IT Group Case Study Case Solution & Answer

IT Group Case Study Case Solution 

Possible Move

In order to stick to the core aim of the business, the possible move that the case has provided is the divestiture of the SSIT Unit, which is not the core business of the IT Group and is also performing worse since a long time.

Qualitative analysis of the Possible Move

Despite the fact that the proposed unit is not performing well historically, there are some positive sides of SSIT Unit as well. It could be said that the SSIT Unit helps the other segment of the IT Group in increasing the company’s market outreach and client exposure and helps the IT service unit gain customers. It is estimated that approximately 2% of the IT service unit’s annual revenue growth is derived from new client introduction from the SSIT Unit. However,in order for the SSIT Unit to exist, the IT Group is required to make additional investment of $ 5 million in annual cost for it to become a standalone entity. Moreover, in order to build the infrastructure necessary to become a standalone entity, the IT Group is required to invest approximately $ 3 million as a one-time start up expense.

Quantitative analysis of the Possible Move

In order to maximize the shareholders’ value, it is estimated that by divesting the non-core business which is performing worse since long,the core aim can be achieved. In order to do so the fundamental valuation of the two segments of the IT Group is performed to check the individual worth of the two segments and their effects on the overall growth of the company in the future. With the help of the future case projections, the quantitative analysis is performed.

Based on the Case Projection
Valuation of IT Group
Given Info:
Annual Growth Rate	3%
WACC	9.90%
Â	2014	2015	2016	2017
Revenues		$624.50	$685.50	$752.40
EBIT		$107.80	$122.00	$137.90
EBIT(1-T)		64.68	73.2	82.74
Op Cash Flows		$82.98	$92.00	$102.14
CAPEX		 $    5.50	 $    6.40	 $        7.90
WC	$163.90	$102.67	$112.70	$123.70
Investment in WC		($61.23)	$10.03	$11.00
FCF		$138.71	$75.57	$83.24
TV				1242.59
Net FCF		$138.71	$75.57	$1,325.83
Enterprise Value	$1,187.62

By performing the fundamental valuation, it can be clearly seen the IT Group is able to generate the positive cash flows in the future resulting in the positive enterprise value, which is the plus point for its growth. In order to come up with the fundamental valuation, the average of the WACC is taken of the related companies which come to be 9.9%. Moreover, the annualized growth rate is 3% which is given in the case.

Valuation of SSIT Unit
Given Info:
Annual Growth Rate	1.6%
WACC	13.70%
Â	2014	2015	2016	2017
Revenues		$86.90	$91.20	$95.80
EBIT		$5.20	$5.50	$6.20
EBIT(1-T)		3.12	3.3	3.72
Op Cash Flows		3.82	4	4.52
CAPEX		 $    2.60	 $    3.00	 $        3.70
WC	 $        9.40	 $  11.38	 $  11.95	 $      12.55
Investment in WC		 $    1.98	 $    0.56	 $        0.60
FCF		 $   (0.76)	 $    0.44	 $        0.22
TV				1.83
Net FCF		 $   (0.76)	 $    0.44	 $        2.04
Enterprise Value	$1.06

By doing the fundamental valuation of the SSIT Unit, it can be seen clearly that this unit adds just $1.06 in the company’s overall value. Moreover, it can be seen that the cash flows that this unit is providing in future are negative as well, which can lead to major threats for the company’s value in the eyes of its shareholders and the results can be damaging. The shareholders can switch to other businesses. In order to do the fundamental valuation of the SSIT unit, the WACC is calculated by taking the average of the given WACCs of the related companies which come to be 13.7%,whereas the growth rate is taken from the industry i.e. 1.6%………………..

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