- Using the already created Google Doc and Google Sheet check the numbers in the tabs of the Google Sheet starting with betas to confirm all calculations are correct.
- Use the data from the Google Sheet to copy into case study.
- Answer all questions in the case instructions. Follow all requirements including page limit etc.. Do not go over the page limit.
- Use the notes in the Google Doc to guide your case analysis and recommendations. The notes are above executive summary. Do not change the heading titles as indicated by the case instructions. The notes above executive summary are simply a rough draft of a brain dump for guidance. You can delete the notes for the final product.
- Please contact with any questions.
- The written English must be impeccable in assignment.
- Stick to concrete conservative finance concepts in the case study. The teacher is not very open to more liberal business ideas and is a hard grader.
YOU MUST USE THE SHEET AND DOC IN THE LINKS PROVIDED. IF YOU NEED AN ALTERNATIVE FORMAT PLEASE ASK.
https://docs.google.com/spreadsheets/d/1e5T4GWVZh3tYtZSNjaAuAruogh_ZmERHOhV6RBtA5Zw/edit?usp=sharing
https://docs.google.com/document/d/1ho3Ra4zYCpGmNWlYvIIJQHQH9Atr-sBnLdvt3dpsLw8/edit?usp=sharing
Sterling Household Products Company ________________________________________________________________________________________________________________ HBS Professor William E. Fruhan and Babson College Professor Craig Stephenson prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. W I L L I A M E . F R U H A N C R A I G S T E P H E N S O N Sterling Household Products Company January of 2013 brought a new year and an important new opportunity to the management team of Sterling Household Products Company. Sterling manufactured and marketed a wide line of consumer goods, including laundry products, soaps, cosmetics, toilet preparations, and cleaning, disinfecting and sanitizing products, which were sold domestically and internationally, and were used every day in millions of households around the world. Sterling’s family of quality products included many highly regarded brand names, and the company had consistently delivered impressive sales and profits to the investment community. Sterling’s financial measures for all recent years showed that the company was successful, but a time series analysis of these same financial measures quickly isolated Sterling’s current challenge: growth rates for unit volume, sales, and profits were very low, and company management was looking to expand into businesses and products with more potential for growth. Sterling had identified health care as an industry with more growth potential, and a detailed search for health care products which could fit well into the company’s existing operations led to discussions between Sterling and Montagne Medical Instruments Company. Sterling was interested in acquiring Montagne Medical’s germicidal, sanitation, and antiseptic products unit, and Montagne Medical was willing to sell the unit for the right price. Negotiations had revealed that Montagne Medical believed the right price was $265 million, so Sterling had to determine if acquiring the unit at this price would generate value for the company and its investors. Sterling Household Products: History, Finances, and a Strategic Opportunity Sterling was a leading manufacturer and marketer of consumer products, selling trusted and recognized brand names through mass merchandisers, grocery stores, and other retail outlets. When Sterling was founded in the early 1920s it produced and sold only laundry products, but success in this narrow business line allowed the company to grow and expand the scale and scope of its operations. Sterling invested internally as attractive opportunities were identified, but with brand development in consumer products being both a lengthy and expensive process, much of its growth came from acquisitions of existing and successful brands. By the beginning of 2013 the company 9-913-556 A P R I L 3 0 , 2 0 1 3 For the exclusive use of J. Bates, 2020. This document is authorized for use only by Jennifer Bates in FNCE 6310 Financial Decisions and Policies Spring 2020 taught by John Byrd, University of Colorado - Denver from Jan 2020 to Jul 2020. 913-556 | Sterling Household Products Company 2 BRIEFCASES | HARVARD BUSINESS SCHOOL manufactured a wide variety of consumer products in more than 20 countries and marketed these products in more than 100 countries. As presented in Exhibit 1, Sterling’s well-regarded laundry products, soaps, cosmetics, toilet preparations, and cleaning, disinfecting and sanitizing products combined to generate nearly $3.3 billion of sales and $323 million of net income in 2012, producing a net profit margin of 9.8% of sales. This high profit margin reflected the income statement success of Sterling and its products, and with year-end 2012 total assets equal to nearly $2.7 billion (Exhibit 2), the company produced a rate of return on assets of 12% in the most recent year. Sterling’s financial results in the preceding years were just as robust; by any financial measure the company was successful year after year. Analysis of Sterling’s income statements through time, however, revealed the company’s biggest challenge. Between 2010 and 2012 sales grew from $3.14 billion to $3.281 billion, a total increase of 4.5%, representing a compounded annual growth rate of only 2.2%. Although the company had excellent products and was well-positioned in the industry, growth opportunities were limited and its business was under constant pressure. The company’s annual sales volume in units had increased by just less than 1% per year, constrained by weak growth in overall demand and strong competition with other products, giving end consumers a variety of manufacturers and products to choose from. In addition, Sterling’s largest retail customer represented 26% of its net sales, and its 10 largest retail customers accounted for 55% of company sales. These powerful retailers regularly squeezed Sterling and other consumer goods manufacturers, with respect to wholesale prices and volumes, as well as encouraging end consumers to trade down to private label products which generated more profit for the retailer. The company’s operating expenses and commodities costs were also rising faster than the inflation rate, placing even more pressure on Sterling’s profits, as shown in Exhibit 1. None of these situations were expected to improve in the near future, so the company was attempting to shift its product offerings into industries with more opportunities for growth and sustained profitability. Sterling’s management team had identified one segment of the health care industry as an attractive investment opportunity. The company had highly regarded and successful household cleaning, disinfecting, and sanitizing products, and justified public health concerns about acquired infections was driving demand for more effective products in health care settings. Acquired infections in hospitals and acute care nursing facilities were a significant and growing concern in the health care industry, with the U.S. Department of Health and Human Services estimating that at any time one in 20 hospital patients had a health-care-associated infection.1 The entire health care infection-control market was estimated to currently represent $2.5 billion of yearly sales; it was growing rapidly and was also quite fragmented, with no competitor holding more than a 7% market share. Sterling’s management recognized that the market for effective germicidal, sanitation, and antiseptic products for use on environmental surfaces, medical equipment, and for skin infection control was large and growing, and management believed that this market was also a natural extension of Sterling’s expertise in the household market. Sterling had identified a possible investment opportunity in Montagne Medical Instruments Company, a large health care company which specialized in surgical and medical instruments, but also owned a unit manufacturing and marketing germicidal, sanitation, and antiseptic products which were U.S. Environmental Protection Agency (EPA) registered to kill numerous microorganisms. Sterling approached Montagne Medical about acquiring the unit, and the two firms initiated formal discussions. 1 http://www.hhs.gov/ash/initiatives/hai/index.html For the exclusive use of J. Bates, 2020. This document is authorized for use only by Jennifer Bates in FNCE 6310 Financial Decisions and Policies Spring 2020 taught by John Byrd, University of Colorado - Denver from Jan 2020 to Jul 2020. Sterling Household Products Company | 913-556 HARVARD BUSINESS SCHOOL | BRIEFCASES 3 Montagne Medical Instruments Company Montagne Medical operated in Standard Industrial Classification (SIC) code 3841, Surgical and Medical Instruments and Apparatus, and generated $1.756 billion of sales in 2012. The products and services contained within SIC 3841 were quite varied, ranging alphabetically from anesthesia apparatus to veterinarian’s instruments and apparatus, with germicidal, sanitation, and antiseptic products included in this classification group. The company’s primary focus, however, was medical examination and surgical instruments, which accounted for approximately 90% of its sales and net income. As shown in Exhibits 3 and 4, Montagne Medical was a strong financial performer, producing a profit margin and rate of return on assets of 14.6% and 17.8%, respectively in 2012, with sales increasing at a 12.2% compounded annual growth rate since 2010. The company also owned a unit which produced germicidal, sanitation, and antiseptic products for health care settings, which sold well and generated positive operating income. The unit and its products, however, consumed scarce resources and management time, which the company believed could be better used in its core lines of business. Management had been considering exit from this market for some time, so they were happy to discuss sale of the products unit when they were approached by Sterling. Preliminary discussions quickly evolved into detailed negotiations about the sale, resulting in a tentative agreement for Sterling to acquire the unit from Montagne Medical for a cash payment of $265 million. The Proposed Sale The tentative sale of the unit by Montagne Medical to Sterling appeared to be a good strategic fit for both companies; Montagne Medical would be able to focus all of its resources on its core medical instruments business while also receiving a large cash payment, and Sterling would acquire a growing and profitable business with products which were closely related to one of Sterling’s existing and successful product lines. Whether or not this acquisition was a good investment opportunity for Sterling, however, could not be determined until the expected financial benefits from the acquisition were compared to the $265 million purchase price. Financial information for Montagne Medical’s germicidal, sanitation, and antiseptic products