Fojtasek Companies and Heritage Partners–March 1995 Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question Number 3

Payment for Fojtasek being offered by Heritage and recommendation:

Heritage Partners had its beginning in 1986 when the funds of three managing partners had established Equity Partners, a unit of BancBoston Capital. BancBoston Capital was the subsidiary of the Bank of Boston, which was responsible for mezzanine and later-stage equity investments. Each of the three partners Michael F. Gilligan, Peter Z. Hermann, and Michel Reichert had extensive experience at the Bank of Boston.

The purchasing price of $56 million has been offered by Heritage Partner to Fojtasek Companies from which the company will pay $43.3 million long-term that are currently outstanding. $7 million will be reinvested into the company’s existing shareholders. Financially its sound and better than other projects as in buyout $65 million was being paid but in this case control of the company is completely under the ownership of leveraged capitalization firm. If they are not able to pay the interest then company’s ownership will be at risk. In this case, the control will go in the hands of investors. $56 million offer from Heritage partner is looking better than that because they will not lose the control over the company. In this case, 50.1% share holding will be in the hand of the Fojtasek Family. So, they will have control over operating activities of the company. Heritage will also be represented on the board of directors. The revised board, which is suggested by Heritage Partners will consist of Randall Fojtasek and two of his key lieutenants that include Heritage’s general partners, and a mutually agreed-upon outsider. Finally, if the company’s performance remains below the target performance in four consecutive quarters then Heritage Partners will take over the control of board of directors. This was not reasonable, as in case of disposition, if company performs below base case statement then only 35% proceeds will be given to the firm. In my view, risk and gains should be shared in proportion of the equity ownership that’s how both the parties will be treated fairly.

Recommendation

The Fojtasek family is actively thinking about a change in their financial and organizational structure of the company. The founder of the Fojtasek Companies is worried about retaining the control of the overall organization. Specifically, it can be said that they are concerned about seeking control of financial buyers after the completion of the transaction. Before taking the final decision, Fojtasek Company will compute accurate value of their company by using variety of methods. They can do valuation through assets and liabilities, valuation by P/E ratio etc. once they compute the correct value of the company and then consider available options.

In the first option, Investment bankers from Bear and Stearns gave a better valuation for the firm, which was about $65 million for the transaction. But this offer is still lower than the expected value of $70 million. Apart from the matter of low value, the family will also lose total control of the company. Therefore, this offer seems less attractive to the family.

In the second option, if they take debt then the company will be engaged in paying huge interest costs and all earnings will be kept for the repayment and that’s how possibility of more growth isn’t possible. Although, this option fulfills the requirement of Fojtasek family to retain the partial part of the company but because the nature of Fojtasek business their business is seasonal and very much depends on builders’ orders. Thus, it can create cash flow issues in those months when the company receives fewer orders and sales will reduce; in this case the company will be unable to pay the interest payment, which is fixed irrespective of volume of sales. So this is also not the best option for Fojtasek family.

Finally, last offer by Heritage can be considered as they will not lose control over the company. Heritage has shown no indication of replacing management so job security for old management is somehow guaranteed. Therefore, Fojtasek can rely on Heritage partners. The other reason for considering this offer is that tax liability will be least as compared to other offers. So I will recommend that Heritage partners’ offer should be accepted. It is a recommendation for Fojtasek family to select the Heritage Partners of Private IPOs. This suggested strategy will enable the family and company to access the additional capital from market for growth in future. As it is a public company; hence, there are many business angels available in stock exchange to invest in the company and can fulfill their need of cash requirement. On the other hand, involvement of Heritage Partners in board and company operating activities may be useful because of the experience they had and this will be helpful to meet expected performance in future......................................

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