Lab International Inc. Case Solution
Question No: 1
These two division can create value for the shareholders if they perform well. Lab pharma could create value for shareholders through outsourcing production of one or more development products and innovation, joint ventures and so on.On the other hand; lab research can generate strong cash flows that will increase the profitability and cash availability for projects, which will increase the share value.
Question No: 2
These two divisions can destroy the shareholders’ value, asin the view of large institutional investors; the stock price of Lab international Inc. is very low, which does not reflects the true value of the company. These two divisions are not performing well, and if this problem continues; then share price will become zero.
Question No: 3
The market can undervalue a company because of its unprofitable division. The company has a division which is either incurring losses or is not being beneficial in increasing the company’s profit margin. The value investors would buy the stocks which would increase after the company sellsits unprofitable division.
The stock price does not suit the investors’ expectations. The valuation technique used by the Lab international Inc. is relative valuation analysis. The company might have different products, divisions and size. The investors are expecting an additional return because of the small size of the company.
Question No: 4
There are several issues being faced by the firm regarding having an increase in the shareholders’ value. The Lab International Inc. was considering spinning off its divisions into isolated entity. The issue was: whether to sell the company in a single transaction or in multiple transactions. The company was concerned about the risk associated with the secondary or multiple transactions. The undervaluation of the stock price was also a main issue for the management to consider.
The undervaluation of the stock price was due to the under performance of one of its divisions. The market knows that the company is about to sell its division, which is causing a decline the market value of the entity.
LAB Research was finding new ways to raise cash so that it could enhance in the LAB Pharma. The agreement of expansion in LAB Research’s Laval facility requires the division to improve the company’s cash flows. The issue was also occurring due to the valuation factors. The market conditions and the qualitative factors are not considered while valuing the firm.
Question No: 5
Alternative a: do nothing maintain the status quo
The company might not get its real worth of selling a single division due to the market’s perception about its divisions; therefore it is better to stay with both the divisions for a better value.
The investors might gain interest in funding the company,which would help them in raising their stock price and growth in profits. It is also difficult to find a similar portfolio for the company to sell its division for the cash raised.
One of the divisions requires consistent cash for its operations, as selling none would lead towards a major loss. The cash required for the expansion of one of its division may create a major threat of selling the company.
The undervaluation of the stock price may always be there, which is why the potential of an increase in profits and focus on one division will not be achieved. The company is solely dependent on LAB research for funding.
Alternative b: selling the research outright
The selling of the LAB Research would provide a quick cash flow to the company, as the sale would bring the cash required for the development of LAB Pharma. The LAB Pharma has the greatest potential to provide high profits to the company, which can be acquired by selling LAB Research. However,the issue of the cash required for its expansion will also be resolved.
The market knows that the company is about to sell one of its department to raise cash,which will lead towards a decline in the selling price of the division. The LAB Research is solely dependent on the stock price of the company, thus selling it might reduce its stock price.
Aternative c:selling the pharma outright
Lab pharma is generating loss for lab international, because it is consuming more cash than it is generating.Therefore,selling the Lab Pharma division can also solve the fund raising issues, which the company is facing for the expansion of LAB research.
The investors have interest in funding the company in the future, because the LAB Pharma madea wrong decision of buyingthe focus inhalation. The market perception of the less value of the division will result in it having a low selling price. It is difficult to find a company that has the matching product portfolio as Lab Pharma……………………..
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