Sterling Household Products

In: Business and Management

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Sterling Household Products Company

Acquisition of the Germicidal, Sanitation and Anitseptic Unit of Montagne Medical Instruments Company Executive Summary

Sterling Household Products Company manufactured and marketed a wide variety of consumer goods products which were sold domestically as well internationally. Despite having great products and being positioned well in the industry, Sterling’s growth prospects were limited. Sterling’s decision to acquire the germicidal, sanitation and antiseptic production unit of Montagne Medical Instruments Company could provide the much needed growth. Furthermore, the division was well aligned with Sterling’s existing operations, helping Sterling diversify its business without compromising on its core competency.
Assuming the growth rate of 3% for terminal value calculation, aligned with the GDP growth of US, the net present value (NPV) of the investment comes to $99.7 million. We also analyzed the NPV of acquisition under two scenarios - 0% growth and terminal value calculated using multiples of 9. As the acquisition provides immense opportunities for Sterling to further expand its production capacity, we calculate the NPV of $167 million. We firmly believe that Sterling should acquire Montagne Medical’s unit as it presents positive synergistic effect on Sterling’s cash flows.

Business Risk
The unlevered asset beta represents the pure business risk of the company. It does not take into consideration the effect of debt leverage and represents the systematic risk inherent in the company. The levered beta represents the business risk taking into account the capital structure of the company i.e. Leverage/debt in the firm.
The project under contemplation is not traded and hence the observed beta of the company is not available. We are taking the average of the beta of two comparable companies’ viz. Chiron and…...

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