Q1) What strategic path should Jim Harris choose? What are the major issues influencing your opinion?
After analyzing the case study, it can be concluded that the best strategy for Harris would be to go for strategic growth through acquisitions. One of the major reasons supporting this view is that the other two options available to Harris while may prove to be safer, the fact is that Harris will profit in future only if he continues with the business following acquisitions. One of the major hurdles in the growth of Optitech has been the growing number of competitors. Since Optitech sits on huge valuation and revenues, it would benefit immensely by way to acquisitions.
Q2) Discuss the process and methods used to value a privately held company.
There are basically four methods which can be used to value a privately held firm. These methods have been explained in brief below:
a) Guideline Company Analysis: Here, the data of public companies which are similar in size and nature is used as a reference and estimated value of the privately held firm is judged.
b) Precedent Transaction Analysis: This is valuation based on the transactions happened in public knowledge where a similar firm was acquired and the amount paid for it is taken as estimated value of the firm.
c) Specific Company Accretion/Dilution Analysis: This is based on the maximum price that a buyer is willing to pay for the target firm.
d) Discounted Cash Flow/Leveraged Buyout Analysis: This valuation of a privately held firm is based on the firms’ assumed returns, cash flows, and available debt capital.
In the case within scrutiny, the Shields and Company analyzed and valued Optitech based on the last methodology of valuation, i.e., they took into consideration the cash flows and capital of the firm in order to come to a conclusion about the valuation of the company.
Some of the major dilemmas that Harris faces includes are: an increasingly competitive environment, eminent future recession, original blank companies filing suit to ensure no reprocessed replacements, competition from companies based on new model offering refilling of old cartridges, increasing overhead costs, etc.
Based on these dilemmas, Harris was offered with various strategic choices: either to continue on without a change in strategy, to follow a strategy based on growth through acquisitions or to sell off the company altogether to a private equity investor. It is based on deep SWOT Analysis and Porter’s five forces model that Harris can effectively decide which path to follow. While the first option can be safely and decidedly eliminated, it is a standoff between the last two options, viz-a-viz acquisition strategy, or sale to private equity investors, that needs to be resolved.
Q4) Evaluate the analysis presented by Shields and Company in exhibits 1-7. What criteria would you use to evaluate and select an investment banker?
Shields and Company has managed to provide with an overall view of the entire consumables industry, while also doing a SWOT analysis of sorts (Exhibit 1, 4 &5). In addition they have managed to do valuation of Optitech by way of analyzing the sales, revenues and cash flows of the firm (exhibit 2, 3 & 6) while equating these with other industry standards (exhibit 7).
While choosing an investment banker, certain aspects need to be considered:
a) Experience: The investment banker being selected should have a wide experience in dealing with private and public firms and raising capital for them.
b) Expertise: The investment banker should be specialized in his field instead of being jack of all trades. This will ensure specific focus on the task entrusted by the firm to the banker.
c) Relationship: The investment banker should have repute within the market for its relationships with the buyers as well as sellers. This will ensure an easy process of raising capital while also limiting the risks involved.