Evaluation Of Investment Decisions And Financing Strategies For JB HI-FI Company

Strategic Alliances as Key to Sustainable Business Growth

This report focuses on the strategic direction and opportunities which could be availed by Organizaiton to expand its business in long run. The main empirical of this report is to identify the how well company could sustain its business in long run by undertaking the new strategic approaches and strategic alliance. It is analyzed that company should undertake strategic alliance such as joint venture, merger and amalgamation to strengthen its overall business outcomes and efficient business functioning.  The main expansion strategy for JB HI-FI Company would be to undertake strategic alliance with its rivals so that it could use their machines and assets to create effective synergy in long run.  This report identifies the potential targets and options which could be availed by JB HI-FI Company to strengthen its overall business and creating core competency in market.  The main suitable target for the JB HI-FI Company would be CVE Technology who is also the closet rival for the organization (JB HI-FI, 2017).

(JB HI-FI, 2017).

The current CEO Richard Murray has identified several expansion opportunities for tis business and by undertaking these possible plans company could easily make its business more sustainable in long run. However, JB HI-FI Company has been facing high financial risk in its business which might negatively impact the business growth and future sustainability in long run. Nonetheless, if company takeovers the CVE technologies in its business it could easily strengthen the overall outcomes and create synergy in its business (JB HI-FI, 2017).

This company is indulged in offering cost-saving, flexible solutions to meet the reverse logistics needs of clients around the world. This company was founded as an affiliate of Cache Valley Electric in 1955 with a view to offer best electronic equipment’s and process system.  It is also indulged in hosting cyber computing business system.

There are several strategic plans which could be undertaken by the JB HI-FI Company to increase the overall business outcomes such as Joint venture, merger, Amalgamation. Nonetheless, JB HI-FI Company has strong financial position and liquid assets which may be positive for the business growth and creating synergy in its business by undertaking merger with its potential competitors (Bekaert, & Hodrick, 2017).

Joint venture- This is the strategic alliance in which two companies is ready to pool their assets and resources to accomplish the set object in effective manner.

Merger- It is combination of two organization which come together to create synergy from the business. It is also called amalgamation which will allow JB Hi-Fi Company to create value on invested capital (Bessler, & Schneck, 2016). 

Takeover- It is the process in which one company buys more than 50% shares in another company. It is analyzed that for JB Hi-Fi Company, it would be beneficial to takeover CVE Technologies Company.

After analysing all the different options, it could be inferred that Takeover option would be beneficial for JB Hi-Fi Company if it wants to create synergy in it business. However, it will help company to increase the market share and grab the potential clients for its business (Lunev, et al. (2016).  

Potential Takeover Targets and Strategies

There are several sources of the synergy which could be developed by JB HI-FI Company if it aligns its business with its takeover targets (Brigham, & Ehrhardt, 2013).

The financial position of JB HI-FI Company is reflecting high financial risk which might be negative indicator for the future growth of the Organizaiton. The merger option with CVE Technology group will require issue of shares to the shareholders of the acquired company. This will strengthen the overall outcomes increase the share capital in its business.

Another source of creation of the synergy would be related to reduce cost of production. If these two companies combine their business with each other’s then they will also have to combine their assets and undertaken strategic work. It will ultimately increase the overall revenue as compared to the revenue which these both companies would have if they were to run their business individually (JB HI-FI, 2017).

There are several key decision makers and managers who will also combine their knowledge and innovative design mind set with each other. It will allow company to combine the pool of knowledge while taking the strategic alliances and decisions in long run. It is analyzed that JB HI-FI Company would have to face less risky business and losses in its business process system which will eventually increase the overall outcomes and business efficiency in long run (Garrett, Hoitash, &Prawitt, 2014).

Another source of synergy after takeover of CVE technology group would be team building. Both organizations have highly experienced team of employees in the business. It is analyzed that proper training and development program is followed in the process then it will assist organization to create value on the investment.

This CVE technology group is accompanied with the strong brand image and high market turnover. If JB HI-FI Company could use the loyalty card program of this company then it would be easy for it to grab the potential clients in easy manner. The loyalty card approach of CVE technology group reflects high coverage of clients which will be beneficial for JB HI-FI Company while introducing new products and services in market (JB HI-FI, 2017).

Market capitalization is the total market value to buy whole company which is equal to price of the total number of shares outstanding in market. The enterprises value is the theoretical takeover price which includes the required amount of capital for the outstanding number of shares (Abbott, et al. 2017). 

It is the most recent market value of the company’s outstanding shares. The market capitalization would be equal to current share price multiplied by the number of the shares outstanding (Kundakchyan, and Zulfakarova, 2014).

For the computation of the market capitalization, company needs to compute net assets value of the target company (Uechi, et al. 2015).

Net value of Company  Amount in AUD $ Million)
Particular
Total Assets	40933
Total Liabilities	20952
Net Value of Business	19981

The net assets value of CVE technologies would be AUD $ 19981 million which is reflecting that company should offer its shares at AUD $ 10 to its new shareholders as consideration for swapping the shares of CVE technologies with its own company.

Sources of Synergy

The Market capitalization of the CVE technologies target company would be as below.

Computation of the market capitalization of the company
Particular	Amount in AUD $ Million)
Stockholders’ equity Outstanding	1998
Offer price	10
Market capitalization	19980

Advise to the management of JB HI FI Company

The JB Hi-Fi Company should offer its shares at 10% premium to the existing shareholders of CVE technologies for swapping their shares with the company. The share price of company is costly as compared to CVE technologies but keeping the share price of its own shares for the existing shareholders may result to destruction of its own takeover deal. Therefore, it is advised to the company that it should offer its shares at 10 % premium only (Vogel, 2014). 

The estimated figures for the synergy for the company would be more than 20% as compared to the individual collective results. It will be based on the team work, lower cost of capital and increased return on capital employed.  However, in qualitative terms the estimated figure will be based on the net value of the business + 20% premium (Delen, Kuzey, &  Uyar,  2013).

Estimated figures for the synergy for the JB HI-FI  company  (AUD $ in million
Net Value of Business	19981
Add % of synergy	20%
Estimated figure	3996.2

In terms of the total revenue, JB HI-FI Company would have higher amount of values in its business. It has gained increase the market share and grab the potential clients for its business which could add value for the increased business outcomes. The pool of talented experts and managers will be great help in creating the effective strategic planning to strengthen the overall outcomes and avoiding the possible losses. The use of loyalty card approach, increased business value of both business and availability of the expert employees will be the base for creating the synergy in organization (Ehiedu, 2014).

It is analyzed that JB Hi-Fi Company would follow the process of takeover to establish the strategic alliance with the CVE technologies.

 The merger should be partially paid off by the issue of the shares and partially through the cash (Delen, Kuzey, and Uyar, 2013).

It is analyzed that those shareholders of the CVE technologies who are ready to swap the shares with the JB HI FI should be paid off by swapping the shares. In addition to this, those minority shareholders who are not selling their shares should be given cash consideration for their shares(JB HI-FI, 2017).

Therefore, it could be inferred that the takeover of company could be done by cash and share issued combined option only (Innocent, Mary, and Matthew, 2013).

Calculation of Required rate of return
Risk free rate (A)	4%
Beta (B)	-0.101252
Market Risk premium (C)	6%
Required rate of return [A+(B*C)]	3.39%

(Please see the attached excel file herewith attached)

	Year
Particular	1	2	3	4	5
Sales (in units)	$         92,000.00	$       110,400.00	$           132,480.00	$         158,976.00	$         190,771.20
Price	$              687.00	$              700.74	$                  714.75	$                729.05	$                743.63
Total sales	$  63,204,000.00	$  77,361,696.00	$      94,690,715.90	$  115,901,436.27	$  141,863,357.99
(-) Variable Costs	$  28,980,000.00	$                     –	$                         –	$                       –	$                       –
Contribution	$  34,224,000.00	$  77,361,696.00	$      94,690,715.90	$  115,901,436.27	$  141,863,357.99
(-) Fixed Cost	$    6,500,000.00	$    6,500,000.00	$        6,500,000.00	$      6,500,000.00	$      6,500,000.00
Net Profit	$  27,724,000.00	$  70,861,696.00	$      88,190,715.90	$  109,401,436.27	$  135,363,357.99
(-)Depreciation	$  43,842,857.14	$  43,842,857.14	$      43,842,857.14	$    43,842,857.14	$    43,842,857.14
Net Profit before Tax	-$ 16,118,857.14	$  27,018,838.86	$      44,347,858.76	$    65,558,579.12	$    91,520,500.85
(-) Tax @28%	-$   4,513,280.00	$    8,105,651.66	$      13,304,357.63	$    19,667,573.74	$    27,456,150.25
Net Profit after tax	-$ 11,605,577.14	$  18,913,187.20	$      31,043,501.13	$    45,891,005.39	$    64,064,350.59
(+) Depreciation	$  43,842,857.14	$  43,842,857.14	$      43,842,857.14	$    43,842,857.14	$    43,842,857.14
Cash Inflows	$  32,237,280.00	$  62,756,044.34	$      74,886,358.28	$    89,733,862.53	$  107,907,207.74
(+) Salvage Value					$      9,500,000.00
Cash Inflows	$  32,237,280.00	$  62,756,044.34	$      74,886,358.28	$    89,733,862.53	$  117,407,207.74
*Present value factor @12%	$                  0.89	$                  0.80	$                      0.71	$                    0.64	$                    0.57
Present Value	$  28,783,285.71	$  50,028,734.33	$      53,302,630.65	$    57,027,491.88	$    66,620,002.72
Total Present values(A)					$  255,762,145.30
(-)Cash Outflows
Additional expenses					$      1,175,000.00
Total cash consideration to company					$    19,981,000.00
Other expenses					$    45,200,000.00
Total(B)					$    66,356,000.00
Net Present Value(A-B)					$  189,406,145.30

Valuation in Efficient Markets – No Bootstrapping (in $million)
	JB HI FI before merger	CVP Technologies before Takeover	JB HI Fi Company  after the merger (AB)
1. Earnings per share	2	1	3.33
2. Price per share	60	10	60
3. Price-earnings ratio	30	10	18
4. Number of shares	20 mil.	60 mil.	30 mil.
5. Total earnings	$40 mil.	$60 mil.	$100 mil.
6. Total market value	$1,200 mil.	$600 mil.	$1,800 mil.
7. Earnings per dollar invested in
the stock (line 1 ¸ line 2)	0.033	0.1	0.056

The estimated share price value of company could be AUD $ 446 million (Morningstar, 2017).

MPS	25
EPS	0.056
Post Takeover share price	446.4285714

There are several ways to finance the takeover strategic alliance by the company. It is analyzed that company could follow the following options

Bank Loans- It is the process to take loan and borrow money form the banks and financial institutions.  It is analyzed that company could create charge on the assets with the bank to finance its takeover deal.

Issue of debts- JB Hi-Fi Company should issue debts in market to raise funds for its capital financing. It will allow company to keep the raised funds for the longer certain time period.

Advisory for Offer Price and Management Decision

Retained earnings- It is the amount of capital which has in its business. It could be used by company to pay off the take-over.

JB Hi- Fi Company could accept mix method of financing to finance its takeover deals. It could use retained earnings and equity capital in its business to finance its takeover deal.

However, deb cost of capital in Australia would be around 7% and retained earning cost of capital would be 3%. The retained earning cost of capital is assumed to be the share issue cost which company needs to bear in its business.

The main reason of accepting these two different options is based on the cost of capital. If company has low amount of cost capital in its business then it could easily create higher amount of return on capital and increased synergy in its business.

The debt capital has several merits and demerits associated with it. It is analyzed that company would have higher financial leverage if the funding is done by issue of more debt capital. Nonetheless, increased debt funding will eventually lower down the cost of capital of organization. On the other hand, JB HI-FI company has AUD $ 113 million retained earning its business which it could use to finance its takeover.

Company should raise the capital by following the mix funding in which debt capital will be issues to debt holders for some consideration and some part of the capital will be financed by the retained earnings. If JB HI- Fi Company finances its takeover options by following the equity funding then it will has to face high cost of capital in its business. However, if it has become mandatory for the company to issues shares in market then it should go for the public funding at premium price. The premium associated with the shares will cover the cost of capital to raise the funds in market.

Methods to raise funds	Pros	Cons
Private funding	It is associated with the less costing and company do not have to incur more expenses for advertisement and legal compliance. The investment capital will be made by the selected members	It will require promoters to make their own capital investment in organization. It will increase the overall cost of capital of organization.
Right issue or public funding	High advertisement cost and legal compliance. Increased business costing. It is the one of the best source of creation of the synergy in the business outcomes and establishes the profitable business in long run.	Loss of business and shared ownership. Eventually, it will increase cost of capital and financial sustainable risk in the business.

In case when the shares are issued through the private funding, it will not be issued on the pro rate basis. It will eliminate the pair passu right of the shareholders. In addition to this, increased numbers of shares will lower down the return on earing available to equity shareholders.

In case of public funding, company might face issue of the insider trading case due to the heat of the moment or case event. It is analyzed that if shares are issued through the public funding then it might result to undue losses to the existing shareholders or some of the shareholders who wants to keep their capital invested in JB Hi-Fi Company may face destruction in loss due to the sudden hike in share price (Palepu, Healy, and Peek, 2013).  

The takeover deal is accompanied risks which might face by JB Hi-Fi Company after takeover. There are chances that company might not have the expected synergy in its business and failed to achieve the certain results out of its own business. Company might risk such as inefficient business functioning, cultural issue, team building problems and lack of transparency and non-effective legal compliance program. In addition to this, due to the external and internal factors, company might face decrease in its net present value (Robb, & Robinson, 2014).  

In case, when company has to face negative business outcomes and increased business risk due to the external business factors, then it will have to face low amount of synergy will also lower down the NPV.

In case when the sensitivity analysis is done then due to the external factors, company might face issues related to low amount of net present value and less synergy.

	Year
Particular	1	2	3	4	5
Sales (in units)	$         92,000.00	$       105,800.00	$       126,960.00	$         152,352.00	$         182,822.40
Price	$              687.00	$              700.74	$              714.75	$                729.05	$                743.63
Total sales	$  63,204,000.00	$  74,138,292.00	$  90,745,269.41	$  111,072,209.76	$  135,952,384.74
(-) Variable Costs	$  28,980,000.00	$  58,190,000.00	$  74,271,600.00	$  119,596,320.00	$  162,346,291.20
Contribution	$  34,224,000.00	$  15,948,292.00	$  16,473,669.41	-$     8,524,110.24	-$   26,393,906.46
(-) Fixed Cost	$    6,500,000.00	$    6,500,000.00	$    6,500,000.00	$      6,500,000.00	$      6,500,000.00
Net Profit	$  27,724,000.00	$    9,448,292.00	$    9,973,669.41	-$   15,024,110.24	-$   32,893,906.46
(-)Depreciation	$  43,842,857.14	$  43,842,857.14	$  43,842,857.14	$    43,842,857.14	$    43,842,857.14
Net Profit before Tax	-$ 16,118,857.14	-$ 34,394,565.14	-$ 33,869,187.73	-$   58,866,967.39	-$   76,736,763.60
(-) Tax @28%	-$   4,513,280.00	-$ 10,318,369.54	-$ 10,160,756.32	-$   17,660,090.22	-$   23,021,029.08
Net Profit after tax	-$ 11,605,577.14	-$ 24,076,195.60	-$ 23,708,431.41	-$   41,206,877.17	-$   53,715,734.52
(+) Depreciation	$  43,842,857.14	$  43,842,857.14	$  43,842,857.14	$    43,842,857.14	$    43,842,857.14
Cash Inflows	$  32,237,280.00	$  19,766,661.54	$  20,134,425.73	$      2,635,979.97	-$     9,872,877.38
(+) Salvage Value					$      9,500,000.00
Cash Inflows	$  32,237,280.00	$  19,766,661.54	$  20,134,425.73	$      2,635,979.97	-$        372,877.38
*Present value factor @12%	$                  0.89	$                  0.80	$                  0.71	$                    0.64	$                    0.57
Present Value	$  28,783,285.71	$  15,757,861.56	$  14,331,286.53	$      1,675,212.93	-$        211,580.64
Total Present values(A)					$    60,336,066.10
(-)Cash Outflows
Additional expenses					$      1,175,000.00
Total cash consideration to company					$         650,000.00
Other expenses					$    19,981,000.00
Total(B)					$    21,806,000.00
Net Present Value(A-B)					$    38,530,066.10

(Yahoo finance, 2017).

The shareholders could be benefited by this takeover deal as it will not only increase he overall turnover of the company but eventually also impact the return on capital employed of company in long run (Yahoo finance, 2017).

It is analyzed that shareholders will have high wealth maximization if company undertake this takeover.

Conclusion 

The ratio analysis, du Pont analysis, top down analysis and different decision tools are the some of the methods which could be used by investors to make the investment decisions. After analysing all the details and information given on the takeover and increased business benefits of synergy, it is inferred that company will have higher benefits from its investment. Nonetheless, sensitivity analysis has also focused on all the external factors which might negatively impact the business functioning of organization. Now in the end, it could be inferred that company should focus on aligning two businesses by changing policies and business functions. 

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