may also happen that nobody will be willing to purchase this division in future due to its uncertain and poor performance. (Appendix 1)

Spinoff of the Newell Design Division

Spinning off Newell Design is far more feasible than continuing with it as, the DCF valuation of this division suggests that the division will be able to generate only 27 million almost (appendix 2) over its foreseeable life. However, these cash flows are discounted and suggests that these amount will be earned by the division after discounting the FCF at 10%. Moreover, the 10% rate is assumed as, the WACC cannot be calculated in the case and the market is expected to grow with 10% therefore, the discounting rate is assumed at 10%. In addition, the terminal value of the division suggests that the unit or SBU will be able to generate around 32 million of Free Cash Flows over its useful life.

On the other hand, it is expected that Ajmiro will give premium prices for the division and it is expected that the unit can be sold in around 31 million (appendix 3)which is far more higher than the capability of the unit to generate discounted cash flows in future. However, this amount is also higher than the NPV of the division. Moreover, this value has been calculated by taking the purchase price given in industry comparable spreadsheet and it has been calculated as a percentage of sales by taking the closest company which was company H.

Furthermore, there will be some disadvantages of this spin off and the major effect of the transaction will be that the company will lose its synergy among the division and therefore, the cost of the company will be increased. However, it has been assumed that the synergy among the department was 5% and the cost of the manufacturing division will increase by 5% in both terms i.e. COGS and SG&A................

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