Business valuation of Keystone Consolidated Industries Inc.

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)

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:

Advantages:

More money can be attracted through the issuing of new stocks, increasing premiums on old stocks or conversion of stocks

The payment of dividends can be delayed until the company registers sufficient profits, action which is impossible in cases when funds are attracted through debt

Disadvantages:

Shareholders are entitled to a certain percentage of the company's earnings, meaning that the final profits are reduced

The profits distributed in the form of dividends are legally perceived as income, rather than debt, and are as such subjected to taxes

The shareholders reveal an increased ability to interfere within the decision making process

7. Final Recommendation

Based on the analysis conducted, it becomes obvious that the opportunity presented is in fact a highly risky one. It is even more so challenging when the fund possesses limited expertise in sharing income and control with stockholders and when the current climate of the steel industry is not a favorable one. Nevertheless, Keystone Consolidated Industries reveals numerous strengths, materialized primarily in its performances, observable in terms of financial ratios analysis. This analysis recognizes the limitations of Keystone, but presents them in light of all challenges facing the industry. Pending this assessment, the final recommendation is that of purchasing the 54% interest in Keystone. The main reasons behind this decision revolve around the proven capabilities of the company, its recent investments in infrastructure development and the bright looking future of the industry.

References:

Keystone Exhibits

Keystone Workbook