Ath technologies

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15.963 Management Accounting and Control
Spring 2007

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15.963 Managerial Accounting and Control
Spring 2007

Prof. Mozaffar Khan

MIT Sloan School of Management

ATH: Chronological Stages

1986 Founding 19891990 Growth 1991 1992 Push to Profitability 1993 Focus on Process 1994 1995
1996 New Management

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ATH: Chronological Stages

1986 Founding 1989 1990 Growth 1991 1992 Push to Profitability
- 4 X Revenues - first profit - rewarded all employees

1993 Focus on Process

1994

1995

1996

New Management
$60 million sales52% gross margin $102 million assets $60 million accumulated R&D investment

ATH Achievements
- developed new product - capitalized new venture - attracted new capital - earn-out plan - built market share - developed a vision - customer focused measures - sales and earnings growth

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ATH Technologies

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We trace theevolution of ATH through five stages. What is the competitive environment?
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The business is technology driven. Technology is evolving rapidly, so product life cycles are likely to be short. Product development pipeline is critical. Did they earn an appropriate return on investment?
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What do you think of Scepter’s decision to purchase ATH?
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The total price, if allearn-out conditions are met, is probably around $150m in 1990 dollars, after discounting at about 18%. The target income for 1994 is $24m. This would need to grow substantially, and for a long period, in order to earn an appropriate ROI. Is this likely given short product life cycles?
Managerial Accounting & Control 4

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ATH Technologies

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Was this a poor investmentdecision?
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There may have been non-financial considerations such as
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access to new technologies and markets, expansion of product portfolio, and first mover advantages.

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However, the laissez-faire approach of Scepter after the purchase does not suggest the presence of operating synergies between Scepter and ATH. Was this a poor outcome, as opposed to a poor decision?
„ „ „Perhaps, but was the earn-out structure appropriate? i.e., did Scepter overpay for ATH, and did the earn-out structure provide the right incentives from Scepter’s perspective?
Managerial Accounting & Control 5

15.963 [Spring 2007]

ATH Technologies

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Consider each component of the earn-out plan. $24m for FDA approval.
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This is necessary, but should more have been contingenton approval and less paid up front?
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Perhaps FDA approval was highly likely – the uncertainty was not about the technology but about the effort required to bring it to the stage necessary for approval.

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$25m for independent confirmation of superiority of technology.
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If the technology can be appropriated, replicated or substituted, then investment unlikely to be recovered.
„Remember from our calculation that payback period is long. It should probably be tied to the next $90m. It should probably also have been tied to the initial $60m.
Managerial Accounting & Control 6

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Should this be tied to any other part of the earn-out plan?
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15.963 [Spring 2007]

ATH Technologies

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$90m for three year sales and earnings goals.
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Should this beindependent of the $25m incentive? Is it too rich, given the earnings goals? Recall our earlier calculation. Is the incentive period too short?
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There will be a severe horizon problem, and behavior may be excessively myopic given the richness of the payoff. One provides incentives to sell, and the other to control costs. On one hand, if sales are sustainable then it may be appropriate to reduce...
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