Forming Management - Merit Marine Corporation

1. Introduction

Based on the case study, Merit Marine Corporation is the exclusive distributor of products of Olympus since 1976 to the marinas across the state of Florida.  Merit Marine Corporation is one of  Omni Bank’s customers. At the start of 1985, Ginny Shields (relationship manager) and Jeff Finch (corporate finance department), both from Omni Bank, are considering how to enhance the bank’s image/reputation via the provision of financial advisory services to their existing customer (inclusive of Merit Marine Corporation).

1. Problem Statement

Merit Marine Corporation experienced declining sales for the period of 1982-1983   because of serious recession, high interest rates and high oil prices).  As a result of this, the company encountered difficulties in securing fixed rate long-term financing.

The outcomes of the decision will ensure which option will profitable to Omni Bank as well fulfil  the fund requirements of Merit Marine Corporation.

1. Related Issues

The problem statement  above are related with the following issues:

1. How to provide the loan option that can sustain Merit Marine Corporation’s competitive advantage, improve its profitability and maintain good customer satisfaction?
2. How to make changes to Merit Marine Corporation’s existing floating rate loan towards long-term fixed rate loan in order ensure the company’s financial stability?
3. If Merit Marine Corporation is tied up with many fixed long-term debts, it will have to incur a prepayment penalty if its cash flow is inadequate to lessen its still existing long-term debts.
4. Will the commercial paper based, floating rate debt by Olympus be permanent in nature?

1. Analysis of the Industry

4.1 Porter’s Five Forces’ Model

1. Customers

The purchase decisions of customers will be affected by the specific features of  marine products that are offered by different manufacturers. This will result in high switching costs and affect the brand loyalty. The marine industry deals with the issue of customer confidence. Economic downturn may seriously affect this industry due to the fact that marine products are recreational products.

1. Supplier

Merit Marine Corporation is tied up with Olympus since it is its only supplier of marine products, though there are other suppliers for its gas and other boats’ accessories.

1. Competition

The marinas industry competition is considered high. Since Merit Marine Corporation is an exclusive distributor for Olympus products in Florida, it faced fierce competition from other distributors and also other recreational boat manufacturers at a regional level.

1. Substitutes

There are several other types of recreational facilities in the recreational market that can be regarded as substitutes of marine products.

1. New Entrants

New entrants as potential competitors will not find it easy since huge capital outlay is required. They will face massive competition from already established existing 20 national and regional manufacturers.

1. SWOT Analysis

1. Strengths

1. Merit Marine Corporation   is the exclusive distributor of marine products industry.
2. Merit Marine’s location in Florida, which has one of the largest recreational centre in the country.
3. Its experience and expertise in this business and industry.
4. Merit Marine has a close networking with the bank.
5. Total current asset increased by year ‘1982, 1983 and 1984 (Exhibit 1).
6. Return earning increased every year.
7. The life cycle of the product is mature based on the cash flows that reflect its profitability.

1. Weaknesses

1. Its capital-intensive activity which needs large capital in terms of maintaining large ware-house  and costs, etc).
2. The sales are purely seasonal and cyclical, which hampers the stable flow of the company’s activities.
3. Being Olympus’ sole distributor, Merit Marine is dependent on Olympus. If anything unfavourable happens to Olympus’ business, it will obviously affect Merit Marine’s business.

1. Opportunities

1. Merit Marine’s investment in fixed assets will trigger future sales’ increase.
2. With its established image in the marine products’ market, it has potential  future expansion (apart being Olympus’ distributor)  and also the possibility of being distributors to other companies.
3. Merit Marine will be able to increase sales.
4.  Merit Marine can become the market leader.
5.  Merit Marine will be able to increase dividends.

1. Threats

1. Maturing portion of long-term debt and notes payable for the next 2 years (1985-1986) will be high 31,223 and 25,595 respectively as provided in Exhibit 2. Merit Marine will have to pay these debts on time. Based on this, the company is vulnerable in case of economic recession. Any changes in demand to the industry’s products will place the company in an unfavourable situation. The company will not be able to secure a reasonably priced mortgage. Its credit worthiness is questionable. The prevailing interest rate environment will further worsen its ability to secure fixed rate financing.

1. FINANCIAL  PERFORMANCE OF  MERIT   MARINE  CORPORATION(1980-1984)

Merit Marine Corporation is considered highly leveraged since its debt/equity ratio ranges from 2.8 (1980) to 1.9 (1984) as in Exhibit 2. Times interest earned ratio is not that high, which historically ranges on the average around 0.7. As a result of Merit Marine Corporation’s sales decline from -31.5 (1982) and -4.1 (1983), the times interest earned ratios were small, which affect the credit worthiness of the company. In 1981-1982, the company was just able to cover its interest expenses.

The  company  has strong  liquidity ratios, an average current ratio of 1.6  and  quick ratio  of  1.0  (1980-1984),  and its profitability  ratios can be considered quite  positive but not too strong since Olympus products are premium in nature. Higher profitability ratios are expected in the historical period, with 0.08 and 0.014 respectively. Gross margin ratio averages 0.23 and operating margin averages 0.05, though average net profit margin is small (0.015), almost at a breakeven point. Over the last years, sales costs increase relative to sales level. However, at the same time the company decrease its operating expenses relative to the sales so as to generate positive incomes.  The company has to check its financial statements to determine the cause of changes in its operating expenses. Also, the company has large fixed assets turnover ratios.