Service Corporation International and Note on Value Drivers
Case No: 9-296-080, Note No: 5-297-006
Posted: 8 May 1997
Date Written: 1997
SUBJECT AREAS: Managing growth and value creation, acquisition strategy, venture capital, capital structure, financial and competitive strategy.
CASE SETTING: July 1995, USA, funeral homes (death care industry), $1.7 billion sales, growth company.
This case is part of a module on managing growth and value creation in an advanced corporate finance course. An overview note (Note on Value Drivers) provides a theoretical framework for the module while individual cases highlight specific value drivers. For example, this case focuses on acquisitions as a form of investment and challenges students to understand the relation between growth and value creation.
The case opens as Service Corporation International (SCI), the world's largest funeral services company, has just announced its acquisition of two French death care companies for $423 million. This acquisition is the culmination of a 30-year acquisition program which has transformed SCI from being a single, Houston-based funeral home to an international company owning 2,680 funeral homes and 320 cemeteries around the world. Through acquisitions, SCI has grown, and expects to grow, in earnings per share, sales, and operations at 20% per year even though underlying demand--the death rate--is growing at approximately 1% per year. SCI's Chief Financial Officer, George Champagne, is worried that investors do not understand SCI's growth strategy and its ability to create value. In addition, he is concerned about how to finance future growth and what constitutes an appropriate capital structure for a high- growth company.SCI creates value by acquiring funeral homes, incorporating them into clusters, and eliminating redundant costs--a strategy known by venture capitalists as a "roll-up". Through consolidation, SCI is able to quintuple the value of a stand-alone funeral home. The biggest threat to value creation, however, is overpaying for deals and SCI has recently paid record prices for international targets. The key questions in the case are whether SCI has lost is pricing discipline and whether its future acquisition strategy is value enhancing or not. Different answers to these questions yield different implications regarding the advisability of future growth and the appropriateness of debt financing. Finally, the case illustrates how difficult it can be to communicate a strategic vision.
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