Creating the First Public Law Firm: The IPO of Slater & Gordon Limited Case Study Solution
S&G’s consolidation strategy to create value
Most importantly, the main purpose of consolidation between two organizations is to combine two different firms to a new corporation restricting each organization to operate its independent operations. Hence, the shift in growth strategies of S&G to acquisition of small and individual organizations sited in strategic locations for capitalization on high fragmentation of personal injury segment in the market. Successful acquisition of Slater and Gordon of law practices were four before considering IPO. These acquisitions significantly demonstrated its capability in identification of acquisition candidates and specifically their integration into law offices network at national level. In acquisition of these four law practices, S&G had spent approximately AUD 3.9 million with an estimation of their contribution of no less than AUD $8 million in the revenues of Fiscal year 2008.
Significantly, the law has allowed the outside share in practices of law which is particularly seen as a way for consolidation and to make deliverance of legal services more efficient for individuals. Traditionally, the small law offices serves these individuals at high street.(Jr, 2008).
It is worth considering each segment of service of either one or a number of vendors for standardization provides with increased leverage over preventable expenses, additional economies of scale and raising transparency into what the organization needs to pay for. Through reduction in the number of business facilities, money can potentially be saved and operations can be performed in more efficient manner. Therefore, Consolidation is the way of bringing improvement in communication amongst the functions of business like production and marketing and achieve funds through decrease in head count and process and system consolidation.
The significant variations in the legislation limits individual rights in order to recover personal injuries compensation which had amplified complexity of impeaching cases of personal injury and make it more complicated for firms operating at small scale for handling of these kind of cases in an efficient manner. Just because Slater and Godson had the ability in operating systems and processes which were required for litigation of cases i.e. more complex. Hence, S&G could create value through integration in small ventures into a well-developed network at national level with possibly low risk and cost. (Chris Aulich, 2011)
Valuation of Slater and Gordon S&G
To assess the worth of Slater and Gordon S&G, the enterprise value is 113000000, also the weighted average cost of capital of the company is 8% which is derived by using the debt and equity portion in the capital structure, the debt portion in capital structure is 0.04% while the equity portion in the capital structure is 0.95%, the net debt outstanding is 5400000 while the cost of equity is 107600000, resulted in 8% weighted average cost of capital (WACC).
On the other hand, the price of each share is calculated by dividing total enterprise value by the number of outstanding shares which is resulted in $1.04 / share which shows that the company offers share at $1.00 which is lower than $1.04,which is due to the fact that the company wants to gather more investors who would purchase maximum number of shares.
In addition to this, the sensitivity analysis is being performed with respect to predict the net present value of the company with different or certain range of variables which includes terminal growth rate and weighted average cost of capital (WACC). The terminal growth rate is provided in case which is 10%, the terminal growth rate is used, which is lower than weighted average cost of capital ranging from 2.5 percent to 5.0 percent. Whereas, the weighted average cost of capital is calculated to be 8%, and the ranges for WACC are used to calculate the Net present value ranging from 6 percent to 10 percent resulting in varieties of highest or lowest net present value.
Investment in IPO
The analysis of the financial stability of S&G to provide Rosen with guidance if she should invest in shares of S&G or not. Analysis on current financial state demonstrated ability of S&G to show potential growth in future. Therefore, for estimation of its NPV – Net Present Value on the basis of sensitivity analysis with varied terminal growth rate and weighted average capital cost was conducted. The evaluation with variable terminal growth rate from 2.5 percent to 5.0 percent with difference of 0.5 percent in each and weighted average capital cost from 9 percent to 13 percent with difference of 1 percent showed significant increase in revenues.
Continuous increase in organizational profit in forthcoming future demonstrated that the value of NPV is thought to be positive even with variation in terminal growth rate and weighted average capital cost. Therefore, it is predicted that there will surely be continuous increase in the growth of organization. Hence, it is to suggest that Rosen should invest in the shares of S&G as potentially there are no chances of loss rather it will surely generate profit.
Optimal capital structure
It is imperative to note that the optimal capital structure of the company is best mix of equity, debt as well as the common stock tend to maximize the market value of the company while minimizing cost of capital. In addition, the optimal capital structure of the company is being calculated in terms of proportion of equity and debt. The calculations shows that the proportion of the debt as well as equity in the capital structure should be 90 percent equity and 10 percent debt it is due to the fact that the weighted average cost of capital resulted in 8.1 percent on which the net present value of the investment in initial public offerings (IPOs) is more as compared to net present value calculated on different weighted average cost of capital (WACC) i.e. 36 percent, 33.1 percent, 29.9 percent, 26.8 percent, 23.7 percent, 20.6 percent, 17.5 percent, 14.3 percent, 11.2 percent and 8.1 percent.
The high or greater than 0 net present value shows that the company should have capital structure with 90 percent equity and 10 debt. In doing so, the company would be able to generate massive profit returns or the investment would be feasible by for Free mantle Securities in initial public offerings (IPOs)……….
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