Scenario:
Tony Fortune, a tenured and well-respected turnaround guru, pondered his latest employment offer as he was driving home from an eventful meeting with a number of key Electronic Equipment executives. He had been asked to assume the presidency at a poorly performing company, Electronic Equipment Venture (EEV), which is owned by Electronic Equipment USA. Certainly he could refuse, but Tony flourished on reinventing and remolding underperforming companies. During the last 10 years, he was instrumental in overseeing three successful business turnarounds, four consolidations of business units, and five successful divestitures. This latest endeavor, based on his understanding, would be a challenge because the board of directors was seeking concrete data that would allow a quick resolution to the companys problems.
Electronic Equipment Venture is a producer of electronic equipment dating back to the 1970s. During the companys first 30 years, it was a pioneer in the development, design, and manufacturing of electronic equipment. The competitive environment changed tremendously in the late 1990s, however, and EEVs market share eroded from 75% to 25% as other firms recognized this untapped market. Reacting to the loss in market share and unacceptable deterioration in profitability, management attempted to revitalize the company by increasing the level of research and development as well as acquiring two smaller but more sophisticated firms.
With the added research and development along with the additional resources, profitability continued to worsen. Faced with slow stock growth at Electronic Equipment USA, primarily because of EEV, the board of directors has been pressed to make a decision regarding EEV. Recognizing that factual data is crucial to the decision process, the board proceeded with authorizing management to employ the appropriate resources needed to conduct the evaluation and valuation of EEV.
Accepting this challenge and knowing he has only 5 weeks to complete the analysis, Tony spent several days developing a strategy for generating a proper and thorough valuation and evaluation of the firms financial position.