Case Study #1

Burton Sensors, Inc.

 Executive Summary

It is common for companies to face a condition that needs them to make decisions. The

alternative opted determines the existence of the business in the future. Burton sensor company

has been designing and manufacturing temperature sensors. The company is faced with three

major decisions that will determine its future, which entails purchasing new thermowell

machines, the addition of capital through private placement, and the acquisition of the electro

engineering Inc., which manufactures fiber-optic. The decisions are critical and in-depth analysis

is essential to come up with a substantive conclusion. As per the analysis done, the company

should invest in all options since they can boost its market share and profitability growth.

Should Burton Purchase a New Thermowell Machine?

The decision to purchase a new thermowell machine is hard to make since it can be costly,

reducing its profitability. There is a need to carry out a profitability analysis of the decision. The

company can either by thermowell or manufacture its own by purchasing thermowell machine.

The decision that needs to be made is whether to buy or make, which requires. Buying a new

thermowell machine will make the company save $1.4 Million it spent in the year 2016 to

purchases thermowells. Despite saving, the company will incur costs like new machines,

operational costs, material and renting costs, and networking capital.

Question #1

The difference between the amount saved by the company and the cost it's will have

incurred is $271,428.57 indicating the profitability of the decision to buy the new thermowell

machine to facilitate the manufacturing of sensors. Although thermowells cover half of the

production needs making the company look for the other half of manufacturing items, it

decreases sales since it is a major part of resistance temperature detector (RTD). It protects the

product from the corrosive process, which enhances the manufacturing of the sensors. The

company's interest is to save in cost and maximize sales. Based on the analysis, the company

should purchase a new thermowell machine to boost its competitiveness and revenue growth.

Should Burton Raise Additional Capital Through a Private Placement?

The company has been overwhelmed by a high level of loan borrowing. The company needs to

raise capital either through over-the-counter or private placement. Unless the benefits of each

method are analyzed, it is not easy to choose which option to select. Issuing shares over the

counter will make the company raise capital of $4.75 er shares. On the other hand, issuing

shares using private investment will raise capital of $ 3.50 per share. According to the private

investment agreement, 350,000 shares will be issued to the investors at $3.50 per share, and

50,000 shares will be issued to the brokers to cater for their services.
 Basing on the shares issued at the private investment of 400,000 (350,000+50,000), the

company raise total capital of $1,900,000 using the over-the-counter (OTC). On the other hand,

private investment will raise total capital of $ 987,000, considering the loss on the value of

shares issued to brokers. It's is evident from analysis that over the counter will raise more capital

than private investment. Considering the value of capital to be raised over the counter approach

is better. Also, the urgency of collecting the capital is essential when it comes to the need to fund

business operations. Private investment takes less time to obtain cash, while over the counter

takes a longer time.

Should Burton Acquire Electro- Engineering, Inc., Which Manufactures Fiber- Optic

Sensors?

There is a growing market demand for the fiber-optic sensor segment. Purchasing Electro

engineering (EE) will enable the company to construct optical temperature problems from low-

cost and high-strength materials. Also, the ability of the EE to reduce selling, general and

administrative expenses will be an added advantage since the company will generate more profit.

An increase in sales after acquisition will also boost its profitability, resulting in its growth.

Reduction of the cost of goods from 51% to 49% indicates the ability of the company to generate

more gross income. Since operating excess is reduced, the company will automatically Maxime

its profitability.
 Also, acquiring EE business increases the company's asset base, which leads to the

expansion of the business activities. Assets increase the ability of the company to generate more

revenue if they are used efficiently. Moreover, the company has unsecured debt capacity, which

benefits the Burton sensors. The acquisition cost is quite low since the owners of the EE

required Burton stock which is valid at $4.75 per share, allows acquisition of EE at 100% equity

for ten times 2016 operating profit before interest, depreciation, taxes, and amortization. Based

on the analysis, the company should acquire EE to invest in the fiber optic sensors segment.

Question #2

2016 2017 2018 2019 2020 2021

Inventory 2436.3 2997.9 3477.6 3755.8 3981.1 4220
Net Working Capital 3719.6 4612.2 5350.2 5778.2 6124.8 6492.3
Free Cash Flows 4037.68 5082.17 5991.8 6458.43 6846.66
Price Per Share 1.03 1.41 1.87 2.37 2.91 3.51

Purchasing new thermowell machine for Burtons will be a good plan. By doing this, it will have

a positive impact on a company's efficiency and production. Purchasing new thermowell

machine will also improve safety during production since they acted as physical barriers between

the production process and the sensing elements. The economic life of the machines also long

hence it will cost effective. Also, the thermowell will help Burton’s to Increase Net working

capital by 650000 dues to increase in inventory. Net working capital means you can meet your

Page | 6 current financial obligations which indicates a company has sufficient funds to meet its

current financial obligations and invest in other activities. You can invest in other operational

needs if you have a higher net working capital. Therefore, in order to support Burton’s Sales

growth Burton needed to sustain high levels of growth. So, purchasing thermowell machine

Burton’s Net working capital increased year by year along with Free Cash flow of the company
and price per share. It indicates that purchasing the thermowell machine increased production for

the company. However, getting new machine will affect the RTD quality due to reduced sensor

response time. This is because of the design and materials used in making the thermowell.

Purchasing new thermowell machine also will be expensive. Therefore, in order to keep High

growth Burton in the highly competitive market purchasing the thermowell Machines will be an

advantage for Burton Sensor, Inc.

Weighted Average Cost of Capital 2017 2018 2019 2020 2021

WACC 9.05% 9.04% 9.03% 9.02% 9.02%

Over the year Burton’s Weighted Average Cost of Capital decreased and is lower than the year

2016. It indicates that they are controlling their financial expense efficiently and maintain the

mix of debt equity properly as a result of acquiring thermowell machine

Question #3

Because of Burton’s Stock was traded on the OTC market, it is hard for them raising equity

capital through stock issuance. Therefore, deciding to raise additional capital through a private

investor will be another challenge to Burton Company. A private investigator approached

Marshall and offered to acquire 450,000 shares of the company at 3.50 per share. Marshall Page |

7 approached a friend at a large financial services firm for advice. She was told that this the only

realistic prospect for raising new equity capital as it will be very hard for the company to sell

enough stock directly to the market for more than the required price. Also, it will not be a big

problem for Marshall because most of the company’s stocks own by Marshall and her family and

rest of them are employees and retail investors. So, they do not have to face any problems with
the shareholders, and they could remain private. But the problem they will is that they will have

to take the investors offer which may not be favorable to the company. Additionally, they will

also have to pay extra 50000 shares to the consulting firm that will make the deal for them.

However, Burton’s intention is to continue high growth strategy and purchasing thermowell

machine. In order to compete with other companies in the same field Burton needs high amount

of investment. Because Burton were unable to issue new shares, the best option would be to

accept the offer from the investor.

Question #4

Acquiring the services of a manufacturer is one of the finest options that businesses who

manufacture products can go with in order to witness business’s steady growth. It is to be

believed that acquisition of Electro-Engineering, Inc. (EE) will undoubtedly serve as a good step

taken by Marshall.

Justifications:

The reason for claiming it to be a great step taken by Marshall majorly hides in the performance

and well-being of Electro-Electric, Inc. in monetary terms. According to the current position of

Electro-Electric, Inc., the venture associates with itself an essence of high-end technology that

serves as a major competitive advantage over other players of the market. Furthermore, it is to be

believed that acquisition of Electro-Electric, Inc. will bring effectiveness and efficiency of the

products being produced.

Along with the above-mentioned reasons, the lowering of production costs is another major

breakthrough that Marshall can witness by acquiring Electro-Electric, Inc. with that, it is

believed that this acquisition will also greatly help in lowering the COGS (Cost of Goods Sold)

by 2% (51% to 49%).

In context of buying a thermowell, it is to be noted that the deferred debt of the company must

not exceed 75% of the cumulative receivables in the inventory. Buying a thermowell is certainly

a great choice to make. Buying new thermowell will greatly help in increasing the productivity

of the business and also to maintain the reputation of the business. But keeping in mind the

financial constraint exerted by the bank, the company must initially figure out whether going

with such a plan is feasible or not. With the bank constraints, the gross liability of the business is

facing limitations. The total liability of the business cannot be more than thrice the book value of

company’s equity. So, keeping in mind the bank constraints, it is to be stated that buying a new

thermowell is clearly a better option and the perks associated with the purchase of a new

thermowell such as reduced productivity costs, efficiency, product attractiveness are the

testimony of the rightness of the decision. Concludingly, it can be claimed that even if the NPV

of the acquisition of Electro-Electric, Inc. is zero, Marshall should proceed with the decision of

acquisition and purchasing new stuff such as thermowell.

Question #5
Buying a thermowell is certainly a great choice to make. Buying new thermowell will greatly

help in increasing the productivity of the business, reducing the production cost and also to

maintain the reputation of the business which it holds with itself in the market.

Since, Burton is one of the major players in the market with considerably good reputation, the

business must capitalize on every opportunity tat can lead its way towards sustainability and

uninterrupted operations.

According to the current monetary situation of the organization, the decision of the company to

acquire Electro-Electric, Inc. is not very likely to turn out to be effective and efficient.

Justifications:

In regard to gain the enough funding that can be used in the purchase of thermowell machines,

the acquisition will not certainly allow Electro-Electric, Inc. to do so. The major reason to this is

the scale of the organization. The idea of gaining incremental funds through private practices of

placement is a smart and effective idea but that only holds majorly for the rising and developing

firms. Now since Burton is a considerably developed organization, raising funds through private

placement is less likely to work for them. If the organization will indulge in such a practice, it

will always allow the lender to have the upper hand and will force the business to accept the bids

of investor.

It is also to be claimed that businesses of larger scale can benefit heavily through the concept of

outsourcing. So, it is a wise option to look for new producers rather than purchasing produced

goods and products to fulfil the need. Concluding, it can be claimed that according to the

explained financial position of Burton Sensors, the decision of acquiring Electro-Electric, Inc.
might not be effective and will certainly not help it in raising funds to invest in purchase of

thermowell machines.