Acquisition of Liston Mechanics Corporation Harvard Case Solution & Analysis

Problem Statement

The South Atlantic Corporation is facing the problem with respect to the valuations of the LMC for the acquisition. The main problem that can be faced is how to evaluate the LMC values and what are the method to use in the valuation. Moreover, they also want to know about the financing sources for the acquisition of the company. The CEO is also considering the facts about overpaying the values which may create a problem for their financing structure.

There are many solutions for the valuation, but in the acquisition cases, most of the analyst used the direct valuation techniques for calculating the actual worth of the organization in term of monetary values. Furthermore, there are also some qualitative factors which always come under the main point of decision making. These qualitative factors may be evolving around the reputation in the market, customer relationship, internal structure of the organization and employee relationship etc.

These are the factors in the LMC which are giving them a high star ranking to the company. But the company is still stuck in the problem of the Finance. The reason is simple that the CEO is familiar about the nature of the company, but he does not know the financial value of the company.

Method of Valuation

There are several methods for the valuation of the companies, but in most of the cases the valuation nature depends on the different nature of the company/ industry. For example, a company has newly established its aims and different perspectives while on the other hand a company is in a mature position and it has different aims which would be good for expansions or growth of the entity. These methods classify in four aspects which will be covered under two headings. The first belongs to Direct Valuation Method, in which there are two methods one is Discounted Cash flow and other is an Economic Income Value analysis. While on the other side, Relative valuation Headings have also two methods which are Price Multiples and Revenue Multiples.

Basically, Direct Valuation estimates the company's principle value with respect to the market values. It mostly relates to the fair value of the market in today`s term value which will generate the future results. On the other hand, the Relative valuation measures the company’s value through the market sentiments with respect to the financial variables and earning values of the organization. In the Current Company`s valuation it uses the Direct and Relative Valuation through the support of Discounted cash Flow and Price Multiples

Financing Sources

The finance source for any company comes in three ways. Which are debt financing source (borrowing from the bank or Issues term finance certificate), Preferred Shares financing source (Issues shares with no ownership power) and Common Share financing source (issues shares to the general public by means of ownership in the company). The four financing technique can be made through the mixture of all the financing sources. Now, the Current Situation for the company is to finance the operation through a mixture of debt and common share equity. The percentage of the mixture may be evolving around 20:80 percent of debt and equity respectively. The reason for the selection for this source is that, it creates a good enterprise value for the acquisition by the South Atlantic Corporation.


The analysis is done on the excel sheet with taking the two scenarios for the calculation by using different assumptions. In scenario number one, it shows the hypothetical assumption for evaluation of the enterprise value by using some assumption in the case materials. Apart from the analysis, it calculates the enterprise value through two financing sources, which are the mixture of the debt and equity & sources of the equity. On the other hand, the evaluation is done in the second scenario with underlying all those assumption which are given in the case material. The second scenario is providing a better picture of the company as compared to the first scenario of the hypothetical values. The reason is simple that it adequately creates all the values with relating to the market situations which are already given in the case. It also gives the advantage of the avoidance of overpaying the values which means that the company is paying more than its financial values toward the acquisition of enterprise.

Moreover, in scenario 2, the value through a mixture of the finance shows the enterprise value which is 309 million and through equity it shows 257 million. The results shows, through mixture of financing sources giving the better result as compare to the value of single finance.........................

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