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Kohler Co A Case Solution

Solution Id Length Case Author Case Publisher
2504 2663 Words (17 Pages) Belen Villalonga, Raphael Amit Harvard Business School : 205034
This solution includes: A Word File A Word File and An Excel File An Excel File

As one of the country's oldest and biggest privately-owned companies, Kohler Co. Despite the fact that Kohler Co. is best known for its plumbing fittings, the firm has extended its activities to include furnishings and high-end resorts. Because of their improved cast iron technique, Kohler Co. had an edge over its competitors. Kohler Co.'s global development and diversification have resulted in tremendous growth. " In this scenario, Kohler Co. wants to figure out how much the outstanding stock is worth on the open market. Because Kohler Co.'s outside investors were dissatisfied with the price they were given to buy back their shares, this is the target they've set for themselves. It's no secret that Kohler favored the idea of keeping his firm private as long as possible for a variety of reasons. The corporation has the right to withhold its financial information since it is a privately held business.

Following questions are answered in this case study solution

  1. Please value Kohler Co. based on Discounted Cash Flows (perpetuity growth and exit multiple) as well as comparable companies method taking into account any discounts due to liquidity or control.

  2. Consider the motives of the key players:

    a. Why does Herbert Kohler want to do the recap? Why does he want to buy the minority shareholders out? Is Herbert Kohler correct in that private is better?

    b. What do the minority shareholders want? In other words, why are they bothering Herbert Kohler?

  3. Obtain value for the firm and the minority shares:

    a. What is the value of Kohler Co. and the value of each minority share based on the discounted cash flow (DCF) method using forecasted FCF until 2002 and a perpetual growth rate of 4% thereafter, a WACC of 11%, and net investment equal to depreciation and amortization after 2002 (e.g., net Capex = depreciation)?

    b. Is the WACC of 11% reasonable? Provide alternative estimates of the WACC and the resulting value for each minority share.

    c. What is the value of the firm and the value of each minority share based on the comparable companies method? Note that more than multiple values are possible here

    d. Briefly compare your calculations and provide conclusions about the value of the minority shares.

  4. Assess the values estimated by Herbert Kohler ($55,400) and the dissenting shareholders ($273,000). Can these values be justified based on your calculations under question 2? – When assessing Herbert Kohler’s relatively low value, note that minority shareholders are in a different position than a family shareholder, i.e. Herbert Kohler. As the case describes, minority shareholders do not have voting rights. Nonvoting shares are clearly less valuable than voting shares. Thus, their shares might be worth less than the valuation under question 2 indicates because a ‘minority discount’, also called ‘lack of control discount’ might apply. Furthermore, the shares are infrequently traded and shareholders of Kohler Co. might therefore not be able to quickly sell their shares or not be able to sell their shares without loss of value. This might lead to a ‘marketability discount’ which reflects the lower value of illiquid shares. Could Herbert Kohler use these discounts to defend his valuation? How? What about the dissenting shareholders? How can they defend their relatively high estimate of the value?

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Case Analysis for Kohler Co A

1. Please value Kohler Co. based on Discounted Cash Flows (perpetuity growth and exit multiple) as well as comparable companies method taking into account any discounts due to liquidity or control.

Cost of Debt

Int (Exhibit 3a)/LT liabilities

0.0637437

 

 

 

 

 

 

 

 

Tax Rate

tax rate

0.438834

 

 

 

 

 

 

 

 

 

1-tax rate

0.561166

 

 

 

 

 

 

 

 

Risk Free Rate

April 98 in Exhibit

0.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

ASD

AMWD

MAS

BGG

CUM

DDC

 

 

 

Business

 

KIT

KIT

KIT

PWR

PWR

PWR

 

 

 

Beta

 

0.82

0.76

1.28

0.66

1.09

1.3

 

 

 

Based on Current Data

 

 

 

 

 

 

 

 

 

 

Equity/Value

 

0.59

0.95

0.89

0.81

0.65

0.84

 

 

 

Asset Beta

 

0.49

0.72

1.14

0.53

0.70

1.09

 

 

 

Based on 36 Months Data

 

 

 

 

 

 

 

 

 

 

Equity/Value

 

0.55

0.87

0.82

0.89

0.75

0.80

 

 

 

Asset Beta

 

0.45

0.66

1.04

0.58

0.82

1.04

 

 

 

Beta Avg KIT

 

0.7199908

 

 

 

 

 

 

 

 

Beta Avg PWR

 

0.81

 

 

 

 

 

 

 

 

Beta Avg All

 

0.77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standard Dev of Market

3.30

 

 

 

 

 

 

 

 

 

Standard Dev of Stocks

 

7.7

14.7

6.4

5.7

8.5

10.4

 

 

 

Total Beta

 

2.33

4.45

1.94

1.73

2.58

3.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Based on Current Data

 

Beta

E/V

Equity B

COE

COD

WACC

Total Beta

COE

WACC

Beta Avg KIT

 

0.78

0.81

0.97

10.8%

6.4%

9.5%

 

 

 

Beta Avg PWR

 

0.78

0.77

1.02

11.1%

6.4%

9.3%

 

 

 

Beta Avg All

 

0.7800148

0.79

0.99

10.9%

6.4%

9.4%

 

 

 

80-20 Weight

 

0.78

0.80

0.97

10.9%

6.4%

9.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Based on 36 Months Data

 

 

 

 

 

 

 

 

 

 

Beta Avg KIT

 

0.72

0.75

0.96

10.8%

6.4%

9.0%

1.91

15.5%

12.5%

Beta Avg PWR

 

0.81

0.81

1.00

11.0%

6.4%

9.6%

1.88

15.4%

13.2%

Beta Avg All

 

0.77

0.78

0.98

10.9%

6.4%

9.3%

1.67

14.3%

12.0%

80-20 Weight

 

0.74

0.76

0.97

10.9%

6.4%

9.1%

1.76

14.8%

12.1%

2. Consider the motives of the key players:

a. Why does Herbert Kohler want to do the recap? Why does he want to buy the minority shareholders out? Is Herbert Kohler correct in that private is better?

Herbert Kohler had the intention of buying out the company's minority stockholders so that he could alter the ownership structure of the business. In point of fact, he advocated in 1998 that the whole company be recapitalized by buying out the outside shareholders and prohibiting the future sale of stocks to outsiders. This would have resulted in the corporation being closed off to new outside investors. His proposition was accepted by the committee. It is vital to keep in mind that Kohler has always favored private ownership above the media attention and stock market speculation that come with being a publicly listed firm. This is something that has been the case throughout the company's history. His argument is that the high share prices may cause family members to sell their holdings to outsiders, which might result in the family losing some of its control over the company. If he were to put his recapitalization plan into action, he would give family shareholders the option of selling their stakes in the company or exchanging them for a new special class of shares that cannot be traded with other investors. Either way, they would no longer be able to trade their shares with other investors. Both of these factors are necessary to understand Kohler's motivation. Taking the company private in the first place would allow it to avoid some regulatory obligations; it would also significantly reduce the possibility of confidential data being shared with competitors and of being taken over on the public market. Taking the company private in the first place would allow it to avoid some regulatory obligations. For one thing, he will have the peace of mind of knowing that the business will be passed on as a family heritage from one generation to the next.

b. What do the minority shareholders want? In other words, why are they bothering Herbert Kohler?

There are a variety of expenses connected with keeping this information secret. Minority shareholders have launched a lawsuit against the company. It's not only the legal fees and defense expenditures that might have a substantial influence on the corporation in this scenario, but also the danger of a trial and possible damages. While it's unlikely that Kohler Co. would hire an outside firm to handle its valuation, a publicly traded corporation does not have to worry about this since the price of a share is always being updated. There are several drawbacks to running a private corporation, such as a lack of financial resources to invest in various philanthropic organizations owned by the firm. It's clear that it has a long-term influence on the establishment of these pro bono foundations. Last but not least, we must take into account the possibility of a lack of ownership diversity on one side and the resulting reliance of the company on its owners for further money. Nepotism and management dependence may also be a worry in family-owned and tightly managed businesses. This can be perceived as an additional expense of keeping the firm private. Despite the expenditures, there are a number of advantages. As a result, Kohler will be able to keep all of the company's financial information under wraps, requiring just the tax authorities to see it. In addition, the SEC and its rules will no longer be an issue for him. As a result, he will be able to execute his own ideas more quickly and effectively, without having to justify every single expense. The price of the company's stock is the primary concern of minority shareholders. They feel Kohler has undervalued them by a factor of five and is seeking to acquire the whole firm for an unethical price.

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