Huffman Trucking Strategy

Huffman Trucking Strategy

Huffman Trucking has an opportunity to expand operations of the company through three options; going public with an IPO, Acquiring another organization within the same industry, and merging with another organization. Each option carries strengths, weaknesses, opportunities, and threats. This paper intends to identify, describe, and explore each opportunity for Huffman Trucking to expand operations.

Strengths of going through an IPO

There are strengths and weaknesses associated with going public through an Initial Public Offering (IPO). An IPO occurs when a privately owned company issues stocks to the public for the first time that transforms the company into one that is no longer privately owned but a company that is owned by public stockholders.

An IPO will enable Huffman Trucking to generate cash flow that is needed to expand operations. The capital gained through an IPO does not have to be repaid, and there are no interest charges, the capital is there for use. Going public also gives the operation more attention and credibility from the public, generally, than a privately owned business and may attract new customers. By going through with an IPO the company can also gain the interest of higher level talent to retain and run the company. For the owner(s) of Huffman Trucking, an IPO can enable an early cash return on their investment so they may advance to other ventures if desired.

Weaknesses of going through with an IPO

The weaknesses of going through with an IPO may make one want to re-think doing it altogether because of the time and expense needed in creating one. Additionally, control, and flexibility are lost by management and involves significant changes within the company.

An IPO process can take between six months to two years to get it up and going. Managers and owners are often so occupied with the process; little attention is paid in the day-to-day operations of the company. Another main weakness is the expense! Going public is very expensive; "some of the major costs include the lead underwriter's commission; out-of-pocket expenses for legal services, accounting services, printing costs, and the personal marketing "road show" by managers; .02 percent filing costs with the SEC; fees for public relations to bolster the company's image; plus ongoing legal, accounting, filing, and mailing expenses" (Hillstorm, 2012).

Acquiring another organization in the same industry

Strengths of approach:

By acquiring another organization in the same industry Huffman Trucking can eliminate competition, increase market share, acquire existing customers, and financing is typically easier to secure for acquisition.

Not only does an acquisition eliminate competition, but it also eliminates debt because Huffman Trucking can acquire stock from the other company at a minimal price.

If Huffman Trucking were to acquire an organization in the same industry but not in the same geographical area they are promoting brand awareness, market presence, and market momentum.

Bankers seem to prefer growth through acquisition over traditional growth. "Bankers are taught to make projections based on past financial performance as demonstrated through financial statements (Annis, 2009).

Weaknesses of approach

A few weaknesses of this approach are that it depletes cash, at least up front, or it may require taking on more corporate debt to make the initial purchase. This can be direct debt such as a loan, or issuance if corporate bonds. However, it could be indirect cost, where company issues additional shares of stock. Whatever route taken, there is some measurable up-front cost to acquire a competing company. Where purely cash capital is used to make the acquisition, working capital must decrease necessarily in the parent company. When working capital reduces, remaining competitors can use this moment to their advantage in new product to market initiatives.

Opportunities of approach

Opportunities of this approach include new customers, increase market share, and survival of the parent company logo, and leadership cadre. The assumption is that a company doing well, and generating solid revenue will be able to absorb the second company and employ the assets in an equally profitable manner by employing the same general leadership approach. When the correct company is purchased, this investment is truly a value-added acquisition. Under the correct purchase price agreement the parent company can acquire equipment and property for quarters on the dollar, which can magnify value, or bend the liabilities curve of the parent company down.

Threats of the approach

Threats of the approach include not truly knowing the full extent of what was purchased until after the ink on the deeds and agreements dries. For example, Huffman company may decide to purchase a second company to take possession of the $1.5 million dollar truck transmission refurbishment facility. This $1.5 million dollar equipment normally cost $2.7 million and has a current book value of $1.9 million. Acquiring this equipment would increase the value of the parent company by $0.4 million book value, just looking at the equipment value. However, after the purchase it is learned that undervalued equipment needs excessive maintenance costs of $0.65 million in refurbishment. The parent company has realized a $250,000 loss.