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Graduate School of Business Administration

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University of Virginia



In early July 1978, Mr. W. L. Lyons Brown, Jr., president and chief executive officer of
Brown-Forman Distillers Corporation, faced an important acquisition decision. The principal owners of Southern Comfort Corporation had approached Mr. Brown in May with an offer to sell the company at a price of $94.6 million. In preparing his response, Mr. Brown was evaluating the reasonableness of the asking price and the likely effects of the acquisition on Brown-Forman’s share price. No

As a leading producer, marketer, and importer of wines and distilled spirits (including the well-known “Jack Daniel’s” brand),
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The company had a relatively larger profit margin, higher growth rates, and stronger balance sheet than its major competitors. The 1978 annual report noted:


The Company’s balance sheet is strong due to continued close attention to asset management. Our low debt/equity ratio and the excellent financial performance in recent years places the Company in a favorable position to assume higher levels of debt to finance acquisitions and other investment opportunities.



Value Line identified Brown-Forman as the “premier liquor company in the United States” and noted that the firm’s major brands continued to grow despite a flat industry growth trend.6 The company was expected to earn $2.40 per share in 1978 and to add another 15 percent to earnings per share in 1979.
Brown-Forman’s income statement and balance sheet for the year ended April 30, 1978, are given in Exhibits 2 and 3. In 1978, two classes of stock existed for the company: Class A stock had the exclusive voting right and was listed on the American Stock Exchange, while Class B common had no voting rights but was also listed. The Brown family held 74 percent of the Class

1977 Annual Report, p. 15.
“Return” defined as the sum of net income (excluding extraordinary items), the after-tax cost of interest, the increase in deferred income taxes, and the amortization of intangible assets during the year. “Average total capital employed” defined as

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