Strategic Capital Management
Problem:
Elena King is a recent MBA graduate, who has an interest in the field of Investment and Hedge funding. In order to pursue her field, she decided to form an investment hedge fund company by the name of ‘Strategic Capital Management’ in Partnership with her two classmates. As the company’s aim is to invest in the shares of those companies thatlooks profitable, so she is able to secure an amount of $20 million from different investors, which she is going to invest. So in order to pursue her goal, she considers an option of investing in an Internet auction firm known as Ubid, which is controlled by a Parent company (Creative Computers) and it is involved in the business of selling Computer and its peripherals. As she has a perception of investing in Internet related companies due to its suggestions by an industry expert, so before investing, she needs to undertake some analysis of both the investment opportunities.
Analysis:
The analysis includes the business and financial analysis of both the companies.
Business Analysis:
As mentioned above, Creative Computers is an organization that is involved in the business of selling computers and its peripherals; however, the organization has been unsuccessful to some extent due to which it was forced to shut down some of its outlets because the industry consist of tough competition in terms of innovation and selling price. Success in this type of industry depends on how much the company is able to cope with the competition by innovating and how much it is able to control its cost in order to lower its product prices so as to gain more sales as compared to its competitors.
On the other hand, Ubid is a subsidiary of Creative Computers, which was created with an aim to provide e-commerce services to its clients, who were willing to buy computer equipments over the Internet through an auction on the website. In the first year of its trading, the subsidiary had been successful in generating $2.1 million of sales during the first quarter. Moreover, it was able to achieve a share price of $15 during its first IPO, which further increased to $48 after the first day of its IPO.
In addition to that, the Internet related companies are new in the industry and as a result of their arrival, they have changed the business model of various industries, which enables them to gain benefits in the form of cost reduction, cross selling , diversification, international trading and much wider customer base. Moreover, the Internet business model has been expected to gain much growth over the years due to which various industry experts have been focusing on investing in Internet business related stocks.
Financial Analysis:
Share Price:
Ubid has a share price of $35.69 as compared to its parent company thatt is $22.75; however, the share price of Ubid is higher due to the fact that various investors have higher expectations from the Internet related stocks despite their financial performance. The performance of Ubid’s stock is shown below:
As seen above, the performance of the stock has slightly decreased after the third quarter of the company’s operations due to which it shows that the trust of investors in Internet stock is slightly decreasing over the period, however; due to a lack of information about the company’s future profitability,strategy and cash flow growth, nothing can be predicted about how the company’s stock will perform in the future.
Other Financial Performance measures:
According to the scenario, Ubid has been able to increase its sales during the third quarter 1998 by 637% over the first quarter. In other words, it increased from $2.1 million to $15.3 million, however; during the third quarter it still suffered a loss of $1.1 million that indicated that the organization still needed to achieve its break-even point before it could make any profit.
On the other hand, the parent company Creative Computers was able to increase its sales up to $186 million during the third quarter 1998, which gave an increase of 39% over the last year's third quarter. Moreover, it had been able to gain a profit of $435,000 on its third quarter sales, however; it could have been $1.1 million if there had been no investment in Ubid..................
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