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Describe the situation facing Mensa at the time of the case. This should include the major issues facing the company and the decisions that need to be made. You are to spend no time on corporate history. You must consider the past, but your analysis and recommendations should be forward looking. List your specific recommendations for the firm in detail. Explain why each recommendation was made including the information used and the logic (or analysis) applied to reach your conclusion. As you prepare your analysis, remember that no decision is complete until the financial impact of the decisions is determined. Don't forget to use cash flow analysis and Net Present Value techniques when analyzing the four divisions within Mensa, Inc. If your recommendation(s) need to be taken in a particular sequence, be sure to indicate the proper sequence and the reasons for that sequence. Discuss the events or uncertainties that are most likely to cause trouble in the implementation of your recommendations and how you would react to them if they were to occur.
1. Describe the situation facing Mensa at the time of the case. This should include the major issues facing the company and the decisions that need to be made. You are to spend no time on corporate history. You must consider the past, but your analysis and recommendations should be forward looking. 2. List your specific recommendations for the firm in detail. Explain why each recommendation was made including the information used and the logic (or analysis) applied to reach your conclusion. As you prepare your analysis, remember that no decision is complete until the financial impact of the decisions is determined. Don't forget to use cash flow analysis and Net Present Value techniques when analyzing the four divisions within Mensa, Inc. 3. If your recommendation(s) need to be taken in a particular sequence, be sure to indicate the proper sequence and the reasons for that sequence. 4. Discuss the events or uncertainties that are most likely to cause trouble in the implementation of your recommendations and how you would react to them if they were to occur. 1 Mensa, INC. (A fictional company) Mensa, Inc. was a firm with a long and uneven history. It was started in 1974 and at one time or another had been a competitor in more than two dozen industries with varied success. Each of the several CEOs had developed a different strategy and over the decades the firm had had many manifestations. The only real constant in Mensa’s strategy had been a commitment to the packaging business in its several forms. But, even in this business there had been any number of changes in direction which diluted the impact of capital spending and had the effect of Mensa never achieving a strong position in any of the packaging segments although, briefly, in the early 1980s Mensa’s total packaging revenues made it the largest packaging company in the world. The lack of a competitive advantage in any of the large packaging segments resulted in Mensa being pushed into producing commodity products which had them penned between powerful steel and tinplate suppliers and powerful food and beverage producers as customers. Also, as their large customers grew there was pressure for them, especially in the low margin food business, to build their own packaging facilities, especially can plants. The long term effect of this was to cause Mensa’s packaging profitability to lag its better positioned competitors. At one time or another during the 1980s and 1990s the company produced auto parts, electrical equipment, power equipment, electric motors, metal alloys, airplane wings, furniture, appliances, communications equipment, specialty chemicals, and consumer products, to name only the most important of their many businesses. They also bought several regional retail chains. None of these businesses worked out well and all were either sold or liquidated at a loss. The financial and human capital devoted to these businesses was largely lost. Further, the problems they caused diverted capital and management attention from better opportunities. NEW STRATEGIES FOR THE 21st Century By the late 1990s under still another new CEO a management consensus had developed. The consensus was to (1) reduce holdings in operations that fall short of performance goals or do not fit the long-term strategy of the company; a target of realizing $600-$700 million from the sale of such assets was established, (2) reinvest these funds in areas promising profitable growth, (3) improve return on equity over the long term as a consequence of this reinvestment strategy, and (4) strengthen Mensa’s balance sheet and credit standing. The new benchmarks for the firm included having a well balanced BCG matrix that considered fast growing industries to be those that were growing at more than 10% per year. The end result would be a firm with four main businesses: financial services, energy, packaging and forest products. The latter was primarily a paper, fiber drum, and cardboard business that also generated about 25% of revenues from selling lumber and wood chips. This strategy was followed and many businesses were sold although the amount of money received for the businesses fell short of the $700 million target by almost $250 million. The businesses sold were all either small competitors in their industry or were in industries that suffered from overcapacity and low returns. 2 The New Mensa By 2XX1 the sales were complete and most of the realized funds had been redeployed into Mensa’s four main business groups, resulting in a firm that management thought met their goals. The Chairman stated in the 2XX0 Annual Report that Mensa was ready to move on to a new phase: “Our primary task is now the efficient production of quality goods and services within our restructured business segments: packaging, forest products, insurance, and energy. Further details on Mensa’s posture are contained in the attached operating and financial statements. Our overall strategy is to achieve the competitive advantages that can result from increased productivity, market focus, and innovation.” By the beginning of 2XX5 management believed that it was well positioned strategically for future growth and profitability. They had pared their operations to four main businesses: Financial Services, Energy, Packaging, and Forest products. The review for each segment was done by top management with the assistance of outside consultants who were all experienced top-level executives in each industry. Some of the consultants were retired and some of them were still active, but they all had long and successful experience in the industry they were consulting on. There is also an outlook section for each industry segment that includes estimates of profitability, cash flow, and needed investment in the next 10 years. The outlooks were done entirely by the consultants. Financial Services Mensa’s first foray into financial services came in the early 2000s when a large investment bank brought the opportunity to buy Columbus Financial Corporation to the attention of the firm. Mensa had hired the investment banker to help with the sale of the unwanted businesses and they knew that Mensa was looking to redeploy the assets generated from the sale of the assets. Initially Mensa was cool to the idea because it was so far removed from their expertise, but on examination it appeared that the insurance business had good profitability and cash flow characteristics so when the existing management was persuaded to stay on the purchase was made. From this base the Financial Services group added more insurance operations to include American Life Insurance Company, with its 49 master brokerage general agents and 13,000 independent brokers and agents. The firm also added a mortgage company, a mortgage insurance company, a number of title insurance companies and several title companies to form the core of the real estate-related financial services area. By the end of 2XX2 Mensa Financial Services underwrote insurance in three broad segments: life and real estate as well as property and casualty insurance. The firm was strongly positioned in the Financial Services business, but competition was tough. Mensa’s Financial Services division was not large by national standards, but the firm was a surprisingly nimble and successful middleweight in the industry. The management of this business had done an efficient job of integrating their many acquisitions into the financial services operation, had proven their ability to pick their target markets, and avoided serious 3 head-to- head competition with bigger and more powerful rivals. The future prospects of the division looked good. Financial Services Outlook. The consultants that looked at the financial services business believed that the financial services business would be a good one for a long time. It was, relatively speaking, a low capital intensity industry with improving returns and strong positive cash flow characteristics. Although Mensa invested more capital per dollar of sales than most of their competitors the consultants thought this problem would be solved by increasing the size of the operation. They believed that Mensa could increase their sales in the division by about 15% per year and increase returns on segment assets to between 15% and 18%. They also expected division sales to increase by at least 15% per year for the next decade if they made the needed investment in the business. They recommended that the firm invest heavily in the business because they were small and would benefit from additional size. Their largest competitor was about double the size of Mensa and growing at about 10% per year. The consultants believed that for the firm to remain successful in the business which means increasing the segment earnings to assets ratio from the current 13% to 18%, they would need to invest at least, and they stressed at least, $250,000,000 per year in the business initially and increase gradually to $300,000,000 in 5- 7 years at which time investment could probably decline to $100,000,000 per year. This investment would more than double the assets committed to the business within five years. They forecast cash flow from the division, assuming the recommended investments are made by the company to be negative $250,000,000 per year for years 1-3, negative $50,000,000 in years 4 and 5, positive $200,000,000 in years 6 and 7, and positive $300,000,000 in future years. The consultants believed that Mensa could sell the financial services business for about $1,000,000,000 if it were put up for sale and if the firm was patient. Energy In 2XX4 Mensa made its first major acquisition in the energy business when they bought EasyGas Energy which became the core of their Energy Division. This acquisition allowed Mensa to enter several areas of the energy business. EasyGas was active in exploration, development, and production of oil and gas, operated an interstate natural gas pipeline system extending from the Texas-Mexico border to the southern tip of Florida, and also extracted and sold propane and butane from natural gas. Prior to the acquisition of EasyGas, Mensa had small working interests in offshore and onshore gas and oil properties in the Gulf of Mexico and in Mississippi which they purchased in the late 1990s to try to develop a better understanding of the business. These were merged into the new energy division. EasyGas was the sole supplier of natural gas to peninsular