Allen Lane’s decision to acquire Plas-Tek Industries (PTI) is intriguing since the business appears to be a good match with Lane’s work experience and interest. As a manufacturer, PTI has been able to create large margins and high cash flow under Harry Elson’s leadership. However, significant risks are prevalent in acquiring PTI. First, more one-third of PTI’s sales originated from five companies and it is uncertain that without Harry Elson’s personal efforts if their patronage will continue. Secondly, the bank valuation of PTI ($600K) appears inflated as the bank’s valuation is notably more than PTI’s book value ($292K), calculated with an inflated price/earnings multiple for a company with no proprietary assets and does not discount any contingent liabilities. Finally, it will be difficult for PTI to achieve long-term growth since PTI has no proprietary assets and that the company is in a mature industry in a slowing economy. Business Venture Status and Characteristics
As an established manufacturing company in a mature industry, Lane will have difficulty creating new growth through manufacturing a nonproprietary product, particularly in a slowing economy. However, the management vacuum created by Elson’s death provides opportunity to create new proprietary products that can grow the company. PTI has high cash flow and annual sales with relatively low labor costs as a nonunion company with both full and part time employees. PTI created its competitive advantage in customer service, so it is important to keep key employees on to ensure that continues after Lane purchases PTI. However, Lane should make sure that he and the current part-time employees learn the job tasks and business knowledge that Bernie, Sarah and Eleanor have to ensure against a loss of intellectual capacity if one of them leaves. Additionally, PTI has demonstrated the ability to create significant cash flow under Elson’s leadership, but it is uncertain...
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