Mystery Case 3:

Sterling Household
Products Company
By: Madeleine Rea
Key Data of the Case
Sterling´s Company is a successful manufacturer and seller of consumer goods

(cleaning products) which sells domestically and all over the world.
Sterling´s current problems:

Low growth rate for unit

volume.
Sales and profits were

low (in comparison of

what they were looking

for).
The company management

was looking to expand into

businesses with more growth

potential
 Montagne Medical Company
Montagne was specialized on medical, examination and surgical instruments.
It was a strong financial performer, producing a profit margin and ROA of

14.6% and 17.8% respectively in 2012, it sales increased at a 12.2%

compunded annual growth rate since 2010.

It owns a unit which produces germicidal, sanitation and antiseptic producst for

health care

Key Data Current Health Problem

Acquired infections in hospitals and acute care nursing facilities were a significant

and growing concern in health care industry.

Health infection control market reptresented $2.5 billion annual sales

Opportunity??
Sterling´s analyzed this great opportunity, at the same time
Montagne Medical liked this propose, therefore this unit was
not really important for them.
This acquisition was a strategic fit for both, Montagne set a
price of $ 265 for its unit.
 ACQUIRE IT OR NOT??
Sterlings financial group presented forecasts from

2013-2017.
Financial results would have to be extended 5 years

more: Projection until year 2022

Sales, growth. capitale exp, depreciation, and all
Key Data relationships to sales in 2017 would continue 5 years

more.
Cash Flow (2022) respresenting cash flow from 2023-

2032 x 9 times (Perpetuity)

Montagne

set a price of

$ 265 for its

unit.
Analysis of Key Data
Integral Projection

Cashflow.
Projected based on

acquisition imputs.
Capital Structure:

70% Debt
30% Equity
WACC 6.34%
Perpetuity 9x

COST OF
times last cash flow
EQUITY

WACC
Analysis of Key Data
Without Expansion
Analysis of Key Data
With Expansion

FCF 2013 IS NEGATIVE, STERLING MUST

FIND A WAY TO FINANCE THE EXPANSION

Analysis of Key Data

EXPANSION - SCENARIO
RESEARCH &

DEVELOPMENT

GROWS WITH SALES

SALES INCREASE

20% OF BASE SELLS

TAX RATE 40%,

WACC 6,26%
SOLUTIONS

QUESTION 1 QUESTION 2 QUESTION 3

There are some risks -Without acquisition: Of course, it adds value to

associated with VPN $ 3.660 (in shareholders because of: the

rapid growth of the germicidal,

acquisitions, such as millions) sanitation and antiseptic

overpayments, -With acquisition: products market; the unit price

miscalculated VPN $ 40.073 (in will grow and stabilize in 2017;

acquisitions and of millions) due to the present problematic

of infections and the product´s

course loose of value demand the sales are also

of Sterling´s while ACQUIRE THE UNIT! projected to increase

acquiring the unit. significantly, all these facts are

COST OF EQUITY: translated into increase of

dividend and capital gains for

7.63% shareholders.
WACC: 6.34%
SOLUTIONS
Desde el 1 de enero de 2025

QUESTION 4
In my opinion, the strategic issue during the acquisition was the fear and

the risk of paying for a less worth company, if Sterling has done efficient

and correct research and analysis of the new market it wants to enter,

this acquisition will be successful to accomplish its actual challenge. The

uncertainties or trends for them would be probably change on the

current situation in hospitals and demand (The infections increase or

decrease), causing the acquisition more or less attractive in all ways.