Cases in Finance - Final Project Report
Friendly Cards, Inc. (1988)
Noah N Flom
TABLE of CONTENTS
1 Assessment of Financial Health & Pro Forma Financial Statements 1.1 Review of History and Statement of Financial Health
1.1.2 Friendly Cards History
1.1.3 Friendly Financials
1.2 Review and Evaluation of Pro Forma Statements
1.3 Financial Policy / Covenants
2 Beaumont's Decisions
2.1 Envelope Machine Proposal
2.1.2 Financial Effect of Investment
2.2 Evaluation of West Coast (new equity offer)
2.3 Valuation of Creative Designs, Inc.
2.3.1 Capital Structure Argument
2.3.2 Weighted Average Cost of Capital Assumptions (WACC)
2.3.3 Cash Flows, Terminal Value, Equity Value Valuations
2.4 Pooling Implictions (Friendly + CD)
2.5 Friendly Cards Stock Valuation
3 Overall Assessment
4 Goals for the Financial Structure of Friendly Cards, Inc.
PART 1. Assessment of Financial Health & Pro Formas
1.1 Review of History and Statement of Financial Health
Wendy Beaumont, president of Friendly Cards, Inc., has rapidly expanded her greeting card business through internal growth and acquisitions. Ms. Beaumont realizes that money is currently tight, however, she is adamant about future growth and has sought our opinion as to determine her best course of action. In presenting a decision we will first conduct an analysis of the industry, then give a short history of Friendly Cards, Inc. (Friendly), and then examine Friendly's financial statements to determine the financial health of the company.
The greeting card industry is dominated by three large companies, (Hallmark, American Greetings, & Gibson), which are referred to as 'The Big Three'. 'The Big Three' dominate market share, and the remaining competitors are predominantly small private and family owned firms. The greeting card industry is characterized high fixed costs due to: large inventory costs, large investment costs in the establishment of efficient distribution lines, and the need for a highly diversified product lines. Market leaders enjoy great economies of scale which tends to hinder new entrants into the market. As a result, the card industry is capital intensive and very competitive. The number of firms competing in the industry has decreased by an annualized rate of 15% over the last three decades. Exiting firms were typically smaller in size, the majority of which had less than 50 employees.
Additionally, the competitive nature of the market results in a high degree of price sensitivity which culminates in smaller margins on sales. Sales tend to be very seasonal in nature with peaks during major holidays. There is trending toward a larger variety of card offerings (increasing inventories), shorter carrying/selling periods, increased diversification of product lines, and an increase in sales of everyday cards as compared to holiday cards.
Friendly Cards, Inc.
Beaumont Greeting Card Co. was founded by Wendy Beaumont in 1978, in New York City. She later acquired Lithograph Publishing Co. and took these companies public a year later for $3 a share under the name Friendly Cards, Inc. Friendly has rapidly expanded by acquiring Glitter Greetings of Lansing, Michigan (for cash and equity), whose primary market was selling cards to supermarkets. Soon thereafter, it acquired Edwards & Co. of Long Beach, New York (for cash), whose primary market was selling juvenile valentines through chain, drug, variety, and discount stores, as well as, to wholesalers and supermarkets. These acquisitions greatly enhanced Friendly's distribution line expanding it to a regional power....