Empire Investment Group’s Harvard Case Solution & Analysis

Overview of proposed Investments:

            Empire is considering thorough research to go for potential acquisition. The company has three options to from and acquisition is one of them. It requires a detailed analysis of each company regarding short term and long term sustainability of these companies.

            The first option is Coming Home Funerals, a UK based company which is related to funeral and cremation for which company has to pay an amount of $240 million and it has an NPV of around $242 million of Coming Home.

            Another option it has to acquire a well reputed European based company 3F that is related to flavor and fragrance industry. The proposed acquisition has a present value of its earning above $1.7 billion where as the purchase price is around $1.2 billion.

            Last option is GML which is related to automobile and two wheel motor bike parts and is situated in India.  It has a history of innovation and product development in its competitive market.  Its purchase price is around $600 million.

Coming Home Funeral Services:

            The company is in a business of Funeral and cremation business in UK. The demand for services and products is only based on death rate and market share in industry. Business does not have a chance of loss because the people use to die due to its universal nature.

            Coming home is operating under three business units: over 500 funeral locations, almost two dozen crematoria and a number of cemeteries, and a pre-arrangement business that served 200,000 individual who prep-paid their funerals.

These three businesses are solely related to death rate, company has given an option to book their funeral during their lives for a better funeral service from company, even though no one is there to finance funeral services after their death.

Projected Growth:

            Coming Home has a projected growth is 9% (2005 to 2008), in funeral business for their EBITA, but it is required to have a capital expenditure of $13 million for reinvestment in existing and new assets of business.

            Free cash flows growth is 15% (2005 to 2008), that are related to funeral business and it is clear that annual depreciation amount is higher than that of reinvested amount.

            Annual growth is 12% (2005 to 2008) in cremation business before reinvestment in capital expenditure in 2008. The resulted growth becomes 4% after incorporating the effects of reinvestment.

            Coming home has an average growth of 10% after considering all reinvestment assumptions. The growth is sustained for future years after 2008 for terminal values.

ROI & Valuation:

            The return on investment is considered to be 20% for the case analysis. However ROI is after tax and tax rate is considered to be 30% in this case. ROI is estimated for perpetuity and it may be possible that ROI may change after time intervals.

            Coming Homes is valued at $242.4 million through free cash flow method. In this method it is estimated that the required return and growth remains constant for period of perpetuity.

Favorable terms and conditions:

            If Empire group proceed for acquisition at amount $240 million then the option is feasible because it gives a return of 20% to Empire. The arrangement of equity must be based on total business value at $240 million or less if possible for Empire because calculation method has its own limitation and estimations that can make acquisition decision unfavorable.

            Empire must go for bargain but it should accept if its required return is below 20%, because of sustainability of funeral business.

Performance (Management):

            Management of Coming Homes is performing well regarding future development strategies. They are coming with innovative ideas for future of company along with cost saving to benefit company owners.

            Management is performing well as compared to their budgeted and actual performances. Management has ideas to get the work done. It is necessary for Empire to retain current management after acquisition, because management has knowledge and experience regarding funeral business.

Exit Strategy:

            For the purpose of exit strategy Empire has three options after 4 years.

  • The first one is to sell its business to any other equity investors that are looking for diversification of their risks.
  • It has an option to sell business to its competitors and those competitors may be willing to pay premium price because of synergies that can flow to its competitor.
  • Final option it has to go for IPO, as business is growing therefore it may be easy for Empire to sell at premium or at least existing price at current growth rates.

Empire Investment Group’s Case Solution

Exit strategy looks like easy due to nature and company image in UK. UK industry is growing as death rate is consistently increasing in UK............................

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