Capital Mortgage Company Case Analysis

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Capital Mortgage Company Case Analysis

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Capital Mortgage Insurance Corporation
Case Study Analysis
Negotiation and Strategy
Oklahoma Wesleyan University
Capital Mortgage Insurance Corporation: Case Analysis
OVERVIEW
Capital Mortgage Insurance Corporation, hereafter known as CMI, is a wholly owned subsidiary of Northwest Equipment Corporation. CMI was acquired by Northwest when their original parent company filed for Chapter 11 Bankruptcy. Northwest expects Frank Randall, president of CMI, to build the company into a larger diversified financial services company.
Randall hopes to acquire Corporate Transfer Services (CTS) a small relocation services company, as part of his plan for diversification. Currently CMI sells mortgage guaranty insurance policies to residential mortgage lenders throughout the United States. Randall had been following the real estate market for some time and discovered that Merrill Lynch had entered into the relocation industry with substantial profit. This fanned Randall??™s desire to move to the relocation industry and diversification. Plans to move forward with the acquisition have gone forward, and informal discussions took place with the principal stockholders of CTS four months previously. A plan for a formal negotiation strategy and a purchase offer are in the development stage. If successful, the acquisition of CTS will be a first for CMI and will help Randall realize his goals for diversification for CMI.
Randall contacted David Osgood, executive director of the Metropolitan Realty Network, a national association of independent real estate brokers. He discovered that they were both attempting to accomplish some of the same goals, and had CMI in common. Both men felt that developing a relationship, or a third-part equity business, between their respective companies could provide major benefits for both organizations (Lewicki, Bruce, & Saunders, 2007) The relationship with David Osgood of MetroNet Brokers could lead to increased sales of CMI??™s mortgage insurance policies. Randal created a Hypothetical Employee Relocation Company Income Statement that showed a return of 13.1%.
Jim Dolan, Senior Vice President and Treasurer of CMI, obtained a copy of CTS??™s latest balance sheet that confirmed what Osgood had stated about the company. (al, CTS Balance Sheet) Continued research showed that CTS had achieved only break-even profit levels. CTS had a net worth of only $420,000, and Randall surmised that business would decline to almost nothing within six months.
Further assessment of CTS required a trip to Chicago by Dolan to examine books and facilities, speak to office employees and assess the company??™s operations. His final assessment was that CTS is a responsible organization, but is experiencing increasing pressure from its bankers to improve financial performance. With this information a proposition was made to and accepted by the MetroNet Third Party Equity Committee and Randall and Dolan began negotiations with CTS. CMI feels there is considerable importance in maintaining a relationship with Elliot Burr.
CTS is eager for an acquisition, but has concerns. CMI is concerned about the value of the acquisition offer and how it will affect the relationships between CMI, CTS and MetroNet.
ANALYSIS
CMI??™s main interest is to expand their financial services and build a strong company that can compete with Merrill Lynch. To achieve that goal they must acquire CTS at a reasonable price. They also need to keep key employees to manage the company and create a good relationship with Elliot Burr in order to make an entry into his ???old boy??? network. Possible gains for CMI include:
A launch into the relocation business quickly
Immediate licensing and other legal documentation in 38 states
An experienced operations manager in Tom Winder
Influential entry into the Metronet network, which would allow operation of CTS and far lower cost
Significant increase in CMI??™s mortgage insurance business
A consultant provided a report that indicated that success in the employee relocation industry would depend on a company??™s ability to provide services to its corporate clients at a lower cost than the clients could do it themselves. Profitability would depend upon the company??™s ability to turn over its inventory of homes quickly and at reasonable prices. The report did not include revenue generated by sales new home mortgage insurance policies estimated at $400,000 annually.
Strategy
Since the relationship with Burr is important to CMI, an agreement on an acceptable price for both CMI??™s parent corporation and the four partners of CTS is necessary. A collaborative strategy would be the best move for CMI. (al L. e., 1007) If they are not able to come to an agreement, CMI can maintain a good relationship with Elliott Burr for future ventures.
CMI had $9 million approved for the acquisition, but did not want to spend more than $600 thousand plus the book value of $420,000 for full purchase of CTS. Both Randall and Dolan agree that this is a low price and seem hesitant on which way to proceed. CTS believes they are worth $6.25 million plus and 80% stake. Some of the CTS executives have invested more money in the company and are interested in recouping some of the investment. Randall feels that the company is becoming an embarrassment for Burr because of its poor performance.
Randall needs to find possible alternatives since both he and Dolan are hesitant about the offer. Options could be:
{text:list-item} {text:list-item} At the negotiation table CMI could present research completed on CTS??™s operations to gain advantage. CTS partners need assurance that they will receive some of their investment back and details assuring this plan could be negotiated.
CMI followed correct negotiation process by first getting into a good position. It was obvious that CTS was eager to sell. CMI employed strategic moves by doing background research and determining the value the CTS would be to CMI in acquisition. CMI also enlisted support from Metronet, who was already involved with CTS.
BATNA
Should an agreement not be made, CMI??™s BATNA will be to start their own relocation services company, or look for another similar company to acquire. The $9 million approved by the parent company gives CMI the ability to look further for an existing company, or the means to begin their own company. CMI has some negotiation strength because CTS is faltering in the business world and desires to sell. CMI has completed substantial research and knows the strengths and weaknesses of CTS. CMI also has support from MetroNet. If a deal is not made, CTS would be forced to either find another buyer or to invest more money to improve the company. At the time of negotiations there were no other interested buyers A stalemate exists in that CMI has a strong desire to buy and CTS has a strong desire to sell.
Negotiation Logistics:
CMI:
Approved for $9 million by parent company
Reservation Price of $1.02 million ($600K over the book value of CTS)
Target Price: $420K, or the current book value of CTS
Suggested opening bid: $820K, or $400K over book value
CTS:
Reservation Price is unknown by CMI
Target Price: $5 million+ for 80% ownership
STRATEGIES TO MAXIMIZE
CMI can gain substantially by capitalizing on their alliance with MetroNet. Should the acquisition fall through, MetroNet could pull out of their dealings with CTS, causing the company further financial distress and quicker failure. CMI also can use their own current financial strength and support of the $9 million from their parent company to add pressure to the negotiations. CTS is struggling financially. Elliot Burr is already embarrassed by the companies performance, and an agreement with him for continued business to make up for losses he would incur from fee income could prove influential as Elliot is considered to be the spokesman for the four CTS partners.
References