Dougall & Gilligan Global Agency
D&G is one of the largest advertising agencies in the world (11,000 employees), serving a wide variety of industries in many countries (56% of total revenues come from foreign accounts).
1) What are the company’s financial condition and performance, funds requirements, and business risk?
Sources and Uses of Funds (1991-1994)
Major uses of funds are increases in intangible assets ($83.5 M) and net fixed assets ($28.4 M). This is consistent with the acquisition strategy pursued by the company over the past years. Another significant uses of funds are dividends ($67 M), currency losses ($50 M just in 1992), stock repurchases and other adjustments that could reduce shareholders equity. Moreover, cash position has improved over this period ($43 M). These uses were financed largely by the company’s profitable operations ($270 M), the issuance of convertible subordinated debentures ($81 M) and stock issuance ($56 M). Other minor sources of funds are increases in bank loans ($24 M), accruals and deferred compensations. (See Table 1) Table 1. Source and Uses of Funds (1991-1994)
The first thing to note is that the company bills their customers and pays the media for the ads placed. Therefore, the company has a lot of receivables and payables. On average, commissions and fees to D&G are only 13% of these billings. The current ratio is slightly lower than the industry median (1.06x vs. 1.1x for the industry) and it has fluctuated very little over the past 4 years. A quick ratio does not make sense here because the firm does not have inventories. Average collection period fluctuated without any particular trend, and it is lower than the industry (42 vs. 52 days). Total debt-to-equity ratio is higher than the industry median (6.3x vs. 4.5x) This ratio is so high because it includes accounts payables (57% of total liabilities). Times interest earned has increased over the period, reflecting a slight improvement in the company’s ability to service. However, it is well below the industry median (4.6x vs. 13.8x) Profitability has increased over the years and it is above the industry. Profit before taxes are 9.8% vs. 3.1% for the industry. The company’s P/E ratio has fluctuated over the years and it is currently at 26.1x vs. the 18.5x industry median. (See Table 2). Table 2. Financial Ratios
Cyclical risk – Worldwide spending on advertising has increased in 1994-95, driving company’s revenues. However, spending on advertising is highly correlated with the level of economic activity in a country. Because it is a discretionary expense it is one of the costs that companies cut first in the event of an economic turndown. Seasonal risk – There is a moderate seasonality in the demand for advertising services with an increase towards the year-end. Currency risk – Foreign business account for 56% of total commission and fees. D&G has no hedging strategy and incurs significant translation gains/losses when $/foreign currency exchange rate changes. Uncertainty of the information technology development – Advertising agencies are aggressively pursuing participation in interactive communication an the internet. This is a new area for advertising and its future and development are uncertain. Competition – The company is one of the three largest players in the industry, and the competition is intense. Success is determined by the balance between efficient operations and a creative edge. Liquidity- Although they try to collect payments and pay at about the same time, a small increase in the gap of collections vs. payables could have a large effect on the company’s need for cash. Company specific risk- The company’s beta is 1.3 compared to 1.1 industry average. 2) Do the existing means of financing unduly restrict the company?
The following table summarizes the past financing decisions of the company and its implications.
Table 3. Characteristics of Past...
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