Topic - Finance and Accounting
LAW AND BUSINESS ASSESSMENT
Hunters Garden PLC ("HG") is a commercial law firm operating mainly in the UK, with two offices in the US. The firm provides specialist legal services in the areas of personal injury (motor vehicle accidents, workers' compensation and civil liability) and private individual legal services (family law, conveyancing, wills and estate planning).
Currently it has six UK offices: Edinburgh, Leeds, Liverpool, London, Manchester and Oxford; an office in Boston, MA and Philadelphia, PA in USA. The total number of fee earners is 415.
HG's growth strategy
HG's growth strategy includes an acquisition programme and the acceleration of the organic growth of the business through exploiting increased awareness of its brand.
An element of HG's growth strategy is to diversify its operations. Recently, HG has pursued a growth strategy through acquiring smaller law firms. The acquisition of other firms assists HG to broaden its business base geographically and across the areas of law in which it operates. This strategy was partially a response to legislative changes, which eroded the rights of individuals to recover compensation for personal injuries.
Over the past three years, HG made five acquisitions including in 2017, the financially opportunistic acquisition of US personal injury law firm Cage, Fish and Associates ("CFA") based in Boston, MA which further diversified HG's revenue stream. The success of this acquisition has highlighted the opportunities in overseas expansion. HG is able to exploit its experience and expertise in personal injury law to manage and increase the efficiency of overseas operations that conduct the same business. CFA remains a largely separate entity and operates under its own brand.
HG accelerates organic growth through:
- Advertising on TV, radio and in print to further build the HG brand as a driver of new client enquiries.
- Additional non-litigation legal services and building cross referral relationships with other professional services businesses.
Potential acquisition
You are advising HG on a potential acquisition of Raymond Priest LLP ("RP"), another commercial UK personal injury law firm. RP has 55 members and, in total, 223 fee earners.
RP comprises two key operating segments:
(i) Legal Services which offers a broad range of specialist personal injury claims services including road traffic accident, employers' liability and public liability claims.
(ii) Specialist Services which offers non-legal services and which extends RP's reach across the personal injuries claim value chain. The Auto Services division provides claims management and related services, managing road traffic accident claims from the initial incident through to final resolution. The Medical Services division provides a full-service, integrated, multi-disciplinary rehabilitation service to the insurance industry, employers and occupational health providers.
HG's Board expects to recommend this acquisition as it has identified the following benefits to its business:
- HG's stronger brand will enhance RP's business;
- RP's profitability will improve through cost reduction, such as cutting the cost of acquiring new business through streamlining RP's processes and from synergies such as shared services with HG;
- Business volume will increase by more effectively exploiting RP's potential pool of road traffic accident and employers' liability / public liability cases.
Required -
1. Provide advice to HG's Board so that its members are better informed about their decision to acquire RP. Identify the firm's opportunities and threats and commercial and financial risks in making the acquisition.
(i) Please use relevant and appropriate strategic tools considered on the module to discuss the internal and external environment of HG in light of the acquisition. Highlight further investigation that may be needed.
(ii) Please consider the commercial and financial risks of this acquisition.
2. The investment bank advising on the deal has valued RP at GBP63 million. Check that this valuation falls into a plausible range, using at least three valuation methods of which at least one should be based on future cash flows (that is, either future dividends or future operating cash flows). Identify reservations with the valuation methods you have chosen and any other information you require.
RP's most recent financial data and other information are provided in Appendix 1.
If you choose P/E method of evaluation, you will need to estimate RP's earnings. RP is a partnership so members do not receive a salary and instead, receive a share of the profits of the firm. As a result, the item 'Profit before members' remuneration and profit shares' over-states the profit of RP compared to listed companies since salaries are not added to costs and deducted from profit. To calculate the 'true' profit for RP, you may assume that 60% of the 'Profit before members' remuneration and profit shares' is salary, so only 40% of that item is 'true' profit.
If you choose DVM method of evaluation, since RP is a partnership, it does not pay dividends explicitly but instead distributes the firm's profits. You may take 32% of 'Profit before members' remuneration and profit shares' to be dividend and 8% to be retained earnings.
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Profit before members' remuneration and profit shares
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100%
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of which, Salary costs
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60%
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Dividends
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32%
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Retained earnings
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8%
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You may assume RP's cost of equity is 58.9%.
Explain the reasoning behind the calculations. The potential transaction has incomplete information and may require making assumptions as not all the data is readily available. This will not negate the validity of your methodology. You may need to conduct independent research to find data on comparable businesses if one of your valuation methods is using comparables / multiples.
3. Explain the factors you would consider when deciding how the transaction should be funded.
HG's most recent financial data and other information are provided in Appendix 2.
Discuss advantages and drawbacks to HG for funding the acquisition through equity or debt.
When considering debt, please note:
- The amount of extra debt HG can raise is limited by its loan covenants;
- You may consider the potential types of debt (bank loans or securities), maturity and currency of the financing;
- You may consider diversification of funding sources and matching assets and liabilities to reduce risk or ways to reduce the cost of borrowing.
Need question 2 and 3 completed 2000 words maximum.
Attachment:- Assignment Files.rar