Sterling Household Products Co. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

Sterling Household Products Company is a leading manufacturer and marketer of a wide range of customer product that include laundry products, soaps, toilet preparations, cosmetic, cleaning disinfecting and sanitizing products. Sterling Household Products Company has highly trusted and recognized brand names that result in consistent sales and profit investment community. Despite the fact that the company has achieved constant growth in the sales and profit, but analysis of financial measures shows that the growth rates for the unit volume, sales and profit are very slow. Therefore, the company wants to expand into businesses and products with more potential growth. Sterling Household Products Company identified Health Care as a more potential sector and find out one unit of the Montagne Medical Instruments Company to be the best fit into company’s existing operations. Sterling Household Products Company negotiation with the Montagne Medical Instruments Company result in the $265 million as a right price for the acquisition.

Problem statement

The main problem that the Sterling Household Products Company is facing is in determining whether the proposed investment given the risk of acquisition will be value added for Sterling Household or not.

Case Analysis

Following are the issues that covered in the report:

Does the unit appear to be worth $265 million without the option to expand?
Now consider the option to expand capacity. How much value, if any, does that add? How much is the GSAP unit worth with this option?
Should Montagne acquire the GSAP unit for $265 million?

Question 1

Without Capacity Expansion Analysis

Part a

In order to analyze the unit acquisition without the option of capacity expansion, the WACC and DCF (Discounted Cash flow). The value of the calculated WACC is 9.36% that shows that the weighted average cost of the capital used to acquire the unit is 9.36%. The value of the beta is 0.97, market premium is 7.50%, risk free rate 3.10%, cost of capital is 257, cost of debt is 46 whereas the tax is taken as the average of tax from the 2010 to 2012(Exhibit 2).The discounted cash flow method is used to determine the financial value of the acquisition on the basis of estimated future cash flows of the company.

Furthermore, discounted cash flow analyzed by using data from the 2013 to 2020 in order to examine the unit acquisition without the option of capacity expansion. The Perpetuity Growth Rate is taken as 2.2% in the calculation and the value of free cash flow for the year 2013 is $ 22,620 thousand whereas in the year 2020 its value is $30,722 thousand. In addition to this, the present value of free cash flow for 2013 is $ 20,683 thousand while for the year 2020, the present value of free cash flow is $ 16,409 thousand.

The calculated terminal value of all the cash flows for the year 2013 through 2020 is $ 9,436 thousand. However, the enterprise value of the acquisition is the $171,789 thousand that is calculated by taking the sum of all, the present value of cash flows from the year 2013 to 2020.

Yes, the suggested approach is used to get the terminal value in order to effectively estimate the expected value of the unit acquisition and in the analysis, it is assumed that the past pattern of the growth will also be continued in the future, so, the growth rate of 2.2 % is used in order to get the terminal value for the unit acquisition without the option of capacity expansion.

Part b

On the basis of the results that get from using the DCF (Discounted Cash flows) for the unit acquisition without the option of capacity expansion, it is concluded that the unit of the Montagne Medical Instruments Company doesn't appear to be worth of $265 million value without the option to expand as the calculated worth of the unit is appeared to be less than the negotiated value of the $265 million.

In addition to this, the calculated value of the unit acquisition is $ 171 million shows that it will not be worthwhile for the Sterling Household Products Company to acquire the Montagne Medical Instruments Company unit. As, the decided purchase price of the unit is $ 93 million greater than the calculated value by using the DCF (Discounted Cash flows).Therefore, the decision of the Sterling Household Products Company should not to acquire the unit of the Montagne Medical Instruments Company as its calculated value is less than the decided purchase price...................

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