Quick Resolve Products

Case Study

Possible Points: $10$

It was late Sunday night and Dan Peterman was getting weary. The big presentation was set for $8\mathrm{.}00a.$m$.$ the next day and Dan kept remembering what Ray Machado, the Chairman of the Mergers and Acquisitions $($M & A$)$ Committee had said to him." "The board members are going to ask several tough questions at the meeting so we better prepare ourselves thoroughly. Make sure that we can substantiate all our numbers and justify all our assumptions."

Dan and Ray were serving on the M & A Committee, which had been formed by their CEO, Keith Overby, to "look into" possible candidates for acquisition. The three of them were employed by Innovative Concepts, a fairly large$-$sized manufacturing firm, headquartered in Minneapolis, Minnesota, which produced unique metal products for household and commercial use.

Formed in $1980,$ the company had seen better days. At the time of its inception, its industry sector was still in its infancy stage and competitica was almost non$-$existent. As a result, the company enjoyed significant grouth over the years and was able to recruit excellent personnel, many of whom stayed with the company right from the start. The firm had accumulated a significant amount of cash and built up a good credit history.

Over the past couple of years, however, due to fierce competition and a lackluster economy, the firm's expansion had all but dried up$,$ and the managers were hard pressed to search for altemative avenues for growth. The company' stock price had recently dropped to $$45$ per share The overwhelming consensus in the board room was that the firm should look for suitable acquisition candidates so as to better utilize its resources and diversify its risk.

About three months ago, the Chairman and CEO, Keith Overby, set up the M & A Committee to research possible acquisition candidates and preseat its findings at the quarterly board meeting. He asked the committee members to consider firms in related as well as unrelated industries and explain the rationale for their recommendations.

After considerable research, data gathering, and analysis, the committee had narrowed their choices down to three possible candidates. After the presentation at the quarterly meeting in March, the Board of Directors had ruled out two of the three candidates and asked the committee to conduct further valuation and analysis on the third candidate $-$ Quick Resolve Products. The board members were particularly cunous about the low P$/$E ratio that the firm was trading at$.$ In fact, one board member had heard about "relative P$/$E magic" and was wondering whether by acquiring Quick Resolve, the firm could boost its $\frac{P}{?}$ ratio and possibly its eamings per share.

Quick Resolve Products, headquartered in Rockford, Mlinois, was a mid$-$sized company with assets of $$2$ billion. The firm's earnings per share had been steadily increasing each year and