Case 6: Deluxe Corporation
1. What are the risks associated with Deluxe’s business and strategy? Is Deluxe’s current debt level appropriate?
Deluxe Corporation was once the largest printer of paper checks in the United States. However, around the past years it started to face difficulties primarily on its sale and earnings growth primarily because of alternative payments systems as online payments, credit and debit cards, etc. Some of the risk Deluxe Corporation is facing are:
* Online payment methods that improve along with the Internet, which is almost accessible to everyone, everywhere. The popularity of paper check payments has decline versus this online services. To add to this, the increase on the use of credit and debit cards are rapidly taking market share from the print checks industry. * The increase on the use of credit , debit cards and ATMs, which have taking market share from the print checks industry. * There is a decline of around 1-3% on the demand of paper checks; and Singh expects a precipitously decline.
Deluxe current debt level is approximately 1.86997. This number was calculated with the debt coverage ratio (operating income/debt service) and shows that Deluxe is below the level required for any rating category.
2. What financing requirements do you foresee for the firm in the coming years? In order to prevent the competition from online payments and credit/debit cards, Deluxe will probably produce large investments and concentrate more in the paper-check industry for financial services, business services and direct people (p.491). Moreover, costs will be reduced by reducing the number of employees and facilities and divesting the organization (eFunds and IDLX Technology Partners.) According to exhibit 4, during the upcoming years sales and cash will probably increase around 1-2%. Debt, on the other hand, will be constant (161.5), but total capital will increase from 277.2 in 2001 to...