Anacomp Case
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Evaluate Anacomps new product development strategy. What are the risks and benefits of this strategy for Anacomps shareholders?
Anacomp is aggressively acquiring new companies and technologies. The company and the shareholders could be better served if the purchases were done with less debt and more carefully consideration of the price and if there were any conflicts of interest. There were significant conflicts of interest in all of the acquisitions made in 1981. Many company officers had controlling interests in the companies being bought. Additionally the company grossly overpaid for the CIS system. The agreement was 6 million and in the end it was 16 million paid out for the software. The company had taken too long to amortize its software purchases, it used straight line deprecation over 5-10 years. A double declining balance over a 3-5 year period would have been better due to the rapid changed in technology at the time. Another problem with the company is with “other debt” which included mortgages, capital leases and equipment purchase notes. They have an effective cost between 9.75% and 15% interest costs until 2006. Im also unclear why the company split the stock two years in a row. The shareholders would have better served if the stock had not split at all.
How is Anacomps accounting influenced by the way the company organizes and finances its new product development?
Anacomps accounting is influenced by its extremely aggressive acquisition policy. I feel the company has put the horse before the cart. It used very aggressive debt financing to make purchases in an environment that was changing rapidly. It also did not have software that was proven to be effective as we saw in the CBIS deal where the company agreed to develop software that they could not reasonably guarantee would work.
Compare Anacomps cash flow performance with its accounting performance. What is your evaluation of the companys financial condition?
Anacomps cash flows and accounting are worlds apart in my opinion. The revenue recognition is sound on the surface but once its clear how much they will be paying out in interests cost due to their excessive debt and there overpayments for software. The company should be create software and then selling or licenseing it. Anacomp is trying to ell software before they created it.
What is your assessment of Anacomps future?
If Anacomp keeps going in the same direction it will be out of business due to its excessive debt and trying to sell software before they have created it. The conflict of interests will continue to be an issue unit the company no longer allows its officer to have controlling interests in companies