Question

CASE: BARRACUDA INC. Barracuda Inc. has diversified beyond its early base as a lamp fixture manufacturer into multiple hardware and plumbing fixture products that it sells to professionals (i.e., plumbers and electricians) and through the large volume do-it-yourself (DIY) stores like The Home Depot and Lowe’s. While this successful growth has been achieved primarily through acquisition, the company tends to let the acquired businesses run independently. It has done so by looking to fragmented industries to acquire small firms with efficient operations and good management teams. It then grows these businesses through a combination of internal cash flow and debt, and directs new sales to the professional and DIY channels. Barracuda has been particularly successful in the faucet segment, which it practically reinvented though such technological innovations as the washerless faucet, and marketing innovations like branding and good-better-best merchandising. Barracuda has leveraged this merchandising strategy across its businesses and, coupled with the explosive growth of the DIY channel, is spectacularly profitable with a net profit after tax (NPAT) of 18%. The firm’s management is looking to broaden its revenue base and has identified the home furnishings business as sharing many characteristics with faucets, prior to Barracuda’s entry into faucets. It plans to enter this industry through large-scale acquisitions. The landscape of the U.S. home furnishings manufacturing industry consists of many players, none with controlling share, and serious issues of overcapacity. There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average NPAT is between 4 and 5%, which also reflects the fact that few firms have good managers. While the industry is still primarily comprised of single-business family-run firms, which manufacture furniture domestically, imports are increasing at a fairly rapid rate. Some of the European imports are leaders in contemporary design. Relatively large established firms are also diversifying into the home furnishings industry via acquisition. Supplier firms to the home furnishings industry are in relatively concentrated industries (like lumber, steel, and textiles), and therefore typically offer fewer accommodations to the small furniture manufacturers. Retailers, the intermediate customer of the home furnishings industry, are becoming increasingly concentrated and the few large, successful furniture companies actually have their own stores or have dedicated showrooms in the larger department stores. Customers have many products to choose from, at many different price points, and few home furnishing products beyond those of the larger companies have established brands. Also, customers can switch easily among high and low-priced furniture and other discretionary expenditures (spanning plasma TVs to the choice of postponing any furniture purchase entirely).

1. Why would Barracuda consider acquisition as its preferred mode of entry into furniture?

2. Given the history of Barracuda, (a) what guidelines would you suggest to management regarding their acquisition strategy in the home furnishings industry; (2) what threats does Barracuda face in entering the furniture industry through acquisition.

Answer 1

Answer 1

Acquisition is a preferred mode to entry into furniture

After making the research into the area of home furnishings manufacturing industry the management team has observed that the existing firms in this area have no controlling share and the volume of sale is not so high as it is designed for production.

Scarcity of good managers among the existing firm is also observed and the net profit after tax of these few firms stay into the bracket of 4 to 5% although there remains a huge scope in this sector as the rate of import is increases in rapid manner. However, since most of the firm run the industry in the manner of family business so the adequate capital investment which is actually required to make a large scale growth of the industry is not possible.

The object of acquisition is not to practise the objectives of merger but to provide the liberty to the acquired firms so that an efficient management team can be developed and operation of the business run smoothly and effectively. The function of Barracuda is to provide adequate capital by way of debt and internal cash which may make the transformation in terms of capacity of the business and thus the small capacity firm can enlarge its business and make the production on large scale basis which may lead to earn more NPAT.

The introduction of professionals and DO IT YOURSELF store enables the company to successfully dispose of the product to its customers. Moreover, establishing big stores for the customers will widen the scope of choosing the right product as per the taste and ranings capacity of the customers.

The skill and comprehensive sense of the furniture product of the acquired firm and the business strategy of Barrucada relating to furniture business may create the synergy which can bring the leverage of such acquisition that can enhance the percentage of NPAT in a large scale. Thus the market value of the company will increase.

Answer 2

Guideline suggestions

To tap the home furnishing market more effectively the following suggestions can be given to Barrucada

• Barucada has opted to introduce debt capital while making such acquisition.

It is true that debt capital is valid way of providing capital but at the same time it also creates interest rate risk in the business for which net income of the firm may get hampered. It is better to introduce shares in the market where no interest expense is required to be spent and the level of financial leverage is also moved down.

• Alternate mode of collecting capital can be introduced that is to look for low level interest rate loan capital which to be paid off for a long period of time that enables the company not to block its own cash.
• In order to prevent the concentrated suppliers of the furniture the company should use its own supplier section called Do IT YOURSELF which enables to distribute the wide variety of required items to the acquired firm who are doing the business in collaboration with Barucada
• In this connection the mode of acquisition can be replaced by merger where the acquired companies are compelled to collect the required items for furniture from Barucuda only. It benefits these acquired firm to get the required items very easily and they are not required to move outside to collect the same. It can help both the acquired firms and Barucuda itself.
• Since the business of Barucuda is getting enlarged for this acquisition it is required to stock some expertise. Therefore, the supportive team of financial, legal should be made up accordingly together with other necessary experts from different fields in connection with the business.

The following threats can be faced by Barracuda

• Since the culture of the small firm may be different from the big firm which acquires the small firm so the clash may have occurred due to the difference of the two cultures therefore it is required to input the corporate values to these firms are an important aspect. The management team should prepare proactive measures to solve this issue if there is any cultural difference exists between these two levels.
• Duties and responsibilities may be common to the workers of both small firm and big firm in a particular department so it creates wastage of man power capital as the same types of work being done by two workers instead of one worker. Therefore the work distribution among the workers should have fine tuning.
• The objective of the acquired firm may differ with the objective of the parent firm which may create confliction into the work culture for which production may get hampered which lead to decrease the net earnings of the firm