Landmark Case Background and Problems

Case Background

The case deals with valuation of companies for acquisition and hence how to determine the purchase price for the transaction. The other aspect the case deals with is how to finance this acquisition. We are first required to check whether the acquisition is profitable foe the firm or not and then if profitable we need to figure out which finance option among the possible alternatives of 100% debt and 50% debt:50% equity.

The given case has two companies Broadway Industries and Landmark Facility solutions. The companies were engaged in providing maintaining solutions for the corporations. Broadway which was based in New York, New Jersey was providing janitorial services, floor and carpet maintenance, HVAC and other building maintenance in eastern United States. Landmark Facility Solutions on the other hand was based in Sacramento are and specialised in building engineering and energy solutions, janitorial and commercial cleaning and other general building maintenance and management. Landmark was famous for integrated technical services such as electrical and mechanical engineering and energy management. Due to high quality service and technical expertise, it was able to charge a premium price. However, despite of such reputation, its operating margins have been continuously declining.

The big firms started diversifying their business by acquisition of other small players as it was beneficial for them to achieve cost reductions due to economies of scale. Also this helped them to charge a premium price due to their compelling value proposition as the customers preferred bundled contracts. Also the services providers could expand their expertise in specific industries.

Broadway felt that acquiring Landmark would be beneficial for them as it helps in providing bundled services, gaining new customers in different regions and also to expand its presence in high tech segment. Also they felt that the biggest problem with Landmark was its inefficiency in maintain high operating margins and Broadway could increase this margin to 3%.

Advisors provided the estimated numbers for both companies and this was to be used to assess the bid for the Broadway. Broadway hoped to benefit great through elimination of common overhead expenses, reduced net working capital to sales ratio and through the respect Landmark commanded in the market. The report looks at feasibility of acquisition and the possible way of financing it.

Problems in the Case

1. Feasibility of acquisition

Landmark has demanded 120 million dollars as compensation for the deal. It has to be checked whether Broadway can make any profit from this deal. For this we need to look at both quantitative and qualitative aspects of the deal. Quantitative analysis is needed to find out the valuation of the individual companies in a standalone situation and in the combined situation in after the acquisition. This can provide us with the idea regarding the correct price that Landmark should ask from Broadway.

The qualitative benefits revolve mainly around expectation of growing market presence, synergy benefits and increase in profits due to it. One of the biggest advantage was the better value proposition to the customers in term of bundled offers as the combined company will be able to provide integrated services. This will allow the company to charge a premium price, have diversified operations, larger footprints and more customer base.

Another possible benefit arises from the confidence shown by the management in their ability to increase the operating margin of the Landmark Facility Solutions and the elimination of common overheads for both the companies. Broadway was banking on the positive image Landmark held in the market. However, analysts were not sure about the estimates of the Broadway and provided numbers for a pessimistic situation as well. Thus the performance of acquisition has to be checked in pessimist situation as well.

1. Ability of Broadway to manage Landmark Facility Solutions

Sales figures for Landmark Facility Situations showed their expected sales in the year 2014 to be around 345.5 million dollars. On the other hand, the expected sales for Broadway industries for the year 2014 were around 161.9 million dollars. This shows that Landmark had business which was approximately 2.13 times the business of Broadway.

Even when comparing the assets, Landmark had 94.6 million dollars’ worth of assets compared to 86.8 million dollars for Broadway. The market capital for Broadway is 43.1 million dollars while it is 50.8 million dollars for Landmark. Event he liabilities of both the firms were identical with Landmark having total liabilities worth of 43.8 million dollars and Broadway industries had total liabilities amounting to 43.7 million dollars. Thus Landmark Facility Solutions was a bigger firm as compared to Broadway in every aspect.