Please read the case below and the following instructions:
DRK Group, Inc., (the Company) owns and operates four manufacturing facilities which produce precision mechanical springs, metal forming and metal stamping. The Company was incorporated in California in 1975. The original plant and headquarters was located in Eureka, California to serve the logging and lumber industries in the Pacific Northwest. DRK initially also served the mining and fishing industries prevalent at the time. The Company grew to three plant facilities in Northern California at the end of the 1980s. During the early 1990s, it became apparent to the founders that the demographics of the three industries they served changed dramatically. The market severely contracted which led the owners to decide on both a change in market emphasis and location. The new emphasis would be in serving the high-tech industries including medical and bio-tech. The decision was made to move to the San Francisco Bay Area to both serve these growth industries as wall as be in a more central place to serve national, and perhaps international markets. In 1996, DRK moved all facilities and opened a fourth in the greater Bay Area region. The Company is presently headquartered in Redwood City, California which consists of corporate offices and one of the four plants. The other manufacturing facilities are located in Santa Rosa, Berkeley, and Sacramento, California.
There were four founders of the Company, two of whom have retired. One of the founders, Charles Johnson is CEO and has 45 years experience in metal stamping and forming manufacturing. Charles is 72 years old. The other founder, Judy Thomas, is vice president in charge of marketing and has an extensive background in manufacturing. John Pang is vice president in charge of operations and is 63 years old. Maria Lopez, Chief Financial Officer (CFO), is a Certified Public Accountant (CPA) with 22 years experience.
There are presently 24 stockholders. The industry is fiercely competitive but high quality manufacturing results in a loyal customer base. There are approximately 750 employees and 475 of them are unionized. Their contract is up for negotiation in 14 months.
You have been engaged by a small group of investors who are interested in buying a business and earning a reasonable return on their investment. The group, known as Rainbow Investors (aka the RI group) is comprised of 6 women and men. Two members of the group are surgeons from Stanford, two are research scientists with Genentech, and two have private medical practices.
The RI Group has engaged you to evaluate DRK Group Inc. as a prospective acquisition. They are requesting you to perform a detailed analysis of this company. The group needs a particularly detailed analysis since they will own 100% of the stock if the group proceeds with the acquisition. The members have little knowledge of investing and running a manufacturing concern.
The Rainbow Investors is managed by Art Thomas. He has asked that you write the RI Group a report. The report should be organized by the following requirements:
1. Prepare a report that surveys the environment of the Company. In researching the industry and its environment, consider items such as: competition, customers, availability of inventory and labor, capital, regulators, and technology. You should conclude the survey with a bibliography of the sources utilized.
2. Prepare and present a financial analysis of DRK Group, Inc. The analysis should be organized so that the RI Group clearly understands the purpose and conclusion of the report. The presentation should include trend, vertical, and ratio analysis. Additionally, you should compare the Company to the industry. The RI Group is particularly interested in your personal assessment of the Company. Conclude whether or not the Group should go ahead and acquire the entity. After completing your analysis, you are to write a memo generally how DRK Group, Inc. can increase its return on equity. Be very specific when presenting your ideas. This portion of the analysis should include a ROE profit driver analysis (also called ROE decomposition or Dupont analysis).
DRK Groups financial statements will be provided and footnotes for the years ended March 31, 2004 and 2003. For analysis purposes, assume the financial statements are for the year ended March 31, 2012 and 2011 respectively.
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