Despite being one of the marketing leaders in the check printing industry, Deluxe Corporation is incapable of incorporating the best capital structure. Failure in exposure to the advantages of debt financing has force it into higher costs of finance. Meanwhile, the emergence of new technology, e.g. electronic payments, has forced Deluxe to streamline its business and has constrained the firm to focus on only its core activities. This unfavorable external environment the firm is facing has driven a need of debt financing. Problems with current financial structure are as follows:
1. Deluxe will have insufficient cash to support its long-term stock repurchase program. 2. Flexibility is not well managed by Deluxe’s current financial policy. The excessive amount of flexibility restricts the firm from achieving its minimum cost of funds. In order to address these problems effectively, we recommend Deluxe Corporation with the following remedial measures: 1. Acquire more debt to attain a lower cost of capital. At the same time diversify its current business to maintain its market share and secure future cash flow. 2. We recommend Deluxe to first reach the debt level of $810m, because this will reduce the current WACC immediately hence increasing the value of the firm.
To: Deluxe Corporation’s Board of Directors
From: Section 2 Group 4
Date: 26th October 2010
Re: Decision of Corporation Capital Structure
The Deluxe Corporation has proven itself as one of the most influential players in the check-printing industry. It had once diversified into different subsidiaries, the eFunds and iDLX Technology Partners, which served different kinds of market and provided integrated financial services, and Deluxe now tries to reposition the company in focusing more on their core activities as check-printing company. There are two significant factors affecting the business recently. Externally, a drastic drop in check demand led...