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Dick Smith Case Study Analysis

   

Added on  2020-03-04

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Finance
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Assessment task 1: IndividualessayDICKSMITH
Dick Smith Case Study Analysis_1

Introduction of Dick Smith In the year 1968 Dick Smith started a small business in Sydney for installing car radios with aninitial invested capital of $610. The business grew exponentially and by the end of 1980 ,Entrepreneur Dick Smith had about 20 stores. These stores expended their product range toinclude many items such as electronics goods and kits. In the year 1980, one of Australia’slargest company Woolworths decided to acquire a 60% stake in the Dick Smith operated stores.Two years later Dick Smith personally exited the business by selling the remaining stocks toWoolworth for about $ 25 million. In the Fiscal year 2012 the company announced restructuring of the Dick smith business anddecided to close approximately 100 stores. Finally, Anchorage capital paid approximately $115million to Woolworth to acquire the Dick smith business. Anchorage paid $20 million as anupfront pay of the $115 million. In about a years’ time by December 2013 the anchorage capitaldecided to float the Dick Smith business in the ASX. The market valuation of the business wasestimated to be $520 million at that time.However, within two years’ time (November 2015) the business was seen experiencingdwindling sales figures and cash flows and decided to write down 1/5th of the stock amounting toover $60mn. Stock prices of the company declined over 80% in December 2015 and thecompany decided to undertake a massive stock clearance sale in December 2015. In the month ofJanuary, the company was pressed into voluntary administration. At that time the company wasoperating a total of 393 stores of which nearly 353 stores were designated as Dick Smith stores.
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Literature Review Dick Smith started the business on the basis of a hobby electronic store which can doindividual things and charge different prices. The initial model was to service individualcustomers and not sell standard electronic equipment because the business was based on a large-scale capital. The business grew and made profits because of its uniqueness of serving customersunique needs. that’s how it succeeded in bring the consumers. But once the company was takenover by the Woolworths hey greatly modified the business model to expand the business furtheralienating the personal touch. However, the Dick smith store never did good business underWoolworths supervision and the company divested the division because it was very unlike theWoolworth business[ CITATION BelON \l 1033 ]. The business of Dick Smith grew underAnchorage initially but were greatly burdened by increasing debts and finance costs. The Company (Dick Smith) that was acquired by Anchorage was for finding the mostopportune time to offload the same and make profit. With that view Anchorages nominees ranthe company but did not proceed to change the firm’s capital structure form a predominantlydebt oriented structure. The debts kept on increasing. The level of debt in the capital structure in2013 was 55% and the same increased to 63% in 2014 and 67% in 2015[ CITATION Dic13 \l 1033]. Equity was divested to accommodate more debts because the cash flows generated were lessthan adequate to run the firm. Increasingly the firm’s operations were run through using more ofthe short and long-term debts. in the early parts of 2015 the debt -equity ratio reached 2:1, andthis is when the management found it really difficult to manage the business as it became almostimpossible to get more debt financing. Current liabilities could not be serviced as per schedule ofthe inability to get more debts. Two bankers of the company (one being HSBC) declined to lendmore and decided to wait until the last quarter of 2015 for the firm’s management to take steps toincrease cash flows and failing which new credit lines were completely stopped by December2015. At that time the acid test ratio of the company was only .3 which showed how dismal thecash flows of the firm were[ CITATION Car11 \l 1033 ].
Dick Smith Case Study Analysis_3

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