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Blaine Kitchenware Case Analysis

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Blaine Kitchenware, Inc.

Case Analysis

Adria Bentley

Strategic Management

Montana Tech of The University of Montana

February 1, 2016


Executive Summary

In order to make an analytic decision of the company’s financial structure the current capital structure and payout policies of BKI need to be addressed.  Because the current approach of the management is to lower the risk BKI has operated the firm almost completely debt free, which has put them in the position of having an inefficient capital structure.  Due to their conservative way of operating they have not considered the option to help lower their cost of capital as a result of reduced taxation.  Because of this they have been consistently paying a 32% tax rate and it is expected to increase 40% in future.  With each acquisition their outstanding shares have increased, and it is in turn reducing their EPS to $0.91.  This also made their ROE drop to 11%, the lowest in the industry, despite the fact that they are among the healthiest and safest.  In addition to this, their payout ratio has increased from a healthy 35% to 52.9% in 2006.  This essentially means that they are not able to make as much cash as they used to causing the growth rate of their cash to decline.  A future acquisition may increase the outstanding shares yet again and this can become a vicious cycle.  Relying completely on equity and not utilizing their strong balance sheet is actually obstructing their growth and ability to be flexible in making decisions to enter new markets such as the beverage appliance segment.  

This case study provides recommendations for each problem presented, and an analysis showing multiple scenarios for the company to consider.  Along with each scenario the analysis describes the advantages and disadvantages of each option, which are supported by the calculations in the appendix.  In the end BKI needs to choose which scenario does the best job of addressing the problems presented.  The analysis concludes to describe the best option that Blaine Kitchenware, Inc. should choose and why.


Problem Statement

        Blaine Kitchenware, Inc., founded in 1927, is a mid-sized producer of small appliances for residential kitchens.  They are a public company but are mainly controlled by the family.  Blaine Kitchenware (BKI) is a major player in the home appliances industry and has been an American Brand serving the domestic and international markets for over 80 years.  The CEO, Victor Dubinski, took over the reins from his uncle in 1992 and has put the company into a very safe, low risk position with adequate growth potential.  He is looking to unleash the unrealized value from discussions with a potential banker.  The problems he should be addressing are as follows:

  • The current capital structure of BKI is not efficient.  The incentive for any public company and Board of Directors should be to increase the value of the firm through projects, increased earnings per share value, and lowering costs.  It is because BKI has chosen to finance projects by selling shares stock rather than made use of debt issuance that the firm’s value is not fully maximized and the weighted average cost of capital is not minimized.

  • Blaine Kitchenware has a threat of being taken over by another company.  BKI currently holds $231 million in cash and securities, which reduces the enterprise value from $959 million to $729 million.  The excess amount of cash and securities will attract hostile takeovers because the acquirer can use the cash to pay the acquisition cost.
  • There is pressure on BKI from private label products and imports.  BKI is resisting lowering prices despite the recent shift in consumer purchasing preferences favoring larger retailers.  By not following suit and lowering their prices BKI is at risk of not achieving an adequate growth in sales.    
  • The company’s is not taking advantage of its opportunities to help increase their profitability, and consequently have a return on equity below industry average.  The beverage appliance segment of BKI has been put off despite its major possibility to provide growth for the company.  
  • BKI does not have an appropriate dividend policy.  The company is paying out a large amount of dividends each year when it is not necessary.

Recommendations

  • Blaine Kitchenware has to use debt as well as their excess amounts of cash and securities as the key tools to help them improve their capital structure.  They need to control their stock prices in order to improve its earnings.  By finding an effective balance between debt financing and equity financing they will be able to correct problems with their overall capital structure.  It will also help the company save on taxes because interest from debt is tax deductible. For the company to their potential they need to be willing to take on more risk and use some debt leverage to buy back some of their shares. Not only will this reduce their tax burdens, but it will also increase their market value because there will be less shares available for trade.  Additionally, they will have better bargaining power with future acquisitions.

  • The $231 million in cash and securities will attract hostile takeovers because the acquirer can use the cash to pay the acquisition cost.  In order to prevent a hostile takeover the company needs to reduce their cash and securities and increase their strength.  By repurchasing stock BKI will get rid of the surplus cash and increase the cost for another company to takeover.
  • In order to help BKI compete with imports and private labels they should continue with their plan to move production abroad, and attempt to lower prices in order to compete more aggressively with their rivals.  Another thing that could help them increase profits is to push their mid-tier products because they take up the majority of their operating income.  By trying to push the higher-end product lines the company is appealing to approximately only 20% of where their revenues come from.
  • BKI is missing out on a major opportunity to increase their profitability by not aggressively attempting to get a position in the beverage appliance segment.  They should plan to enter this market in 2007, which will increase sales due to the consistent growth of this segment.    
  • From investors’ perspectives a dividend payout is not a guarantee the company’s success, and it is not an obligation for the company to pay dividends to their investors.  For BKI a dividend is not tax deductible and it can’t bring any tax benefit.  Since the goal is to maximize shareholder’s value, rather than paying dividends, BKI should use all available cash to support new investments that promote company growth.  This is not a disadvantage to the stockholders because the value of their shares will go up.

Analysis

Considering the position of Blaine Kitchenware, Inc. amongst their competitors it is obvious that they need to make a change in their capital structure.  In order to do this BKI should use their cash and securities along with debt to buy back stock.  In turn this will help to control their stock prices, increase their earnings, reduce tax obligations, increase their market value, give them better bargaining power for future acquisitions, reduce the risk of a hostile takeover,  increase shareholder wealth,  and allow them to feel confident in making decisions outside of their usual conservative way of managing.  

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