Premium Essay

Paint-Pen

In: Business and Management

Submitted By elizaasis
Words 683
Pages 3
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 apprehensive about the deal.
Analysis
To be able to arrive at a decision, Mr. Hamer needs to assess the value of the synergies the acquisition would offer.
Operating Synergy
Operating synergies can affect margins, returns and growth. However, in the case, we could not identify the operating synergies of the combined firm. Reason for this is that we do not know the details of Mr. Hamer’s company and to which industry it belongs in. If Mr. Hamer’s firm is also under the crafts and hobby industry, the acquisition would definitely have value by the following possibilities: economies of scale, greater pricing power, positive effect of combining functional strengths, and higher growth in existing markets. For this case, we determine the value of the synergies of Paint-Pen alone and assume that the value will be additive to the buying firm, hence will increase value of the combined firm.
We value the cost and growth synergies of the target firm using the DCF Model. With the given Income Statements and Balance Sheets, we forecast the Free Cash Flows of the firm and discount them to present value.

Financial Synergy
By acquiring…...

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