ATH

Topics: Output, Process control, Economics Pages: 17 (1458 words) Published: February 15, 2015
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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

1989

1990

Founding

15.963 [Spring 2007]

1991
Growth

1992
Push to
Profitability

1993

1994
Focus on
Process

Managerial Accounting & Control

1995

1996

New
Management

2

ATH: Chronological Stages

1986

1989

1990

Founding

1991

1992
Push to
Profitability

Growth

1993

1994

1995

Focus on
Process

1996

New
Management

ATH Achievements
- developed new product
- capitalized new venture

- attracted new capital
- earn-out plan
- built market share

15.963 [Spring 2007]

- 4 X Revenues
- first profit
- rewarded all
employees

- developed a vision
- customer focused
measures
- sales and earnings
growth

Managerial Accounting & Control

-

$60 million sales
52% gross margin
$102 million assets
$60 million accumulated
R&D investment

3

ATH Technologies

„
„

We trace the evolution of ATH through five stages.
What is the competitive environment?
„
„

„

„

The business is technology driven.
Technology is evolving rapidly, so product life cycles are likely to be short.
Product development pipeline is critical.

What do you think of Scepter’s decision to purchase ATH?
„

Did they earn an appropriate return on investment?
„

„

„

The total price, if all earn-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?

15.963 [Spring 2007]

Managerial Accounting & Control

4

ATH Technologies

„

Was this a poor investment decision?
„

There may have been non-financial considerations such as
„
„
„

„

„

access to new technologies and markets,
expansion of product portfolio, and
first mover advantages.

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?

15.963 [Spring 2007]

Managerial Accounting & Control

5

ATH Technologies

„
„

Consider each component of the earn-out plan.
$24m for FDA approval.
„

This is necessary, but should more have been contingent on approval and less paid up front?
„

„

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.

$25m for independent confirmation of superiority of technology. „

If the technology can be appropriated, replicated or substituted, then investment unlikely to be recovered.
„

„

Remember from our calculation that payback period is long.

Should this be tied to any other part of the earn-out plan?
„
„

It should probably be tied to the next $90m.
It should probably also have been tied to the initial $60m.

15.963 [Spring 2007]

Managerial Accounting & Control

6

ATH Technologies

„

$90m for three year sales and earnings goals.
„
„
„

Should this be independent 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....
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