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Case 1: Capital Mortgage Insurance Company

In: Business and Management

Submitted By chaningq
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Case 1: Capital Mortgage Insurance Company

Overview

This case is set in the late 1970’s and describes an acquisition attempt by Capital Mortgage Insurance of Corporate Transfer Services. CMI is a company that sells mortgage insurance to mortgage lenders and banks but executives at CMI want to grow into the real estate relocation industry. Corporate Transfer Services assists employees who have been transferred to a new city as they try to find a new home. Capital Mortgage Insurance Corporations goal is to acquire Corporate Transfer Services at the lowest cost.

The president and vice president of CMI met with the owners of CTS many times. If CMI acquires CTS, it will provide them with an easy way into the relocation industry and a high potential for profit. This makes the acquisition appealing to CMI, regardless of the fact that financially, CTS has been struggling to break even. Corporate Transfer Services wants to be acquired, but is worried about their ownership levels after the acquisition.

Analysis

Capital Mortgage Insurance Company’s main interest is to expand their financial services capabilities and build a strong network that can rival Merrill Lynch. Growing at a 10-15% annual rate, the corporate relocation business was a very appealing market. CMI has to protect their close relationship with MetroNet, with which Elliott Burr sat on the board. MetroNet proposed and approved the acquisition attempt of CTI. Preservation of good relationships with the CTS owners makes a collaborative strategy easier to implement for future success.

Capital Mortgage Insurance Company’s initial offer for Corporate Transfer Services was $820,000 with a reservation price of $1,020,000. CMI’s offer fixed a 100% stake in CTS and that Thomas Winder, a key manager, would relocate to Philadelphia to run the business. CTS heads would also have to agree to sign a non-compete agreement that would be in effect for two years.

BATNA

Capital Mortgage Insurance Company’s BATNA:

• Create a relocation service from the ground up

• Look for alternative acquisitions

Building a relocation service from scratch is not an attractive option, and would be very costly and time consuming. CMI could look for another company in the same field, but there are currently no other known companies that CMI is interested in. This means that CMI’s best option is to acquire CTS.

Capital Mortgage Insurance Company has the upper hand in the negotiation because they know that CTS is struggling financially and in dire need of a buyer. CTS’s known financial woes puts a burden on the reputation of the owners motive in the negotiation. CMI also has more barging power due to their vision of the future. They have a solid vision, buy in from MetroNet, and are creating the step stones to rival the big dog Merrill Lynch.

Corporate Transfer Services BATNA:

• Find a new buyer for the company • Fix the company by investing more time and money into operations There are currently no other known interested buyers for CTS and they have been unsuccessful in efforts to turn the company around thus far. Hence, CTS has a strong need to reach a deal.

Corporate Transfer Services main goal is to sell the company for as much money as possible. The owners invested a great deal of money and time into the company, and would like to see a return on their investments. Corporate Transfer Services needs to sell the company quickly as it is continuing to drain its funds and resources. CTS is also wanting to retain partial ownership after the acquisition as a way to ensure their returns.

Corporate Transfer Services primary source of power is their strong internal network that Capital Mortgage Insurance is so desperate to get their hands on. Second to this is their influence over MetroNet due to Corporate Transfer Services members serving on the board of directors. Corporate Transfer Services has the potential to influence MetroNet even after the acquisition.

Lastly, they know Capital Mortgage Insurance publicly committed to acquiring Corporate Transfer Services in an approved proposal. There is pre-negotiation pressure on Capital Mortgage Insurance to deliver on their proposal commitment. Corporate Transfer Services negotiators know that Capital Mortgage Insurance is as desperate to buy as they are to sell. This tends to level the negotiation field.

Strategies to Maximize

For the two parties to reach a successful strategy, trust and effective communication are of most importance. CMI and CTS must both be equally committed to understanding each other’s wants and needs and be flexible in their negotiation. Both parties will also need to be willing to tweak their perspective knowing that in the end, they both want the same thing. They both have the same final destination in mind; they just have different paths that they need to make cross.

There are two key reasons that a successful acquisition is desired by both parties. First, Capital Mortgage Insurance Company wants to grow their business by providing loans to additional clients. To do this, they need the benefits of MetroNet. Second, the success of a relocation business will depend on the ability to provide services cheaper than if clients had to do it on their own. CTS knows that the more services that they offer will increase the possible revenue per customer.

The potential outcome of this negotiation, in theory, is a win for both CMI and CTS. This three pronged strategy is designed to ensure success.

The first prong of the strategy addresses the relationship of both companies. The second prong focuses on each company’s perspective on the value of CTS. The final prong defines the possible alternatives. The three prongs of the strategy are:

1. Relationship-Both parties need to focus on the relationship in addition to the outcome. The two are equally important. Agreement on a price that is acceptable to both CMI and CTS is very important. CMI must try not to focus only on the outcome during the negotiation. It is in the interest of both companies to maintain a good working relationship regardless of the outcome.

2. Perspective- Capital Mortgage was approved to spend $9 million for the acquisition of Corporate Transfer Services, but they do not want to spend more than $600 thousand plus the book value of CTS. CTS believe that they are worth upwards of $6.25 million dollars. They want $5 million and an 80% stake. By these numbers, it seems that CTS is more worried about getting their investment back over anything else.

3. Alternatives- Both parties clearly have very different views on CTS’ value and price. With this, it is very important that new configurations are made and CTS’ interests are taken into account. CMI will need to do this and still ensure that their vision to build a diversified financial company.

This may prove to be a difficult negotiation. Both companies have completely different views about the acquisition but they both hold the same final vision and that being that the two companies merge and create the rival for Merrill Lynch.

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Relationship

Perspective

Alternatives…...

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