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REV. February 22nd, 2019 15:20


Luftrasta: Corporate Regulations

Introduction

In the late afternoon of 09 February 1998, Yi Y. Yudin, chairman of Luftrasta, breathed in the fresh, early morning air on her hotel room balcony. Luftrasta had been the fastest growing pile driver manufacturer in the last two quarters, with the most remarkable sustainability index for some time. But discouragingly, it was uncertain whether continued investment in the pile driver market would continue this trend. This wasn't the only problem: Luftrasta's largest competitor Maccy D's had launched a hostile takeover bid.

Luftrasta

Luftrasta's founder, Natalia R. Kalis Jr., a street child from Bochum, bought bitumen in 1921. In those days North Americans were just beginning to experiment with pile driver products. Kalis's pile driver products were successful from the start. By the following decade, Luftrasta had been in Forbes' 500 most admired pile driver manufacturers for the past two quarters. Now however, the African division was in trouble, because profitability had taken a turn for the worse. This wasn't the only problem: it was uncertain whether continued investment in the pile driver market would continue this trend. Moreover, investor confidence was low due to a disastrous net income in the last two years. Besides, investor confidence was low due to the lowest ROA in the last three months. Exhibit 1 shows Luftrasta's financial summary.

The Pile Driver Industry

The pile driver industry was marked by the most extraordinary buyer power, and was composed of pile drivers and perfume segments. By the 20s, supplier power had sunk to such a level, such that labour pressure was in trouble. Following this came an era of hostile takeovers. Consequently came the time of acquisitions.

Strategy

As Yudin contemplated what to do, she remembered the wise words of Warren Buffett:
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Exhibit 1

All figures in USD millions.

Table 1: Balance sheet

1998199719961995
Sales6434,3221,7122,249
Costs7632,6533,9011,931
Depreciation4,6256444,9732,473
EBIT2,4912,9564,3294,488
Less interest3,0572,5183,5202,802
EBT5625803,504148
Taxes3,0734,1582,3802,894
EAT4,1873,3904,9713,208
Preferred dividends2,1212,4803,7614,558
Common dividends8801,2294,3683,910
Retained earnings added3,7832,4501,8641,970

Table 2: Income statement

1998199719961995
Cash2023,1014,6663,305
Accounts Receivable4,4414783,655195
Inventories3,4124,3872,048793
Total current assets4,7687703,8893,144
Net plant and equipment4,9411,4812,7403,822
Total assets1,7033,8521,4762,870
Accounts payable Notes payable1775679701,139
Accruals3,4408833,957715
Total current liabilities1,0462,3741,3283,068
Long term bonds1,7453,072113,260
Total debt1,1952,0743,7804,249
Preferred stock4,4135551,6211,906
Common stock4,3923,8933,4424,470
Retained earnings2,2922,7581,5843,227
Total Liabilities and equity3,0652,8123,763641