This case study discusses the search of Allen Lane in purchasing a business. It tackles the issues surrounding the acquisition business including the ethical, business, and tax issues. It also mentions the several unsuccessful attempts at acquisition before coming up with a new acquisition candidate. With such identification, this case study discusses the independent valuation report of the business and how Allen Lane prepared his bid.
Howard H. Stevenson; Michael J. Roberts
Harvard Business Review (384077-PDF-ENG)
September 19, 1983
Case questions answered:
Should Allen Lane purchase Plas-Tek?
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Allen Lane: Will the search for a business be finally over? Case Answers
This case solution includes an Excel file with calculations.
Please scroll down to the bottom of this post to download the additional Excel spreadsheet.
Problem – What is the valuation of Plas-Tek Industries (PTI)? Is PTI a good fit for Allen Lane and his skills?
Factor in Allen Lane’s unique owner profile and bid accordingly.
- Experience in Manufacturing and Distribution
- VP of operations for a small manufacturer of electronic parts
- Independent consultant focusing on operations-oriented work
- Consultant to top management of large manufacturing and distribution companies
- He wants to run his own company
- Fixer, not a creator. Looking for something undermanaged
- Excellent at building systems
- Does not want a start-up
- Wants a distribution business
- Wants to have influence and decision-making power
Plas-Tek Business Analysis
PTI – a combination of manufacturing and sales company, not a distribution business
- makes gaskets, washers, “O” rings, and other plastic items
- currently operating with a 50% gross margin
- competitive advantage: fills orders quickly, great customer service
- 35% of its sales come from five main customers (of 300 total)
- 90% of sales are to distributors and equipment manufacturers (mostly food & chemical)
- With Allen Lane’s expertise, the distribution, market, and product offerings could be expanded
- Suppliers/competitors not interested in buying the company; on the market for an additional month
- Requires key employees to stay
- Potential contingent liabilities
- Elson invested a lot of his personal time to make the business successful
- Sales have been declining – assumed to be due to market conditions
Allen’s Cash Flow / Payback / ROE
- Submit an offer of no more than $350,000 (implied P/E multiple of 2.09x).
- Rationale: PTI is already a lean operation, so Allen’s expertise in operational optimization would have little impact on improving the financial prospects of the company
- Continue to evaluate businesses that present a greater strategic fit and allow Allen Lane to utilize his expertise fully.
- Take the emotions out of investing!
- Lucrative niche – gross margins of >50%
- Strong cash flows and sales with low labor costs
- Good reputation for fulfilling orders and excellent customer service
- Good relationships with employees
- Contingent Liabilities – Unreasonable compensation and accumulated earnings could lead to tax claims, which would lead to the infeasibility of the venture.
- Key Employee Dependence – Aging employees, the risk of leaving the company. Thus, loss of knowledge.
- Key Customer Dependence – Most of the sales coming from 5 customers account for 35.3%. Any loss of one of those customers would have a severe impact on the company.
- Inflated Valuation – NY banks do not consider contingent liabilities, and therefore, the market value will have to be adjusted.
- Management vacuum with Elson dead
- Leverage Allen Lane and Dan Ray’s experience and knowledge
- Introduce proprietary products – would require capital & effort.
- Upside in sales potential. An additional market effort will increase sales.
- Questionable long-term perspective as it is a mature market and the economy is in a downturn
- Nonproprietary product
Excel spreadsheet. Download here.