Landmark Facility Solutions Harvard Case Solution & Analysis

Introduction & Problem Identification

Broadway, located in USA, was formed by Mr. Harris in 1992.Broadway is providing facility services like janitorial services, floor and carpet maintenance services and building maintenance services. In last few years, Broadway has been seeking significant growth and has spread its operations to other countries like New England and Florida by providing additional services like educational and industrial services.

The CEO and president of the Broadway aim to spread its operations in addition to facility support services to building engineering and energy solution. For this purpose, CEO and President of the Broadway industries are considering acquiring the Landmark facility solutions.

Landmark facility is specialized in providing commercial building, engineering and energy solution services.It was found in 1954 and it has significant brand recognition throughout USA and due to its strong brand recognition, Landmark is capable to charge premium prices. Instead of charging premium prices, Landmark is currently facing the problem of reduction in operating profit.

The current financial position of Landmark encourages Mr. Harris to acquire Landmark because it is expected that the acquisition of Landmark will satisfy the strategic needs of the Broadway in order to expand its services. However,the management of Broadway suggested that the current demanding consideration from the Landmark is high and the expected benefits from the acquisition will not justify the purchasing cost. In addition to this, Mr. Harris is considering the financing of the acquisition because currently Broadway has two available options and it is identifying which one is suitable if the acquisition process may proceed.

Does Broadway Benefit from Acquiring Landmark

The management of Landmark stated that any proposal less than$120 million will not be accepted. The forecasted financials of the Landmark without being acquired show that the net sales of the company will grow to $441 million and it is expected that it will also generate positive incremental cash flows. However,under acquisition the forecasted financials of both companies are expected to be exhibit different results.

In order to calculate the realized benefits from the expected acquisition, certain assumptions have been taken and for this purpose the net present value of the forecasted free cash flows is calculated. In order to calculate the realized benefits on the basis of time value of money, the appropriate discount factor is calculated by using the capital asset pricing model.

For this purpose 10 years treasury rate is assumed to be risk free rate and taking the beta of comparable company 3 and market risk premium cost of equity is calculated by putting these values into the formula of capital asset pricing model. By considering the credit rating of Landmark it is bad due to its high debt ratio cost of debt is found.

 By taking the debt and equity ratio of from the financials of the year 2014 of Landmark and putting these values into the formula of the WACC along with the cost of debt and cost of equity, the cost of capital for the Landmark is calculated.By discounting the free cash flows at this cost of capital net present value is calculated which 14 million dollars is.

It is expected that the cost of capital for Broadway is also calculated by using same procedure and by using the debt equity ratio from the financials of Broadway of the year 2014. By using this cost of capital and discounting the projected cash flows of Broadway before and after the acquisition by taking the certain assumptions, it is expected that Broadway is generating more net present value of $15 million as compared to the net present value without acquisition.

Broadway is getting the assets of the Landmark of worth $94 million, therefore total worth of the Landmark’s assets, incremental net present value of the Broadway and expected positive net present value of Landmark and all benefits are justifying the cost $120 million and increasing the worth of the Broadway by 123.86 million dollars, which clearly supports the stance that Broadway is getting benefits by acquiring Landmark.Landmark Facility Solutions Case Solution

Financing Alternatives should be Chosen

Broadway has two options available in order to finance the acquisition. The first option is debt and the other is combination of debt and equity. Currently, Broadway has 50% debt in its capital structure and this means that the option of debt could be exercised however,it will increase its debt ratio more than 100% and choosing the other option will increase the debt ratio too approximately 81%.However,it is expected that financing through other option will dilute the wealth of the share holders as it will give 40%holding to investors, which means they are getting more than they have invested.................

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