Dressen’s Buyout Harvard Case Solution & Analysis

Why did Westinghouse want to sell Dressen at the end of 1995?

            Dressen is performing below the market average and due to this there are high chances to lose money by proceeding in the industry. It has shown a net loss and a decrease in its sales revenue, has made the management to believe that its survival is not possible for future years. The US office furniture industry revenue has grown by an average of 5% for last many years, but the poor performance of Dressen has put it in the position of the buyout.

            Westinghouse has also failed to take reasonable measures to reduce the costs and take synergy benefits.However, its lack of interest in such cost reduction measure has caused the situation of buyout for Dressen. It does not have skilled sales and distribution staff that can perform their duties in an excellent manner to increase the revenues of the division and the company as a whole. The dealer and sales force has been disappointed by the poor performance of sales and distribution stall that is solely related to Dressen.

            Its below industry performance has substantially affected the profitability and cash flows of other divisions that are deteriorating the performance of the whole group. Dressen is taking the profits of other departments with its loss to make the consolidated financial blow to benchmark. This situation is affecting the share price of Westinghouse that is decreasing since 1990 due to bad performance of Dressen’s division.

            Westinghouse has acquired CBS with a cash consideration of $5.4 billion in August 1995. Due to the acquisition, it has to raise a loan short-term of $2 billion to finance the acquisition. It has to pay back the loan in late February 1996, it requires cash therefore it is selling all its non-core businesses. Dressen is under consideration for sale to finance the loan.

Is consideration of $585 million fair price for Dressen Division?

            The consideration of $585 is viable with some of the valuation methods, and it is unacceptable for some other valuation methods. However,it happens in every case of valuation that the values from different methods give different results and a final bid is given and accepted in between those values.

            The market multiples are used on the basis of the market average to value the business because the industry is affected by the well performing and worst performing firms (Exhibit 5). However,Dressen has performed better than average in the last third quarter of 1995, therefore, it may not be acceptable to take higher than average number to Warburg Pincus Ventures.Due to its management skills and market survey, it may not convince him to believe the fact of its better performance.

            The values of Dressen through forecast method is; $335.58 million through sales market multiple, $861 million through EBIAT multiple, $640 million through EBITDA multiple, $164 million through Net Asset valuation, and $1,753 through Free Cash Flow method. All methods are acceptable to some extent, however,the most appropriate valuation method is considered to be the free cash flow method that takes many assumptions, but the value results are in terms of cash makes it more appropriate (Appendix).

            Through free cash flow method, the division is selling at the prices substantially lower than that value on FCF method. The selling loss is of $1168.5; the method is made by the forecast on the basis of much estimation without taking consideration of the past performance and the performance of 1995. The forecast can go wrong, therefore the decision must be taken on the basis of consideration of the results of the impact on the performance in 1995.

            The value of Dressen through forecast method is $335.8 million through sales market multiple, $725.7 million through EBIAT multiple, $569.6 million through EBITDA multiple, $164 million through Net Asset valuation, and $587.06 through Free Cash Flow method. In this case, we also do consider cash flow method as the most appropriate for both the entities (Appendix).

Dressen’s Buyout Case Solution

             Bid price is near around to the FCF method results after taking consideration of the performance in1995. The bid price seems to be reasonable after taking consideration of the results in 1995, however,it has ignored some fore casted synergies and cost saving impacts.

            The price is reasonable on the basis of valuation results because the bidding company takes many risks of failure with it after paying the reasonable price to Westinghouse.

            Dressen must go for a deal with Herman Miller that might give a higher amount as it is one of the market leaders in the same industry and it can pay higher due to the impact of synergy.................

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