23 Pages Posted: 21 Oct 2008
In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations to the company's board of directors regarding the firm's financial policy. Special considerations are the mix of debt and equity and the maintenance of financial flexibility.
In the late summer of 2002, Rajat Singh, a managing director at Hudson Bancorp, was reflecting on the financial policies of Deluxe Corporation, the largest printer of paper checks in the United States. Earlier in the year, Deluxe had retired all of its long-term debt, and the company had not had a major bond issue in more than 10 years. Simultaneously, the company had been pursuing an aggressive program of share repurchases, the latest of which was nearly complete. So far, those actions had proven successful; investors had responded well to the share repurchases, and the company's stock was at its highest level in nearly 10 years. But Singh, who had been retained by Deluxe's board of directors to provide guidance on the company's financial strategy, saw dangers looming for Deluxe that would require the company's managers to do more.
Deluxe Corporation was the dominant player in the highly concentrated and competitive check-printing industry. Deluxe's sales and earnings growth, however, had been in a slow decline as the company struggled to fight a relentless wave of technological change. Since the advent of on-line payment methods and the rising popularity of credit and debit cards, consumers' usage of paper checks had fallen steadily. In response, Deluxe's chair and chief executive officer (CEO), Lawrence J. Mosner, had led a major restructuring of the firm whereby he rationalized its operations, reduced its labor force, and divested several noncore businesses. Singh sensed that those measures would only carry the company so far and that the board was looking for other alternatives.
Singh surmised that there would eventually be a tipping point at which the demand for paper checks would fall precipitously. In this challenging operating environment, Singh was convinced that Deluxe would need continued financial flexibility to fend off the eventual disintegration of its core business. Singh had already told the board that the company had probably gone as far as it could with share repurchases. The time for a new round of debt financing was at hand. The board had asked Singh for a detailed plan in five days, and had insisted that, as part of the plan, he undertake a complete assessment of the firm's overall debt policy, focusing primarily on the appropriate mix of debt and equity. In the not-too-distant future, Deluxe's financial and strategic choices would be severely constrained, and Singh believed it was essential that the company's financial policies afford it the necessary funding and flexibility to steer a path to survivability.
. . .
Keywords: debt financing, leverage, financial policy, cost of capital, financial flexibility, bond ratings
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
This is a Darden A Case paper. Darden A Case charges $6.25 .
File name: UVA-F-1492.pdf
If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity.