From: http://consultingcases.blogspot.com/search/label/declining%20market%20valuation
Fluor Corporation to Eliminate 750 Engineer Positions
Case Type: reduce costs.
Consulting Firm: Booz & Company first round job interview.
Industry Coverage: engineering & construction.
Case Interview Question #00532: The client Fluor Corporation (NYSE: FLR) is a large publicly owned engineering, procurement, construction, and maintenance (EPC / M) services organization. Based in the Las Colinas area of Irving, Texas, the company employs more than 41,000 international employees and maintains offices in over 25 countries. Fluor is a Fortune 500 and a S&P 500 company.
The company’s main business is to build large refineries and large industrial plants. They are global in nature and operate in four main regions. This company is a recent roll-up of three smaller companies that operate independently. They have $1 billion in revenue for fiscal year 2008. Recently, however, Fluor has seen their market valuation drop sharply. You have been hired to find out the reasons behind Fluor’s declining market valuation. How would you go about it?
Instruction to the interviewer:
The objective of this case is
- To see if the candidate can comprehensively explore the possible reasons and causes of declining market valuation.
- To see if the candidate can structure and articulate an intelligent structure with which to approach the problem.
- To see if the candidate can complete simple mathematical/quantitative analysis.
The case should start with the candidate hypothesizing the reasons that could lead to declining market valuation. This is a simple test of idea generation. Ask the candidate to list a structure with which they will approach the problem. Check his/her structure to see if it seems reasonable and comprehensive.
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Case From: http://www.consultingcase101.com/fluor-corporation-to-eliminate-750-engineer-positions/
Hint:
Value and market your business
Key factors affecting the value of your business
Finance
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Historical, current and projected profits and cashflow.
- How well you control costs.
- Need for capital expenditure in the near future.
External factors
- State of the economy in general including interest rate levels and the level of demand in your market in particular.
- How similar businesses are being valued.
- How many potential purchasers are interested in the business.
- How many similar businesses in your sector are on the market.
Intangibles
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Goodwill and intellectual property such as patents.
- Strength of customer relationships – and how profitable they are.
- Your business’ growth potential.
- Economies of scale a new owner could leverage.
Assets and liabilities
- Value of assets such as property, equipment, debtors and stock-in-hand.
- How full your order book is.
- Level of debt and other existing liabilities.
People
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The management’s record of success.
- How dependent the business is on your own skills – and the likely extent of your future involvement.
- Experience and commitment of key staff.
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SUGGESTED ANSWER:
me: interviewee
I: interviewer
me: so our client is experiencing a drop in market valuation, and you want me to identify the main reasons for this drop. are there any other objectives?
I: you are right, no other objective is relevant.
me: there are a number of factors that could affect a business’s market valuation
- the industry overall. how is the industry overall doing?
I: the industry overall is strong.
- the company’s growth and potential. how are doing? do we have a lot of businesses to do or are we loosing market share?
I: we have a lot of businesses to do. the organic growth is strong.
- the company’s finances and operations. how is debt structure like in our company? do we have a large portion of debt? or do we have plans to incur debt in the near future that might have triggered a downward pressure on our market valuation?
I: no, the company’s debt structure is healthy. we do not have plans to incur large amount of debt in the near future.
do we have data on the profit? profits up or down?
I: profits is growing.
our revenues?
I: revenues up.
our costs?
I: our company is loosing margin
me: I believe i have found the main reason here. the company’s revenue is up, but the profit margin is shrinking, it must be the costs that are associated with the operations. am i right?
I: good, go on.
me: so i would like to look at the costs of the company. If I could have a cost breakdown, I could run some numbers to determine which part is responsible for the shoot-up in costs.
I: how would you obtain these inforamtion.
me: I am gonna have to talk to your finance people, accounts, and different departments. I may have to interview them again to validate the information that i have obtained after I come up with a plan and draft.
I: summarize for me.
me: usually there are several factors that typically affect a company’s valuation:
a) the industry overall, and the economy.
b) the company’s finances. if the company has a large portion of debt (high debt to equity or debt to asset ratio) then the company may face a downward valuation. also if the company has plans to incur debt to fund projects that need capital expenditure in the near future then it could also affect the market valuation.
c) the company’s operations. if the revenue is down; the profits are down; or the profit margins are shrinking; costs are shooting up. then the company could face a drop in market valuation.
d) the company’s management is also crucial. if the management is incompetent or not trusted by the public and investors, it could also lead to drops in market valuation.
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