You are employed as a financial analyst for the private

Question

The Project

The Setting:  You are employed as a Financial Analyst for the private equity firm Celash, Byrne &Moovon.  They are considering approaching either the management of Company A or Company B (choose from the list below) to discuss with management their possible interest in selling out to CB&M.  You have been asked to do a comprehensive analysis and evaluation of both companies and make a recommendation as to which of the two is the most desirable acquisition and at what price.  You report directly to Mr. Moovon (pronounced "move on").  He is not a patient person and has a low tolerance for waffling and indecision.  You have less than two months to complete the task and he will expect frequent updates.  You can also expect that he will interrupt you with other projects. (Welcome to the real world.)

Choose one of these pairs of companies to compare. Choose one company from column A and the company immediately to its right in column B.

Company A	Company B
Google (GOOG)	Yahoo (YHOO)
Target (TGT)	J. C. Penney (JCP)
Merck (MRK)	Lilly (LLY
Occidental Petroleum (OXY)	Valero Energy (VLO)

Your Tools Are:

a. The course textbook, especially Chapters 3, 17, 18 and 19.

b. The supplemental text The Interpretation of Financial Statements, Benjamin Graham.

c. Detailed Financial Statements for your companies are filed with the Securities and Exchange Commission and available on the company web sites.

d. The Value Line Investment Survey (available online from the Columbia College Library.

e. Your imagination and creativity.

What Your Will Report Look Like:  He is not going to weigh your report, but a good guess would be that he would be disappointed if the final submission was less than 15 to 20 pages and 2-3000 words of explanation.

What is Expected:  A detailed comparison of the two companies using all of the relevant ratios and the calculations involved.  The ratios should be accompanied by text explaining what each means and why they differ between the two companies. Chapter 3 of the Text and Part Two of the Graham book will be a help here.

You will not get away with data for one year.  Here is his minimum expectation of ratios to be analyzed and explained.  In each case he wants to see five years of data. He doesn't want to hear you can't find five years of data.

Mr. Moovon expects you to begin with the Balance Sheet. 

1. Start with the Capital Accounts.  How do they differ?  How are they the same? Are they realistically presented?  What are the Book Values, and what are the present Ratios of the stock Prices to Book Value.
2. Now look at the Fixed Assets (the Property Account). When you read Chapter Five of the little Graham book you will realize that assets are always what they appear to be.  Do either of your companies show as Assets items that need explanation?  What are they?  How are they explained?  You might have to go into the footnotes to the Financial Statement to find the answers.
3. Are the Non Current Assets material and how are they explained?  Are there material Intangible Assets? (Chapter 8 in Graham)  What would be material for companies as large as the ones you are working with?
4. Do your companies have Deferred Tax Accounts?  How are they treating taxes?
5. Now let's look at the Current Assets.  Are the companies maintaining adequate liquidity?  Mr. Moovon is going to want to see the relevant ratios, so you had better calculate them and have them ready. (You will find most of them in Chapter 3 of the text.)
6. Liabilities. As Mr. Moovon always says, "You can't be sure about the Assets but the Liabilities are always real."  Does either company have too much debt?  If so, CB&M won't touch them.  Can either company carry significantly more debt? How much more? CB&M always loads the companies it acquires with as much debt as they can carry.  That's how they finance the deal. 
7. Are there any hidden assets?  

Now move on to the Income Statement.

1. Are the companies as profitable as they should be?  What ratios would tell us that?  OK!  Now calculate them.  Let's see those Efficiency Ratios.

2. Now that you have calculated the ratios, what can CB&M do to make them more profitable?  What do you suggest?

Not all of the ratios will apply to all of the companies. For instance, Sales per Square Foot is important in Retailing but meaningless for a Manufacturer or an online Search Engine.

As a double check let's run a DuPont Analysis on both companies. Mr. Moovon will be disappointed if you leave that out.

Put a value on both companies.  Calculate some valuation ratios like Price/Book Value, Price/Earnings Per Share (make sure you use fully diluted share numbers), Price/EBITDA Per Share.   If you chose JCP and TGR, how do these ratios compare with some other retail operations?  You might want to compare these companies to others in their field or to some big box retailers.  What is the current market value (debt and equity) of each of your two companies?  Mr. Moovon will need to know this to formulate a reasonable bid (or walk away).

Let's impress Mr. Moovon.

1. Paper  - This week I want you to do some research on the history of the two companies  Yahoo & Google and then write a paper that tells me what you have learned. What do they have in common?  How are the businesses different? This will take some deep digging.  Go into the company web sites and search through their various filings with the SEC. How big are their stores (in sq. ft.)? What are their sales per square foot? Why are they different? How much per square foot do they pay in rent?  Do they own the land?  If they don't do you see any evidence that their leases are below current market rates? (3-5 pages)

2. Paper - The Project - Part Three 

Now is the time to do the detailed Financial Analysis of our two companies in preparation for submitting your recommendations in Week Seven. Make sure you calculate all of the appropriate ratios called for in the Project and be sure to provide at least five years of ratios. Use the Financial Statements for the most recent fiscal year filed with the SEC and for earlier periods look at Value Line and at sites like Yahoo Finance. They can also generally be found on the company websites. Tell me what they mean to you. That will help you focus on the recommendation you are going to make in two weeks.

This should be a 6-9 page paper with detailed discussion and analysis and critical thought. If you just provide a cut and paste of financials as your answer, it will receive a failing grade. You will need to show that you truly understand the various ratios and financials by examining and detailing and contrasting the information. It is best to take at least 6 ratios or more and compare the two firms as well as compare the two firms to the industry.