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Describe the situation facing Mensa at the time of the case




asking that we develop a five-year strategic plan with cost estimates and a time line. It should be 5-7 double-spaced, typed (12 point) pages plus exhibits. Your plan should include/address the following points;1.Describe the situation facing Mensa at the time of the case. This should include the major issues facing the company and the decisions that need to be made. You are to spend no time on corporate history. You must consider the past, but your analysis and recommendations should be forward looking.;2.List your specific recommendations for the firm in detail. Explain why each recommendation was made including the information used and the logic (or analysis) applied to reach your conclusion. As you prepare your analysis, remember that no decision is complete until the financial impact of the decisions is determined. Don't forget to use cash flow analysis and Net Present Value techniques when analyzing the four divisions within Mensa, Inc.;3.If your recommendation(s) need to be taken in a particular sequence, be sure to indicate the proper sequence and the reasons for that sequence.;4.Discuss the events or uncertainties that are most likely to cause trouble in the implementation of your recommendations and how you would react to them if they were to occur.;You did address the five points however, it is not a five-year strategic plan with cost estimates and a time line. I apologize for the inconvenience, but is there anyway you can develop that plan? I'm willing to pay more if needs be. Just let me know how much. Additionally, the suspense for this five year plan is 2 May. I uploaded the Mensa Case Study and the paper you put together last time for your review. Thanks;****************************************************************************;I certify that my work upholds the standards for Academic Honesty outlined in the Graduate Catalog. I have not;Cheated;Used or attempted to use crib sheets, electronic sources, stolen exams, unauthorized study aids in an academic assignment, or copied or colluded with a fellow student in an effort to improve my grade.;Fabricated;Falsified, invented, or misstated any data, information, or citation in an academic assignment, field experience, academic credentials, job application, or placement file.;Plagiarized;Used the works (i.e. words, images, other materials) of another person as my own words without proper citation in any academic assignment, including submission (in whole or in part) of any work purchased or downloaded from a Web site or an Internet paper clearinghouse. Additionally, works I have produced for prior classes have been properly cited and not represented (in whole or in part) as new work produced for this assignment.;Facilitated Academic Dishonesty;Assisted or attempted to assist any person to commit any act of academic misconduct, such as allowing someone to copy a paper or test answers.;Additionally, I certify that I have been informed of the resources provided by the university to teach students about academic honesty, including the Online Writing Center and Webster?s plagiarism tutorials. I understand that it is my responsibility to learn and apply the principles of academic honesty, and cannot argue ignorance should I be caught violating the Academic Honesty Policy.;I understand that, should I violate the Academic Honesty Policy, I must submit to the consequences determined by the instructor, which may include failure of the assignment or course, or dismissal from the university.;Ryan Mendenhall;Running head: MENSA, INC;Mensa Case Study;Ryan Mendenhall;Webster University ? BUSN 6200;Major Issues faced by Mensa;Mensa, Inc. had undergone a major renovation in its business portfolio and investment sectors. In the 1990?s, the firm sold out most of its non-profitable units and assets. It generated a capital of about $450 million, $250 million short of their original target. Most of this capital generated was re-invested in their current 4 main business groups. They were;? Financial Services;? Energy;? Packaging;? Forest Products;The company is not yet firmly settled in the market and has mixed reviews in its performance in its different sectors. Some of them look promising while others have bleak prospects. The problems faced by them will be discussed separately.;Financial services;Mensa, Inc. bought Columbus Financial Corporation in the early 2000?s. The corporation was making good profits and had a positive cash flow and these were the reasons why Mensa decided to take over the firm. It soon added a chain of other insurance companies, including American Life Insurance Company and other mortgage and mortgage insurance companies. Soon the company had insurance underwritings in 3 major sectors, life, real estate and casualty.;The company?s position in this sector looks pretty good. Although the company is not yet competing among the giants but it has a decent position in the market and occupies quite a decent market share. Now they have a decision to make, whether they are happy with the comfortable position their company is at or do they want to make any further investments and risk getting into the more competitive section of the market. Currently, Mensa is investing more capital per dollars of sale than their competitors. This can be solved by investing more money and increasing their sales. But that will lead them to be viewed as threats by the major companies who can then try to remove the competition from the market. So the decision at hand is an important one.;Energy;In the energy sector, Mensa, Inc. has bought Easy Gas Energy. This company is a reputed one and is involved in the exploration, development and production of oil and gas. It is the largest supplier of natural gas to the state of Florida. It is one of the six companies which are licensed by the Mexican National Oil Company to buy gas from it. Thus, it is a well set and profitable investment with relatively low risk. In 2006, with the help of Allied Corporation, Mensa took over Suppan Energy Corp. This helped the company in its efforts in exploration and it spent over $400 million in 2006 in exploration.;The problem facing the company is that it is in no position to undertake such expensive exploration projects. The company did not have a strong capital to support these activities unlike its competitors. The risk involved is too high and may well lead to the collapse of the company in this sector. Hence they are faced with a decision to put a stop on such huge exploration and development projects. Then there is a question of further investment which seems to be futile. No matter the amount of investment Mensa might make, it has no scope of competing with the other companies in this sector.;Packaging;In the packaging sector, the company has decided to adopt a new approach in catering the needs of the consumers. They decided to let the consumers determine the technologies that they required in the manufacturing of the containers. They even closed down many non-profitable units.;But this does not seem to be a very smart move on the part of the company. The packaging market is an oligopolistic one. So they do not have any major advantages over their competitors other than goodwill and reliability which can easily be attained by the others. So their attempts to form contract with consumers is understandable. But, the problem over here is that these consumers are well established firms in their own rights and hence have substantial bargaining power. Their needs are also very high and they will not refrain from constantly expecting advanced technologies with no relief in prices. Hence this is a very capital intensive venture. It also does not show any signs of future profits. So the decision rests whether to continue or scrap this project.;Forest Products;The company is a large producer of bleached folding carton boards and also holds large assets of timber (1.45 million acres of timberland). The company is the sixth largest producer of timber in the United States. But the problem facing the company is that the technology used in the production is obsolete and will soon lead them to higher costs of production compared to their competitors and lead them to lose market share and hence revenues. They have to consider selling the plant or to start building a new more cost effective one. Then there is the large reserve of timber that the company has. It even has to decide whether to invest in the timber market or to sell off its assets and get the maximum possible revenue out of it.;Recommendations;The company now has some serious decision making to do. My recommended actions in the various sectors would be;Financial Services;The company would do much better by investing into this sector. Currently the company can expect a 15% growth in sales in this sector. But if they were to invest, they can benefit from their growing market share. The current segments earning to assets ratio is 13% and the ideal value is 18 % in order for the company to be a contender in the long run. They should invest $250-300 million in the business for the starting 5-7 years. This investment will lead them to doubling the capital and assets involved in the business.;The investments have been forecasted to have the following cash flows in the later years;? A negative cash flow of about $250 million in the first three years.;? A negative cash flow of $50 million for the next two years.;? A positive cash flow of $200 million in the next 2 years and $300 million later on.;This seems a very promising future for the company and the market value of the company will rise to $1 billion in that time.;Energy;In the Energy sector, the company can take the following measures;? It should not invest in the exploration and development area as it does not have a large capital back-up. Investing in this area would mean a negative cash flow of $500-600 million a year with no profits visible for at least 5-7 years. It is possible that the outcome may be dramatic given the mercurial rise in oil prices, but the risk is simply too much for them to bear. They have proven assets worth $500 million which could easily scale up to $1-1.5 billion in the next 8-12 years. Hence, they should continue with the current scheme without undertaking any major investment.;? The Florida pipeline is something the company should consider investing on. Florida is a fast emerging commercial hub in the United States. Initially the company should invest $50 million for the first 4 years. This is supposed to lead to a positive cash flow up to $300 million a year, starting at $100 million a year from the 5th year onwards.;Packaging;The company would do best to sell off this entire division. This is because;? The firm cannot grow at a faster rate than the GDP and there would be pretty high negative cash flows in the coming years when the companies demand for better technology.;? The profitability will decline over the coming years and so will the cash flow. The cash flow would go from positive $230 million to a zero till year 5. Then it will result in negative cash flow of $100 million and deteriorate by 20% each year.;? Selling off the firm now will give them $1.2 billion, about 70% of their book value which does not seem a decent deal at first. But considering the long term expenditures involved in keeping the division running and no scope for any development, this is a fair deal after all. That money will come in handy while investing in the other more profitable divisions of the company.;Forest Products;The best course of action for the company in this sector would be to close it down. The company?s obsolete technology will lead to higher costs of production than its competitors and hence it will have a negative cash flow over the following years. Investing in new plants would require $1 billion and would not produce revenues till 6 years after initiation. Hence the company will have a negative cash flow of $50 million till the first 5 years and anything between $100-125 million later on. Selling off the firm would give them $600 million or the book value which is a pretty good deal. They even have valuable timber resources which they should hold on to the timber resources which are now valued at $300 million. Their value is expected to rise by 60% in the next ten years.;Action;The sequence of actions should be as follows;? The first priority of the company should be to sell off the packaging and forest products plan. The reason is that these industries have no scope of generating revenues in the future and it is best to sell them off as soon as possible as their value will depreciate with time. They should be sold off within a year or so, as the money hence generated will be vital in the company?s investment plans in the other sectors.;? The company should now invest in the Florida pipeline work as it is the most happening thing at the moment. If they delay the investments here, their future revenues will be threatened as people might find an alternate source of power and their sales will fall threatening their profitability.;? Then the company must look to invest in the financial services sector immediately. The capital required will be generated from the closing down of some of the divisions of the company. Then it can look to be a more formidable force in the financial sector and obtain much higher revenues.;Recommendation for course of action;The recommended course of action is the one in which minimum risk is involved. But we cannot neglect the volatile economy. There is always a chance of an economic breakdown which will seriously threaten the company as it is now focusing mainly in the financial sector. The best course of action in that case would be to focus less on that sector and divert their investments in the other sectors of the company which are relatively less influenced by the economy like the Energy and Forest products sector. These sectors will then be the stronghold hat will support the company in the bad times and see it through. Then the company can again look forward to the suggested plan of action and carry on accordingly.;Another problem that the company might face in the near future is the unexpected rise in production of oil. If more oil reserves are detected, then the price of oil will not rise up to the expectations of the people. Thus it will conflict with the plans of the company. They will depend on the money they were expecting to gain by selling the assets at an inflated price. But the increased production might lead them to change their course of action. They might as well consider the prospect of exploring in order to find oil reserves as these events will certainly suggest that there is still scope of finding some (My Budget 360, n.d.).;References;My Budget 360. (n.d.). How Does Oil Impact the Economy? 3 Major Areas of Economic Consequence: The Impact on Inflation, Consumer Spending, and Auto Sales.Retrieved on April 21, 2014 from;******************************************************************************;1;Mensa, INC.(A fictional company)Mensa, Inc. was a firm with a long and uneven history. It was started in 1974 and at one time oranother had been a competitor in more than two dozen industries with varied success. Each of theseveral CEOs had developed a different strategy and over the decades the firm had had manymanifestations. The only real constant in Mensa?s strategy had been a commitment to the packagingbusiness in its several forms. But, even in this business there had been any number of changes indirection which diluted the impact of capital spending and had the effect of Mensa never achievinga strong position in any of the packaging segments although, briefly, in the early 1980s Mensa?stotal packaging revenues made it the largest packaging company in the world.The lack of a competitive advantage in any of the large packaging segments resulted in Mensa beingpushed into producing commodity products which had them penned between powerful steel and tinplatesuppliers and powerful food and beverage producers as customers. Also, as their large customersgrew there was pressure for them, especially in the low margin food business, to build their ownpackaging facilities, especially can plants. The long term effect of this was to cause Mensa?spackaging profitability to lag its better positioned competitors.;At one time or another during the 1980s and 1990s the company produced auto parts, electricalequipment, power equipment, electric motors, metal alloys, airplane wings, furniture, appliances,communications equipment, specialty chemicals, and consumer products, to name only the mostimportant of their many businesses. They also bought several regional retail chains. None of thesebusinesses worked out well and all were either sold or liquidated at a loss. The financial andhuman capital devoted to these businesses was largely lost. Further, the problems they causeddiverted capital and management attention from better opportunities.;NEW STRATEGIES FOR THE 21st Century;By the late 1990s under still another new CEO a management consensus had developed. The consensuswas to (1) reduce holdings in operations that fall short of performance goals or do not fit thelong-term strategy of the company, a target of realizing $600-$700 million from the sale of suchassets was established, (2) reinvest these funds in areas promising profitable growth, (3) improvereturn on equity over the long term as a consequence of this reinvestment strategy, and(4) strengthen Mensa?s balance sheet and credit standing. The new benchmarks for the firm includedhaving a well balanced BCG matrix that considered fast growing industries to be those that weregrowing at more than 10% per year. The end result would be a firm with four main businesses:financial services, energy, packaging and forest products. The latter was primarily a paper, fiberdrum, and cardboard business that also generated about 25% of revenues from selling lumber and woodchips.;This strategy was followed and many businesses were sold although the amount of money received forthe businesses fell short of the $700 million target by almost $250 million. The businesses soldwere all either small competitors in their industry or were in industries thatsuffered from overcapacity and low returns.;The New Mensa;By 2XX1 the sales were complete and most of the realized funds had been redeployed into Mensa?sfour main business groups, resulting in a firm that management thought met their goals. TheChairman stated in the 2XX0 Annual Report that Mensa was ready to move on to a new phase;?Our primary task is now the efficient production of quality goods and services within ourrestructured business segments: packaging, forest products, insurance, and energy. Further detailson Mensa?s posture are contained in the attached operating and financial statements. Our overallstrategy is to achieve the competitive advantages that can result from increased productivity,market focus, and innovation.?;By the beginning of 2XX5 management believed that it was well positioned strategically for futuregrowth and profitability. They had pared their operations to four main businesses: FinancialServices, Energy, Packaging, and Forest products. The review for each segment was done by topmanagement with the assistance of outside consultants who were all experienced top-level executivesin each industry. Some of the consultants were retired and some of them were still active, but theyall had long and successful experience in the industry they were consulting on. There is also anoutlook section for each industry segment that includes estimates of profitability, cash flow, andneeded investment in the next 10 years. The outlooks were done entirely by the consultants.;Financial Services;Mensa?s first foray into financial services came in the early 2000s when a large investment bankbrought the opportunity to buy Columbus Financial Corporation to the attention of the firm.Mensa had hired the investment banker to help with the sale of the unwanted businesses and theyknew that Mensa was looking to redeploy the assets generated from the sale of the assets.Initially Mensa was cool to the idea because it was so far removed from their expertise, but onexamination it appeared that the insurance business had good profitability and cash flowcharacteristics so when the existing management was persuaded to stay on the purchase was made.From this base the Financial Services group added more insurance operations to include AmericanLife Insurance Company, with its 49 master brokerage general agents and 13,000 independent brokersand agents. The firm also added a mortgage company, a mortgage insurance company, a number of titleinsurance companies and several title companies to form the core of the real estate-relatedfinancial services area. By the end of 2XX2 Mensa Financial Services underwrote insurance in threebroad segments: life and real estate as well as property and casualty insurance. The firm wasstrongly positioned in the Financial Services business, but competition was tough.;Mensa?s Financial Services division was not large by national standards, but the firm was asurprisingly nimble and successful middleweight in the industry. The management of this businesshad done an efficient job of integrating their many acquisitions into the financial servicesoperation, had proven their ability to pick their target markets, and avoided serious;2;head-to- head competition with bigger and more powerful rivals. The future prospects of thedivision looked good.;Financial Services Outlook. The consultants that looked at the financial services business believedthat the financial services business would be a good one for a long time. It was, relativelyspeaking, a low capital intensity industry with improving returns and strong positive cash flowcharacteristics. Although Mensa invested more capital per dollar of sales than most of theircompetitors the consultants thought this problem would be solved by increasing the size of theoperation. They believed that Mensa could increase their sales in the division by about 15% peryear and increase returns on segment assets to between 15% and 18%. They also expected divisionsales to increase by at least 15% per year for the next decade if they made the needed investmentin the business. They recommended that the firm invest heavily in the business because they weresmall and would benefit from additional size. Their largest competitor was about double the size ofMensa and growing at about 10% per year. The consultants believed that for the firm to remainsuccessful in the business which means increasing the segment earnings to assets ratio from thecurrent 13% to 18%, they would need to invest at least, and they stressed at least, $250,000,000per year in the business initially and increase gradually to $300,000,000 in 5- 7 years at whichtime investment could probably decline to $100,000,000 per year. This investment would more thandouble the assets committed to the business within five years. They forecast cash flow from thedivision, assuming the recommended investments are made by the company to be negative $250,000,000per year for years 1-3, negative $50,000,000 in years 4 and 5, positive $200,000,000 in years 6 and7, and positive $300,000,000 in future years. The consultants believed that Mensa could sell thefinancial services business for about$1,000,000,000 if it were put up for sale and if the firm was patient.;Energy;In 2XX4 Mensa made its first major acquisition in the energy business when they bought EasyGasEnergy which became the core of their Energy Division. This acquisition allowed Mensa to enterseveral areas of the energy business. EasyGas was active in exploration, development, andproduction of oil and gas, operated an interstate natural gas pipeline system extending from theTexas-Mexico border to the southern tip of Florida, and also extracted and sold propane and butanefrom natural gas. Prior to the acquisition of EasyGas, Mensa had small working interests inoffshore and onshore gas and oil properties in the Gulf of Mexico and in Mississippi which theypurchased in the late 1990s to try to develop a better understanding of the business. These weremerged into the new energy division. EasyGas was the sole supplier of natural gas to peninsularFlorida and was one of only six U.S. companies selected by PEMEX, the Mexican National Oil Company,to purchase gas from that prime source. The company?s pipeline operations offered a strong cashflow at relatively low risk.;Prior to the purchase of EasyGas Mensa?s nascent energy division had begun investigating a numberof major and very expensive projects including a 1,500-mile slurry pipeline that would transportcoal from Eastern Appalachia and the Illinois basin to the Southeast. If approved, this projectwould call for $2-3 billion in financing over seven years. The company was also considering joiningwith Shell and Mobil in the construction of a 502-rnile carbon dioxide pipeline in which thecompany would have a 13% interest at a cost to Mensa of $50,000,000 per;3;year for 5 years, and was considering converting an 890-mile segment of its 4,300-mile natural gaspipeline to petroleum products (while maintaining its natural gas deliveries to the Floridamarket), at a cost of $100,000,000 spread evenly over 5 years. They were also consideringparticipating in four major offshore natural gas pipeline projects in the Gulf of Mexico to connectinto the Florida Gas Transmission system. Their share of these projects would cost about$400,000,000 spread over 10 years. The senior management of the firm was reluctant to curb theenthusiasm of the pipeline managers, but they were worried about the possible risks of such largeventures and were counting on the management of EasyGas, who had agreed to join Mensa and run theEnergy Division, to advise them on these possible investments.;Exploration and Production. Mensa undertook a joint acquisition (with Allied Corporation) of SuppanEnergy Corp. at a cost of more than $400 million. This acquisition increased the company?s provenreserves of oil and gas by approximately 50% and its undeveloped acreage by 50%. Suppan?s emphasison development drilling also complemented Mensa?s activities and strengthened its position indomestic natural gas. In joint ventures with Shell Oil, Mensa acquired additional offshore leasesand participated in extensive exploratory drilling activities. In 2XX6 it spent some $400 millionon exploration, but was now focusing on developing existing fields to improve the firm?s cash flowto try to offset the impact of all the investments in the energy business. An industry analyst saidof Mensa?s energy business;?Although the company is a baby to the industry giants, it has a strong position in some segments.It is the largest supplier of energy to the State of Florida, one of the nation?s fastest growingstates and that is a good business. However, in exploration and production they have no suchprotected position in an industry that is rapidly consolidating into giant firms with the financialresources to make, and lose, big bets in exploration. With the looming oil shortage proven reservesis where the money will be and Mensa is probably just too small to make the needed investments and,more importantly, take the risks associated with exploring in deep water and/or hostileenvironments like Siberia. They have the right idea, but their small size, their major competitorswere 8 to 10 times the size of Mensa?s exploration and production unit, makes an inherently riskybusiness even more risky. A loss that would be immaterial to anExxon Mobil could sink Mensa?s exploration business.?;Energy Outlook. In 2XX8 the future of the energy business looked pretty bright and this view wasemphasized by the consultants that Mensa brought in to review their energy business.Growth in China and India practically guaranteed that worldwide demand would grow much faster thanwas true in the past. The supply problem for the U. S. was exacerbated by the fact that China wasnegotiating long-term contracts to buy oil and gas from countries that had traditionally been U. S.suppliers, Canada, Mexico, Venezuela, and Norway. China was rapidly ensuring their future access tooil and the effect could be to cause future shortages for everyone else. The consultants believedthat the long-term, worldwide supply and demand picture for oil and gas was extremely favorable forthose firms that had either reserves or the cash flow to find and develop them. They felt that oilprices would not drop below $50 per barrel for very long and 10%-15% annual price increases was aminimum estimate and the possibility of much larger price increases was also more likely thananyone could have guessed even in 2XX7. They;4;stressed that this forecast did not envision any significant disruption in supplies from themiddle- east or elsewhere. In the event of a major disruption prices could easily exceed $175 perbarrel. Their view was that only a really huge new oil field discovery, which was unlikely, or aworld- wide recession of major proportions would derail their forecast and even the recession wouldonly delay the increase in the price of oil. They also mentioned that U. S. oil production hadpeaked in the early 1970s and that one reasonable estimate was that worldwide oil production wouldpeak in the early 2000s (2002-2010). If this latter prediction were true future increases in theprice of oil would be hard to predict but could be ruinous until a transition to some other energysource was complete. The consultants stressed that given their size Mensa could never hope to growto a competitive size in the industry, but their existing proven reserves and promising landholdings would only become more valuable as time passed and the supply/demand situation becametighter and tighter. They did not recommend major new investment in either exploration orproduction for the reasons given by the analyst quoted above.;Florida Pipeline. They felt that for Mensa to prosper in the new energy environment they would needto build pipeline capacity into Florida because of the tremendous population growth in the state.Their estimate of capital investment needs in the Florida market was about $50,000,000 per year forthe next 4 years. Beyond that time the investment needs would be determined by the longer termpopulation growth. Some demographic and real estate experts believe that the recent rapid increasein housing prices in Florida would cause population growth to moderate from the current 365,000people per year to a more sustainable rate of maybe 150, 000 per year. If these estimates proved tobe true the consultants expected cash flow to be negative $50,000,000 per year for years 1-4 andincrease slowly to positive $300,000,000 from a positive $100,000,000 in year 5.;Exploration and Production. The experts believed that Mensa was too small to compete long term inthe exploration and production area unless they were willing to build oil reserves and productioncapacity simultaneously. This would be an expensive undertaking that could easily take$500,000,000-$600,000,000 per year for the next decade but the impact on earnings and cash flowcould be expected to be dramatic, but probably not for 5-7 years because of the long lead time forinvestments in reserves and refinery capacity to come on line. And, they noted, investments inexploration were risky investments and there could be many dry holes. They thought that returns onassets would improve from the recent 5% level to the 8%-12% level at best. They also felt that thevalue of the proven reserves could easily increase from the present$500,000,000 to the $1,000,000,000 to $1,500,000,000 level over the nest 8-12 years. The entiredivision could probably be sold for about $1,560,000,000 at the present time and could be worth asmuch as $2,000,000,000 within 5 to 6 years. They expected revenues to increase by about 8% per yearin the absence of the major investment outlined for the exploration and production division. If therecommended investments were made they expected revenues to increase annually from the 10% range tothe 15% range during the next 10 years. They were further advised against frittering away capitalon non-energy enterprises and focus on building supplies of both oil and gas. Given the neededinvestments the expert consultants expected the exploration and production operation, assuming theneeded investments were made, to be cash fl


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