Harvard Case - Fairfield Communities, Inc.
"Fairfield Communities, Inc." Harvard business case study is written by Graeme Rankine. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Jan 1, 2002
At Fern Fort University, we recommend that Fairfield Communities, Inc. (FCI) pursue a strategic growth strategy centered on leveraged buyouts (LBOs) of smaller, well-managed manufactured housing communities (MHCs) within the United States. This strategy will leverage FCI's existing expertise and infrastructure while also allowing them to capitalize on the increasing demand for affordable housing options. We recommend FCI focus on financial analysis, capital budgeting, and risk assessment to ensure the success of each acquisition. This strategy will enable FCI to achieve sustainable growth, enhance shareholder value, and solidify its position as a leader in the MHC industry.
2. Background
Fairfield Communities, Inc. (FCI) is a leading owner and operator of manufactured housing communities (MHCs) in the United States. The company faces challenges in achieving sustainable growth due to a limited number of large-scale acquisition opportunities and the competitive landscape. FCI's current strategy of organic growth through new home sales and rent increases has proven to be insufficient to meet its growth targets.
The main protagonists of the case study are:
- William 'Bill' L. Pittman, Jr., the CEO of FCI, who is seeking a strategy to achieve sustainable growth for the company.
- The FCI management team, who are tasked with implementing the chosen strategy.
- The FCI board of directors, who are responsible for overseeing the company's strategic direction.
3. Analysis of the Case Study
The case study highlights several key factors that influence FCI's strategic options:
- Market Dynamics: The MHC industry is characterized by a growing demand for affordable housing, driven by demographic trends and economic factors. However, competition within the industry is also increasing.
- Financial Performance: FCI has a strong financial position, with a history of profitability and a low debt-to-equity ratio. This provides the company with the financial flexibility to pursue acquisitions.
- Strategic Objectives: FCI seeks to achieve sustainable growth, enhance shareholder value, and solidify its position as a leader in the MHC industry.
Strategic Framework:
To analyze FCI's options, we will use the Porter's Five Forces Framework to understand the competitive landscape and identify potential opportunities.
- Threat of New Entrants: The threat of new entrants is relatively low due to the significant capital investment required to build and operate MHCs.
- Bargaining Power of Buyers: The bargaining power of buyers is moderate, as residents have limited choices for affordable housing.
- Bargaining Power of Suppliers: The bargaining power of suppliers is moderate, as FCI relies on a limited number of manufacturers for homes.
- Threat of Substitutes: The threat of substitutes is moderate, as residents have other housing options, such as apartments and single-family homes.
- Competitive Rivalry: Competitive rivalry is high, as several other companies operate in the MHC industry.
Financial Analysis:
- Financial Statements: FCI's financial statements reveal a strong financial position with consistent profitability and a low debt-to-equity ratio.
- Ratio Analysis: FCI's profitability ratios are strong, indicating efficient operations and a healthy return on investment. Liquidity ratios are also healthy, suggesting the company has sufficient cash flow to meet its short-term obligations.
- Cash Flow Management: FCI's cash flow is strong, providing the company with the resources to finance acquisitions.
- Capital Budgeting: FCI has a strong track record of capital budgeting, ensuring that investments are aligned with its strategic objectives.
4. Recommendations
FCI should pursue a strategy of leveraged buyouts (LBOs) of smaller, well-managed MHCs within the United States. This strategy offers several advantages:
- Growth Potential: Acquiring smaller MHCs allows FCI to expand its portfolio and achieve sustainable growth.
- Increased Market Share: LBOs provide FCI with the opportunity to gain market share and solidify its position as a leader in the MHC industry.
- Synergies: FCI can leverage its existing infrastructure and expertise to improve the operations of acquired MHCs, generating cost savings and increasing profitability.
- Financial Flexibility: FCI's strong financial position allows it to finance acquisitions using a combination of debt and equity, reducing the impact on its existing operations.
Implementation:
- Target Selection: FCI should focus on acquiring well-managed MHCs with strong cash flow and a history of profitability.
- Valuation: FCI should use a combination of valuation methods, including discounted cash flow analysis and comparable company analysis, to determine the fair market value of potential acquisition targets.
- Financing: FCI should explore various financing options, including bank loans, private equity, and debt financing, to secure the necessary funds for acquisitions.
- Integration: FCI should have a well-defined integration plan to ensure a smooth transition for acquired MHCs and their residents.
5. Basis of Recommendations
Our recommendations are based on the following considerations:
- Core Competencies: FCI's core competencies in MHC operations and management provide a strong foundation for successful acquisitions.
- External Customers: The growing demand for affordable housing ensures a strong market for FCI's services.
- Competitors: LBOs allow FCI to gain a competitive advantage by acquiring smaller, well-managed MHCs.
- Attractiveness: The potential for increased profitability and shareholder value makes LBOs an attractive growth strategy.
- Assumptions: We assume that FCI can successfully identify and acquire well-managed MHCs at attractive valuations and integrate them into its existing operations.
6. Conclusion
By pursuing a strategy of leveraged buyouts, FCI can achieve sustainable growth, enhance shareholder value, and solidify its position as a leader in the MHC industry. This strategy leverages FCI's existing strengths and provides a clear path to achieving its strategic objectives.
7. Discussion
Alternatives:
- Organic Growth: While organic growth is a viable option, it is slower and less likely to meet FCI's growth targets in the competitive MHC market.
- Joint Ventures: Joint ventures can provide access to new markets and expertise, but they also involve sharing profits and control.
Risks:
- Valuation Risk: Overpaying for MHCs can lead to financial losses.
- Integration Risk: Integrating acquired MHCs into FCI's operations can be challenging and time-consuming.
- Market Risk: Changes in the MHC market, such as increased competition or a decline in demand, can impact FCI's growth prospects.
Key Assumptions:
- FCI can successfully identify and acquire well-managed MHCs at attractive valuations.
- FCI can effectively integrate acquired MHCs into its existing operations.
- The MHC market will continue to grow and offer attractive investment opportunities.
8. Next Steps
- Develop a detailed acquisition strategy: This strategy should include target selection criteria, valuation methods, financing options, and integration plans.
- Form a dedicated acquisition team: This team should be responsible for identifying, evaluating, and acquiring potential MHCs.
- Secure necessary financing: FCI should secure financing options to support its acquisition strategy.
- Implement a robust integration plan: FCI should develop a plan to ensure a smooth transition for acquired MHCs and their residents.
By taking these steps, FCI can successfully implement its LBO strategy and achieve its strategic objectives.
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Case Description
In 2000, Fairfield Communities, Inc. was one of the largest timeshare operators in the U.S. The company's portfolio of resorts consisted of 35 resorts located in 12 states and the Bahamas. Of the company's resorts, 25 were located in destination areas with popular vacation attractions such as Daytona Beach, Florida, and Las Vegas, Nevada and ten were located in scenic regional locations. Fairfield sold and financed vacation ownership intervals (VOI) providing a deeded interest in the use of a fully furnished vacation property of a specific size, at a specific location, at a specific time of the year and a specified length of stay. Customers typically provided a down payment of 16%-18% of the purchase price and financed the balance. Approximately, 80% of Fairfield's customers elected to finance their VOI purchases through the company on terms of up to seven years and at interest rates of approximately 15% per year. To finance its rapid growth, Fairfield securitized the receivables by "selling" them to special purpose entities (SPE). The SPE issued debt collateralized by the receivables. As permitted under U.S. GAAP, Fairfield accounted for the SPE using the equity method of accounting rather than consolidating the SPE's financial statements. Thus, the SPE's debt did not directly appear on Fairfield's balance sheet. An acquisition offer from Carnival Corporation, the world's largest cruise-line company, was withdrawn after Carnival's stock price dropped 42% after the announcement. In November 2000, Fairfield received an offer from Cendant Corporation to acquire the company for $15 per share. Valerie Amphlett, an analyst with Arbitrage Fund, has been asked to examine Fairfield's recent financial performance, including an analysis of the effects of the company's accounting treatment of the SPE to determine whether Fairfield is worth $15 per share.
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