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Case Background
Paint-Pen, Inc. is a company that manufactures and distributes liquid paint dispensed in ball-point tubes. The product is sold under the registered trademarks “Paint-Pen” and “Liquid Embroidery”. Aside from bearing the Good Housekeeping Seal of Approval (awarded in 1973), Paint-Pen distributes its products under the home party plan with exclusive franchise agreements with its distributors.
On April 19, 1997, the company was offered for sale to Mr. Warren G. Hamer. Provided with the exhibits that contain the summary of Terms and Conditions of Sale, audited Income Statements and Balance Sheets, and Company History, Mr. Hamer needs to decide whether or not to place a bid, which is due on April 24. However, Mr. Hamer was
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This signals that the excess cash was not highly utilized in the past although it already paid out dividends to its shareholders in 1996. This excess cash can be used for future projects and investments of the combined firm after acquisition.
With Paint-Pen having a debt ratio of 22.74%, Paint-Pen is less risky and has high debt capacity. Adding this high capacity to borrow will add to the value of the combined firm. This acquisition will increase the debt capacity of the combined firm. Aside from the tax benefits that can be exploited after acquiring Paint-Pen, Mr. Hamer’s firm can also put value to the effect of diversification as the firm can diversify by just at the acquisition cost (less other synergies).
Valuations depend on forecasts. The reliability of the forecasts will then depend heavily on complete analysis of the industry, in addition to the evolving changes in the economy. It also requires understanding of the business and financial characteristic of the industry.
The group recommends placing a bid on Paint Pen. Mergers and acquisitions have the potential to create value for acquiring firms. If performed effectively, sources of synergy would be positive economies of scale, economies of scope, and extending technological capabilities of Paint Pen.
Mr. Hamer should decide to buy Paint Pen because efficiency improvements as
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