The Murray Ohio Manufacturing Company

1. The Murray Ohio Manufacturing Company Presented by: Vincent, Shaoying, Mary, Yuting, and Feny

2. Agenda • Strategy Analysis • Accounting Analysis • Financial Analysis • Prospective Analysis • Conclusion • Subsequent Developments

3. Strategy Analysis • Bicycles • Established in 1936 as a bicycle manufacturer • Based in Nashville, Tennessee • By 1984, Murray Ohio manufactured approx. 1/3 of the bicycles made in the U.S. • Power Mowers • Started manufacturing power mowers in 1968 • By 1984, one of the largest manufacturers in the U.S. • In 1985, formed new marketing subsidiary “Sabre Corporation” to market to outdoor power equipment dealers • Dealers participated in higher priced mower market

4. Porter’s Analysis Rivalry Among Existing Firms Bicycle: High • Main competitors include Huffy, Roadmaster, Columbia, and Ross • MO has long history and established significant market size • Increasing rivalry expected as more firms enter the attractive market (both domestic and foreign import) Power Mowers: Medium to Low • Main competitors include Western International, Roper, MTD, and Aircap • 152 firms produced lawn and garden equipment in the U.S. in 1982 • Estimated that MO has significant market power as one of the largest manufacturers in power mowers • Rivalry is expected to increase significantly as imports continue to grow rapidly

5. Porter’s Analysis Threat of New Entrants Bicycles: High • Expectation of long term demand for bicycles remain strong • However, increased competition into the market from imports from the Far East makes it less profitable for new entrants Power Mowers: Medium • Despite increasing import competition, markets are attractive • 1984-1989 expected increase in constant dollar shipments at compound annual growth rate of 4% • Growth due to increase in real disposable income, increase in replacement demand, growth in housing starts

6. Porter’s Analysis Threat of Substitutes Bicycles: High • Bicycles are common, and range in prices • Different styles and makes are widely available through many outlets • Alternative recreational equipment widely available Power Mowers: Medium to High • Mowers are also common, and range in prices • 152 firms produce lawn and garden equipment in U.S. • Alternative law and garden equipment such as manual mowers, shears, etc. available

7. Porter’s Analysis Bargaining Power of Buyers Bicycles: High • Buyers demand depends on discretionary income for recreational equipment • Higher income households comprises a major portion of the market Power Mowers: High • Buyers demand depends on level of real disposable income and health of household

8. Porter’s Analysis Bargaining Power of Suppliers Bicycles: Medium • Manufacturing since 1936 • Assumed established relationships with suppliers • Supplier power may change with market demand Power Mowers: Medium • Entered market in 1968 • Also assumed established relationships with suppliers • Supplier power may also change with market demand

9. Porter’s Analysis Implications and Conclusions • Strong history of success in early years of operation in both bicycle and power mower sectors • Market demand is largely dependent on the economy and disposable income • Competition from imports expected to increase in bike industry, resulting in decrease in MO’s operating profits • Sustaining growth potential for the mower segment

10. SWOT Analysis Strengths • Long history of bicycle manufacturing experience • Variety of distribution channels • Centralized manufacturing facility • Full line of bicycles and mowers • Large market share implies high brand awareness Weaknesses • Lack of competitive advantage in quality and manufacturing productivity • Lack of innovative product development to capture market • Mower segment is performing significantly better than bike segment despite bike segment’s longer operating history

11. SWOT Analysis Opportunities Bicycles: • Expectation of long term demand for bicycles remain strong Power Mowers: • 1984-1989 expected increase in constant dollar shipments at compound annual growth rate of 4% • Growth due to increase in real disposable income, increase in replacement demand, growth in housing starts • Import of garden equipment also expected to continue to increase especially in lower priced models • Introduction of higher scale “sabre” line has potential for increased profitability Threats • Increased competition from foreign producers which competes on the basis of lower costs of production • Competition from going domestic manufacturers • Fluctuating demands as a result of economical changes

12. SWOT Analysis Implications and Conclusions Bicycles: • Lack of competitive advantage to compete with foreign producers • High amounts of capital required to implement above strategies Note: Currently borrowing to pay dividends • Questionable ability to achieve low cost given past history with bike mfg. Note: Acquiring low cost production performance takes time Power Mowers: • Growing industry and expanding product line offerings • Stable and maintaining growth and profitability

13. Plans and Strategies Plans to Improve Future Performance • Adopting aggressive bike pricing structure • Improve manufacturing productivity • Introduce new and innovative products • Lobby U.S. Congress to increase import tariffs on bikes

14. Case Discussion 1 • Based on the new proposed strategy, can the company improve their sales for bicycles and power mowers? • Yes, why? • No, why

15. Accounting Analysis • Adjustment #1--- Investment Tax Credit • Accounting policy changed from deferral to flow-through • NI should be reduced by $ 1.4M • Adjustment #2 --- Tax on International Sales Operations • Potential payment of deferred taxes for prior years for company’s export sales was eliminated • NI should be reduced by $0.92M

16. Accounting Analysis • Adjustment #3 --- Pension Plan • Assumed rate of return increased • Employment level changed • Pension expense decreased • NI should be reduced by $0.763M • U.S. owned company, so over-funding is company owned (take over target appeal) • Adjustment #4 --- Gain form Settlement of Law Suit • Law suit receipt in 1984 was $0.85M • NI should be reduced by $0.085M

17. Accounting Analysis

18. Financial Analysis - DUPONT

19. Financial Analysis - DUPONT • Net Profit Margin – low profitability • Asset Turnover – less efficiently using the assets • Financial leverage • Assets almost twice of the equity • ROE • Lowest in recent years

20. Financial Analysis

21. Financial Analysis

22. Financial Analysis

23. Cash Flow Analysis

24. Class Discussion 2 • As security analysts: • Would you keep the company’s stock under the equity income fund? • Would you keep a different equity portfolio? • Would you consider to sell it?

25. Forecasting-Assumption

26. Forecast-Most Likely Case

27. Forecast-Best Case

28. Takeover Risks • Substantial borrowing capacity • Current ratio:2.2 • Debt/Equity ratio:0.86 • Low profitability • The stock price will be undervalued

29. Takeover Risks • The asset was under valuated • Land at old cost • Inventory recorded at LIFO, but should valuated at FIFO. LIFO reserve of 6.8 million • Pension plan over funded (pg.239) Net asset: 47151 Less PV vested Lib: 27463 Less PV of non-vested Lib: 4496 Over funded:15192 (belong to the firm)

30. Valuation

31. Conclusion • The strategy might not work on bicycle business because it takes time for the company to learn how to be a low cost producer. • Un-optimistic view on ability to maintain stability future cash flows from operation • Ability to maintain dividend structure is doubtful, decrease or elimination of dividends in the future is likely

32. Open Alternatives • Alternatives for management to consider: • Secured distribution channels • Outsource productivity • Move plant to abroad • Sell bicycle division

33. What Happened in the End? • Management stuck to its strategy to turn around the bicycle division • The problems in the division persisted • 1985. Dividends were cut by 50% • Stock price floated around $21 till 1987 • May 7, 1988. Electrolux AB of Sweden made an unfriendly takeover for $48 per share • Murray resisted the offer • June 22, 1988. Murray was acquired by Tomkins PLC for $52 per share

34. 1985 – 1987 Performance

35. Stock Performance

36. QUESTION?