Business valuation of Keystone

Business Valuation of Keystone

The process of business valuation is a complex one and the specialized literature on the topic is vast, but fails to offer an integrant perspective on the actual elements which should be addressed and contained within a business valuation report. This particular paper aims to achieve a gradual business valuation of Keystone by assessing the steel industry, the company, the competition, the offer and the advantages and disadvantages of controlling a public organization. Based on the findings, the final recommendation is that of purchasing the interests in Keystone.

Keystone Consolidated Industries Inc.

The best means of assessing the company is that of looking at its strengths and weaknesses. The strengths include the following:

Keystone is a reputable manufacturer of wire products, industrial wire and wire rod, using steel as its main commodity

The company enjoys a favorable reputation due to its vast expertise and product applicability in several fields

The organization is vertically integrated, which has materialized in numerous benefits, such as lower production costs or a decreased dependency on the industry

Keystone has carefully selected its customers as being reliant, stable and less influenced by cyclic stages

The levels of business diversification are generally increased, with the company also activating in plastics distribution, gardening products or scarp recycling

Major investments have been made in technological, infrastructure and production capabilities, which could materialize in excess production to be sold within the international market

The weaknesses include:

Keystone reveals high levels of debt, which in turn lead to negative perceptions relative to the efficiency of the managerial act and the actual capabilities of the firm

Inventory operations are fairly reduced, meaning that in cases of large and unexpected orders, shortages and impossibility of delivery could be met

All employees are protected under unions, implying additional personnel expenditure

Inefficiencies exist relative to the amounts of wire rod shipped (43.6% in 2001) and the sales they generate -- 25.6% of the total sales (Keystone Exhibits, steel and wire product mix, p.5)

3. The Steel Industry and Competitors' Analysis

The steel industry is mainly characterized by the threat of cheaper imports, which significantly reduce the demand for national products. This has manifested in the closing down of more than 20 steel-based products manufacturers in the past five years. The current threat of foreign imports onto Keystone is fairly reduced due to the lack of distributors to offer overseas products to the company's main customers. Movements within this apparently mature industry still occur and materialized primarily in mergers or files for protection under bankruptcy laws. The future, nevertheless, is expected to bring about a regeneration of this sector.

In its essence, the steel industry is extremely dynamic and competitive, meaning that we, as the prospective owners of Keystone Consolidated would have to invest large sums of money into the continuous development of the company in overcoming the competition and addressing the shifting needs of consumers. Large competitors derive their strength through economies of scale, whereas smaller size entities address local markets and serve niche needs. Forces which impact the competitive strength include the distribution channels used by manufacturers, the strength of their brands, the retail price implemented or the quality of the products manufactured and services delivered. The largest competitors of Keystone are USX-U.S. Steel Group, AK Steel Holding, Nucor Corp., Bethlehem Steel, National Steel, Weirton Steel and Rouge Industries. The largest threats are however posed by the most similar competitors -- Oregon Steel Mills and Insteel Industries (Keystone Workbook, Competitor Data).

4. Financial Analysis

The financial analysis revolves around the presentation of the financial highlights and the comparison of the financial ratios against industry averages. In terms of financial highlights, as evolution throughout the past five years, the following are of the utmost importance:

With the exception of 1998, net sales have decreased; the largest value of $370.022 million was registered in 1998 and the lowest of $308.670 million was registered in 2001

The operating expenses fluctuated between the high value of $24.745 million in 2000 and the low value of $15.737 million in 1998

The operating profit also fluctuated between $21.250 million in 1997 to a negative 17.591 million in 2000

The net income followed a constant descendant trend, decreasing from $12.368 million in 1997 to -$26.393 in 2001 (Keystone Workbook, Historical Common Size Income Statements)

Relative to financial ratios, the following must be considered:

All ratios of operational analysis are larger than the industry averages, meaning that the company operates at high levels of quality and performance

With the exception of payable turnover and cash conversion cycle, all resource management ratios are superior to the industry averages, meaning that Keystone is fairly able to use its resources and transform them into money

Profitability ratios are equal or below the industry averages, meaning that the company is less able to generate earnings in comparison to the costs it incurs

Investment returns are also inferior to the industry averages, meaning that Keystone is less able to use the attracted investments to generate money

Liquidity ratios are higher than industry averages, meaning that the company is better able to honor its short-term commitments than other players within the steel industry

Financial leverage ratios are significantly over the industry average, revealing a growing risk for Keystone to find itself in an impossibility to pay its debts, and as such face bankruptcy.

5. Analysis and Recommendation Relative to the Proposition

The current proposition refers to the offer to purchase 54% of Keystone's interest and become as such the largest owner. The financial figures imply an estimated investment of $3.54 million, with a possibility of gaining access to more than $300 million in earnings. Nevertheless, considering that the company follows the sustained decline in revenues commenced five years ago, the actual gains could be highly decreased. Additionally, the current promise of $300 million earnings could not be sustainable once debts are paid. Nevertheless, keeping aside what could occur in the future and only focusing on the current financial characteristics of the offer, the recommendation would be one of purchase.

6. Advantages and Disadvantages of Controlling a Publicly Traded Organization

Being the major shareholder at a publicly traded company implies a wide series of advantages as well as disadvantages. Some of the most important ones are succinctly presented below: