Introduction

Kohler Company was faced with a very tough decision of whether or not to settle
outside of court or go to court to settle with the dissenting shareholders. We will take
you through the history of the company and why they recapitalized. Also, we will touch
on some of the risks of going to trial to have the courts set a price. We have also broken
down the numbers and found many different prices found by using the dividend growth
model and the multiples approach. We will also show how different outcomes will affect
Kohlers retained earnings and cash standing. In the end, we believe we have chosen the
best possible price to make everyone in the case happy without much sacrifice from
either side and without having to go to court.

History & Privacy Issue

By creating a hog trough John Michael Kohler established one of the most
profound plumbing companies in the world. In addition to the continual development
and production of plumbing supplies Kohler also hit many other markets since its
formation in 1873. The companys private dedication to excellence has allowed them
expand and seek control of these other industries. Some of these include furniture,
engines, generators, rental services, and most recently the elegant golfing resort
destinations which gives travelers a sense of privacy. Privacy happens to be one of
Kohlers most important values of which their success can be partially credited to it. In a
publicly held firm, the companys ownership is held and controlled by outsiders who had
in some way bought into the firm as an investment, but in Kohlers case being private
means something totally different.
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Since the companys development and upcoming ownership has generally stayed
within the family and maintained a completely private state of control. This means both
family members and employees are distributed the ownership of the firm though shares.
Forbes claims that Kohlers success can be credited towards going and staying private
because this implements a strategic long-term plan that will keep the tenure of the
business within the family who is valued immensely. As a proposed way of getting the
firm to a more private state after some shares had been sold to outsiders as an investment,
Herbert V. Kohler, Jr. sought after recapitalization. This made it nearly impossible for
any Kohler family member to sell shares to the public. After the proposals were
implemented the shares were now held by a sort of ironclad trust that makes a public
offering or outside sale very unlikely.
One of Kohlers first big moves that indicated to its family members that privacy
was of utmost importance took place in 1912 when the villages of Riverside, WI were
developed. Houses were built and sold to workers for cost and included recreational
areas, open spaces, and eventually The American Club, this created a sort of utopian
Kohler Village gave its family members a sense of belonging and strong tie with the
company. In the 1970s the buildings were eventually tore down as an investment of
Kohler to put up office buildings and a very famous golf course known as Whistling
Straits. Along with theses establishments Kohler further expressed its companys
continual search of success by creating an opportunity for synergy; they showcased their
own furniture, fixtures, whirlpool bathtubs, and power generators.
Another plus of being private is the opportunity to be more patient during the
business decision making process. This is due to no added stress from Wall Street and
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public brokers who have no idea what Kohler is all about like its family members do.
Kohler did no want to deal with Wall Street making critical decisions for them. It was
stated that Wall Street could have possibly vetoed the idea of expansion into the resort
destination business because at first it may have sounded paradoxical, going from
plumbing to vacationing, but as we have read this happens to be one of the firms most
recent and biggest successes. An example of the firms success that can be accredited to
privacy was during expansion into China and other foreign markets around the world.
Natalie Black, the wife of Herbert V. Kohler, states that If not for our being private, we
probably never would have tried to enter China (mikehenning.com). Kohler established
a name for their firm in the foreign market in 1991 when they first started manufacturing
in China. The competitors that existed in the market when Kohler made their move could
only find success in forming joint ventures with local partners. This left the expansion
seeking Kohler at an immediate disadvantage and made the situation more risky, but due
to their private disclosure, they were able to turn the risk into reward and institute a
profitable and fast growing extension to their firm.
Another important part of Kohlers prominent history was in 1978 when they
offered a reverse stock split to facilitate their public disclosure henceforth leaving them
more private. The initiative for this decision was because somewhere along the line of
business a few outstanding shares that were held by the family were sold to outsiders.
Herbert Kohler noticed that the number of shareholders was increasing over time, nearing
400, so he decided to go on with the proposed 1-for-20 reverse stock split to keep the
SEC and their regulations out of his firm. The effect of this split forced the non-family
shareholders to sell out at $412.50 per share substantially reducing the number of
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outsiders. This was very beneficial because Kohler keeps its always sought after private
control without a corporation take over, steers them clear of regulatory statutes, and also
keeps important business data about the industry out of competitors possession. After
the successful reverse stock split only a small percentage of stock still remained with
outsiders, but was closely monitored for the next 20years to maintain the private state of
firm control.
It is hard to find negatives for being so private because Kohler has been so
successful at it. A few possible reasons for big companies such as Kohler to have public
shares is because they offer a new source of capital, a cash flow for acquisitions, liquidity
for estate planning and a means to reward employees with options. Kohler could make
the counter to these public offers by saying we may not have these public options, but
who is going to take us over anyway were Kohler.
Why recapitalize:

In 1998, Herbert Kohler proposed to buy back all the shares from outsiders and
further restrict the selling of shares to outsiders. There were many reasons for this
recapitalization plan:

Herbert Kohler did not like the high speculative prices that the shares were selling
for. People started to think that Kohler would go public and it would increase the
share prices. Therefore, they paid higher prices for the Kohler stock with the
expectations that the stock price would go higher. He thought that it might entice
the family members to sell their shares to outsiders.
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Kohler preferred the companys private status. It was a family owned business
and Kohler wanted to keep it within the family.
Kohler could not control prices of shares that were traded publicly. The high
prices also speculated that the company might go public and this caused concern
among the family owners.
With recapitalization, it would be easier for Kohler to make investments for the
long-term growth of the company that are hard to justify to the public. If there are
more outside shareholders, then such investments would have to be explained to
outside shareholders. Example of this is the updating of cast iron technology
when competitors were looking for alternative materials. If Kohler were a public
company at that time, it would have a hard time explaining this move to the
outside shareholders and the board of directors might not have approved it.
With fewer shareholders, Kohler would not have to disclose the financial
statements. In Kohlers viewpoint, these disclosures gave up too much
information to the competitors and could hurt the growth of the company.
If number of shareholders reached 500, then Kohler would be subject to strict
regulatory requirements by Securities and Exchange Commission. In that case,
Kohler would have to disclose the financial statements and also file certain
disclosures with the SEC. This would not only increase the cost of meeting those
filing requirements but it would also put burden on the company to disclose
everything on time and with complete accuracy in order to avoid any penalties.
With fewer outside shareholders, there would be less pressure to declare
dividends each year. Therefore, Kohler could use the earnings to invest into long-
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term plans triggered towards growth of the company. Kohler family members
would be inclined more towards long-term growth as compared to outside
investors who look for short-term monetary gains.
Recapitalization Plan:

Kohler had been looking to revamp its ownership structure. Several plans were
proposed that were dropped by the company management. In 1998 the companys
general counsel and Natalie Black (wife of Herbert Kohler) came up with a new plan to
restructure the ownership of Kohler (Harvard Case). The plan was targeted to keep
Kohler Company private in future. The plan carved four different classes of stock:
Common Voting Stock
Restricted Voting Stock
Series A Non-voting common stock
Series B Non-voting common stock
The restricted voting stock was restricted for the company executives. This was to
make sure that no outsider would be able to vote on issues concerning the company and
that the decisions of the company lay with the family members. One outstanding common
share at that time could be exchanged for:
1 share of voting common stock
244 shares of Series A non-voting common stock
5 shares of Series B non-voting stock
Each share of the old restricted stock was converted into 250 shares of new Restricted
Stock. Shares could only be transferred to related parties of Kohler descendents. In this
case, the shares are transferred to a non-permitted transferee; Kohler could buy back the
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shares at the fair market value (Harvard Case). This plan paved the way for Kohler to
buy back shares from outsiders. Outsiders who were not related to Kohler family had two
options:
Accept cash at the fair market value appraised by an independent appraiser
selected by Kohler
Dissent and take the matter to court where the fair market value of shares would
be determined.
This plan completely rested with the thinking of Herbert Kohler, who wanted to buy
back shares from outsiders to keep a check on the speculative prices and also to avoid
giving out company information to competitors through financial disclosures. Kohlers
board of directors approved the plan with 88% votes at a special shareholders meeting in
May 1998. This plan ensured that Kohler would remain a privately owned firm, and
therefore received the support from Kohler family members.
Why Shareholders are Filing Suit Against Kohler

The dispute between privately owned Kohler Co. and its shareholders occurred
after the companys recapitalization a few years ago. Over 100 shareholders that
apprehended 811 shares or roughly 12% of Kohlers stock felt that the company was
being unfair to its owners after the capital adjustment. The purpose of recapitalization
was to buy out all the outside shareholders and restrict future sales of stock to outsiders
because Kohler values their private status to which they credit their success. By making
these modifications the current share price was then set at $54,500, which seemed right
by Kohlers board of directors and the majority of shareholders (88%). The other 12%,
both outside and family shareholders felt that the value of their stock exceeded the
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recapitalized share price by an estimated five times. They projected the shares worth at
an outrageous $273,000. After determining this value they decided to exercise their right
to defy the current share price is unfair and requested a lawsuit to determine the
appropriate valuation. The question that arose from the case is whether or not the
$54,500 was fair value or if the $273,000 was a reasonable request by the 12%. Then if
neither were proper, then there must be a precise meaning of fair value decided legally.

Trial Riskiness
The negotiated share price had yet to be determined so a trial by court seemed to
be the remedy unless Kohler decided to formulate a fair settlement price. With the
possibility of this court case in the near future there are some risks Kohler could face.
Some of these consist of who is involved and what is at stake for them, the issues that a
trial by court brings, the dilemma of bad press, and the chance of the IRS stepping in.
After reviewing the risks associated with the court case Kohler should seek a settlement
in order to avoid the tribulations.
Throughout their years in business, Kohler has established a name for their
private business and along the way they have picked up strong relationships with family,
shareholders, and charities. By creating these bonds, Kohler institutes a sense of asset
protection for their firm. If Kohler decides not to settle outside of court then these groups
of people could be affected and become disgruntled. The family, which is the actual
Kohler family and its employees have strong ties with the company and could end up
being dissatisfied with the court decision and could cause problems within the business
and workforce. The shareholders, the 88% that didnt file suit, will be affected in a
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couple ways. They could benefit from the case because of the possibility of a higher
share price, but if they are true and ethical towards the company they will back them the
whole way and hope for a settlement deal. One of Kohlers major fall backs is their
relationship and commitment to charitable foundations. Their main charity is called the
Kohler Foundation and was setup to support educational and cultural programs so if the
case was to go through then this programs image and standing could be publicly
affected.
A court case can be a very expensive process and depending on the outcome
could be very detrimental to a firm. In order to enter a case, there are court costs which
must be paid in order for the case to be heard. Also, the cost of lawyers is extremely high
and could become even more pricy if the litigation process drags on. For Kohler, they
must look at the case from the standpoint that if the verdict were to favor the 12% of
shareholders could the firm afford it? In addition to this, since this is a minority situation,
then all shareholders will get the new price.
After interviewing Mr. Huddleston he said a companys image is one of the main
things that will be affected when going into a court case such as this one. The press that
Kohler will receive will in no way be beneficial to their current public status. They
currently value the private ownership they maintain and do not want the public to view
them in any way as unfair and immoral to customers or shareholders which can derive
from bad press associated with a lawsuit. Therefore, finding a settling price seems to be
the best option for Kohler from a press standpoint because keeping the company name
out of jeopardy is key for future success. The thought of bad press could also cause an
ethical dilemma with Kohlers family, shareholders, and charity programs. The idea of
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casting a shadow over the company name could have these members wanting their
name out of association with Kohler.
Last of all, Kohler takes the risk of their firm becoming even more public after the
decision and then letting Wall Street and/or IRS step in. If Kohlers total number of
shareholders exceeds 500 then the company must go public and in turn be on the New
York Stock Exchange and abide to their rules and regulations. Even though the Feds
(Federal Reserve Board) tends to favor the wealthy elites such as Kohler, in a case like
this we feel they will oppose them since they have been private for so long. By staying
out of court and keeping themselves private Kohler can continue to be successful and
avoid the public buyers, sellers, and traders in Wall Street.
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Huddleston Interview Thursday March 9th
1) In a large corporate case such as the one Kohler is being faced with what are the
risks involved with going to court as opposed to settling?
Mr. Huddleston first claimed that it all depends on the strength of the case when
determining what to do basically saying that if the $54,500 is the right price then
proceeded with it and win. On top of that he claimed that the biggest risk is the cost of
litigation, also other things such as taking away time of management in the business
process and the firms image. He claims that with a big private corporation like this one
they would rather have no press and settle outside of court because litigation effects
image dramatically and that it must be taken into consideration.
2) Once a price is established either in or out of court is it mandatory that everyone,
not just the 12% that filed the suit, get the new price?
Mr. Huddleston described this as a minority risk case and after a decision is made either
in or out of court then it will apply to all shareholders since just a few of them are
wanting the higher price. He stated that a way to avoid this would be to figure out what it
would take to buy out the 12% and get rid of them so you dont run the risk of the rest of
the stockholders.
3) If this case is taken to court how will a price decision be made?
He said that the judge will hear all evidence from both sides and ultimately set a price
that he feels right; it could be the $54,500, the $273,000, or any medium between the two
after properly weighing both arguments. He also claims that the IRS shouldnt have
much say in a case such as this one as the Harvard Business case suggested.


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Kohlers Offer Price

Kohlers initial offer price of $55,400 per share may have been too low. This
price is based on the presumption that Kohler will remain a private company with the
same growth strategy and basic ownership and control structure. This price raises some
eyebrows within the company for many reasons. First, just a month before the
recapitalization, a Kohler family member traded shares and received $103,600 per share
(Harvard Business Report). According to our calculations, the book value per share in
1998 was $103,629. The book value per share represents the amount of money each
shareholder would get per share if the company went under and had to liquidate. So the
question here is why would a Kohler family member trade at $103,600 just one month
before an independent valuation firm set the final buyout price at $55,400? The answer is
speculation, which we will touch on later in the paper.

Implication for Shareholders

The implication of the price $55,400 for the group of shareholders that disagree
with this price is that they feel they are getting ripped off. The case states that they feel
they are getting as little as 1/5
th
of the actual value of the companys stock price.
The 88% of shareholders who agreed with the recapitalization most likely
exchanged their shares for the new shares issued by Kohler. As the stock issues
spreadsheet shows, the majority of the authorized stock had been already issued as of
December 31, 1998.
Shares Issued Info
73.46% of authorized common stock had been issued as of 12/31/98.
13.59% of authorized restricted stock issued as of 12/31/98
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12% of shares being dissented
14.54% of shares bought back by Kohler at a price of $55,400 as of
12/31/98

Implication for Kohler

The implication for Kohler offering the share price of $55,400 is the chance of
dissent, which as we know actually occurred. The case states that in the state of
Wisconsin, the value of shares held by dissenters is always equal to the fair value. The
problem with this is that there are multiple meanings of the words fair value for
everyone involved in this case. Obviously, if someone thinks the company is going
public soon, then that should be incorporated into the fair value. For Kohler, they
know they are not going public, so adding on an extra amount of money to the value of
the stock does not represent the companys fair value whatsoever.
The effects of dissent could be devastating by means of going to court. We have
already outlined the effects and negatives of going to trial earlier in the paper. These
effects should be remembered as implications for Kohler by offering the buyout price of
$55,400.

Dissenters Claimed Price of $273,000

First and foremost, we strongly believe that this price is an overwhelmingly
overpriced value of Kohlers stock. We stand on the side of Kohler with regards to the
dissenters wishes of receiving $273,000 per share as the buyout price. The group of
people dissenting against Kohlers proposed price of $55,400 per share could share the
same financial numbers and percentages as we do in column one in the spreadsheet
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attached titled Dividend Discount Model Analysis. This could be true. However, we
believe that the main reason the group of dissenters wants a higher price is for the shear
belief that the company is going to go public soon and they want their share prices to be
as high as possible so they are bought out when the company goes public. If the share
price is high when the company goes public, then they would reap a huge profit on the
value of the shares that they hold. The less the share price, the less they earn when the
company buys back from private shareholders to make an IPO offer on the free public
market.

Implications for Kohler

Kohler had been a private company the entire life of the company and there was
no plan by upper management to ever go public; not in the near future, and not in the far
future. Paying the dissenting group of shareholders this amount would be crazy for the
company because the value of Kohler is not that high. Kohler believes, as do we, that the
group of dissenters was speculating the announcement that Kohler would go public in the
near future which would give them reason to suggest such a high fair value price of
Kohler. If Kohler had to pay out this price, they would have to fork out $221.4 million
dollars (811 dissenting shares multiplied by $273,000). This would take over twenty
percent of Kohlers year 2000 retained earnings to pay for the dissenters shares during
recapitalization. This would be a huge loss for Kohler if they went to court and the courts
decided to award the group of dissenting shareholders the amount of $273,000.
Obviously, we want to stay out of court for the shear reason of the possibility of the
courts awarding this price to the dissenting shareholders. The results would not be pretty
for Kohler.
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Implications for Kohler Foundation

Implications of this stock price for the Kohler Foundation are huge as well. The
case states that the Kohler Foundation is required by law to annually pledge a minimum
of 5% of its assets to charitable causes (Harvard Business Report). It can easily be seen
that the lower the value of the stock, the less the Kohler Foundation is forced to give
away to charitable organizations. On the other hand, if the value of the stock is very
high, then they are forced to give away even more money. They are rooting for the price
to stay low because the higher the price, the more money they must give away to
charitable organizations. We are not implying that giving to charitable organizations is
bad; as a matter of fact it is a good business tactic to gain marketability and brand name
awareness. However, if an organization is forced to give away a certain percentage of its
assets, it is always good for them to give away a percentage of a lower number rather
than a higher number. This keeps the cash in the organization, which in this case, is the
Kohler Foundation.

Implications for the Estate of Frederic Kohler

There are also implications for this share price for the estate of Frederic Kohler.
The higher the share price, the more taxes that Kohler must pay on the estate of Frederic
Kohler, who owns 975 shares (findarticles.com). What this means is that taxes paid are
directly proportional to share price. Obviously, if the share price is lower, then Kohler
will pay less in taxes because the value of the estate will be much lower. If the share
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price is determined to be $273,000 like the dissenters are claiming, then Kohler will be
paying a gigantic amount of taxes on the estate of Frederic Kohler.

Implications for SoGen

SoGen, a primary holder of outside shares and a big player in the dissenting
group, had recently bought 63 of its 80 shares of Kohler in March 1998 at a price of
$103,600 per share (Harvard Business Report). If the value of Kohler stock is kept at
$55,400, SoGen would take a huge loss on their investment. SoGen desires to either keep
their equity in Kohler stock or to receive a higher price than what they invested at
(findarticles.com). Obviously, SoGen has a huge stake in this case. A lot of their money
is at stake as well as their investment strategy with Kohler. They have a huge interest in
how this all unfolds and we can see why they are disagreeing with the price offered of
$55,400 per share.

Implications for Other Shareholders

Another implication of this price is the question of what happens to the 88% of
shareholders who originally agreed to the $55,400 price per share if this case goes to
court and the court awards a price of $273,000? Obviously, the people who only
received $55,400 would then feel that they got ripped off by Kohler and that the price
that they received was five times undervalued. This would generate huge problems for
Kohler and the people who originally agreed upon the $55,400 price per share would be
outraged.
Obviously, there are many implications to this price of $273,000. For the
dissenting shareholders, if they get this price then they can gain large profits if their
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speculation is true about the company going public. For the company, they would take a
huge hit on their retained earnings to pay out this price per share to the dissenting
shareholders. For the Kohler Foundation that owns Kohler stock, we know by the case
that they give away 5% of their assets every year to charitable causes; because of this,
they would want the value of the stock to be lower so that they do not have to give away
more money. For SoGen, they have a huge interest due to the price they paid just a
month before the recapitalization. Obviously, there are a lot of people, groups, and
organizations who have a huge stake in this case. A lot of people will be affected by any
decision. We believe that the basic foundation to this price of $273,000 is based on the
speculation that the company will go public. Due to the information available, we can
deduct that Kohler is not going public anytime soon, therefore, the price of $273,000 is
way overvalued to the actual fair value of Kohler.

Risk of Court Determined Value
There is huge risk at stake if this case goes to court. With the exception of the
group of dissenters, all parties involved most likely wish to stay out of court due to the
risk factor of the courts determining a price. There is a lot of money at stake for Kohler,
Kohler Foundation, and the Estate of Frederic Kohler. This is one reason why we will
offer a settlement outside of court later in the paper. The effect to each of these parties
could be monumental in the history of their existence. The courts could choose a price
that would be devastating for some of these groups. This risk is just not worth going to
court. It also could be risky for the dissenting group such as SoGen because the court
could even value the company at even less than $55,400.
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Our Proposed Settlement Offer Price Outside of Court
There is a wide range of prices that we came across when trying to figure out a
settlement price. We know that we are proposing to settle outside of court, it is just that
there are many different factors regarding coming up with a stock price. For example,
Kohler does not have a Beta factor, so in some of our price proposals we used different
betas using different techniques to coming up with those beta figures. Three options that
can be pursued with regards to coming up with a stock price are:
Book value per share method.
Multiples approach to valuing a companys stock
Dividend discount model.

Book Value per Share
As stated earlier in the paper, the book value per share is simply the amount of
money that each shareholder would get if the company were to liquidate. SoGen has
recently bought shares at $103,600 per share in 1998, or roughly the amount of the book
value per share of Kohler stock in 1997 (spreadsheet attached). We do not think this is a
coincidence that just prior to the recapitalization announcement in April of 1998 that
shares of Kohler stock were being traded for almost exactly the same amount of the 1997
book value per share. Therefore one of the options Kohler could pursue in this case is to
offer a settlement price of the book value per share at the time of the recapitalization to
the dissenters to settle the case outside of court. However, we realize that the book value
per share only shows what the company is worth if it liquidates and goes out of business.
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Book value per share does not look into the future of the company. We are not talking
about looking into the future as speculating, but rather looking into the future by looking
at projected income statements and projected statements of cash flows. We believe that
the fair value of the stock offered as settlement should take into account the prospect of
future profits, and therefore, using the book value per share approach is not the most
effective way to offer a settlement price outside of the courts.

Multiples Approach Settlement Price
Another approach to finding a stocks value is using the multiples approach. The
case gives basic stock and financial data for companies comparable to Kohler is some
way or form. Using these numbers, average price-book ratios, price-earnings ratios, and
price-cash flow ratios can be found. These averages are shown in the spreadsheet titled
Multiples Approach. When these averages are used with Kohlers book value per
share, earnings per share, and cash flows per share, estimated prices can be obtained by
multiplying the two as shown in the Multiples Approach spreadsheet. An appraiser for
SoGen believes that Kohlers stock price could be valued as high as $400,000 if Kohler
Co.s financial were examined. Using the multiples approach as we have shown gives
high stock price estimates that could be used to argue higher prices.
The estimations shown are higher than the price we have chosen, but many
problems can be found with these estimates. Kohler Co. has business sectors in
household fixtures, cabinets, small engines, generators, and resorts. Kohler Co. is
diversified and should be considered a conglomerate. Comparing a conglomerate to
other businesses is difficult to do because it is unlikely that any other company would
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truly match there corporate structuring. The comparable companies ratios will show
some indication of what Kohlers should be, but they are definitely not an exact match.
One approach to deal the problem of Kohler Co. being a conglomerate would be to break
down each business segment of Kohler Co., use a multiples approach with similar
companies, and then average all the segments. This would take an extensive amount of
research and time.
Another problem with the multiples approach is that the ratios could be adjusted
and refigured in many ways to justify almost any stock price desired. By weighting each
comparable company in different ways, different ratios would be found. Small changes
in ratios can lead to huge changes in stock pricing.
Multiples Approach Findings
P/B Estimated Stock Price $155,255.43
P/E Estimated Stock Price $469,379.92
P/CF Estimated Stock Price $182,615.22
Average of the three $269,083.52


Dividend Discount Model Settlement Price
We have two different ending prices that we are focusing on using the dividend
discount model. The only factor that is different in the two formulas to come up with the
two prices is the figure for beta. In the first price, you can see on the attached
spreadsheet titled Dividend Discount Model Analysis that we came up with a price
quite similar to the $273,000 that the dissenting group is asking for. Our price that we
came up with is $269,243 per share. This price was found by using the dividend discount
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model. We found our required rate of return by using the industry average beta
calculated from the case, the risk free rate in 1998, and the average market risk premium
over the last 75 years; both of which figures were found in our Investments textbook.
Then, we projected our future dividends from the case and found a projected share price
in 2002 and discounted all of those cash flows back to 1998. As we know, the net present
value of any asset is equal to the present value of all future cash flows. This is what we
did to come up with this price of $269,243 per share.
In our next price we came up with, which is the price we believe should be our
initial settlement offer; we just did one minor thing differently than in the previous
proposed price. This time, instead of taking the simple industry average beta, we made it
an industry weighted average beta based on sales in order to proportionally show the
companies size, strength, and market power. By using a different beta based on the
weighted average, this changed our required return by about half a percentage point and
made a huge difference in our valuated share price of Kohler. As you can see in the
attached spreadsheet, the price we came up with as option 2 is $120,125 per share.
Amazing how such a little change in the required return can change the value of the price
of one share of stock. However, we believe this is the correct way because of the
weighted average approach to the industry beta that we had to use for Kohler due to
Kohler not having a known beta because they are not a public company.




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Kohler Retained Earnings Implications
As of 2000, Kohler would have projected retained earnings in the amount of
$968.9 million dollars to use for reinvestment into the business and to pay off current
debt (Harvard Business Report). Since the recapitalization can be considered reinvesting
into the business, Kohler will not have a problem paying off the dissenting group of
shareholders at our suggested settlement price of $120,125 per share. There are 811
shares that are dissenting. If we settle these shares at a price of $120,125 per share the
total cost will be $97,421,375. Also as show in spreadsheet Stock Issues Kohler has
repurchased about 14.54% of its common stock during recapitalization, and they have
bought back about 86.41% of its restricted stock. The cost of these stocks being bought
back at a price of $55,400 totals about $66,834,887. This figure plus the settlement
figure brings the recapitalization figure to about $164,256,262. This plus legal and
appraisal fees would come out of our retained earnings. If our settlement price is
accepted Kohler Co. would use roughly twenty percent of its projected year 2000 retained
earnings.
The Stock Issues spread sheets shows different costs for different settlement
prices. Obviously higher stock prices would lead to a greater amount of retained earnings
being used for the Kohler Co. recapitalization.
Back-up Plan
A main reason as stated that Kohler Co. wants prevent a court valuing of its stock
is that if a court sets a value for they stock, then that price must be offered to all the share
holders. The price will even be awarded to all shareholders that had previously sold their
shares to Kohler as of December 31, 1998. Kohler might even have to pay interest on the
23
amount over $55,400 to individuals who had previously sold their stock to Kohler in
1998. Having to offer every shareholder the court determined price would kill our
retained earnings depending on how high the court determined the share price. For this
reason, we are willing to use 25% of our projected 2000 retained earnings to stay out of
court. Settling out of court is a negotiating process. With talented negotiators we believe
we can keep our share price around $120,125, but we must have a limit on how high we
are willing to go. As the spreadsheet titled RE Analysis shows, 25% of our retained
earnings would justify a price as high as $216,264 per share. Obviously we would much
rather pay $120,125 per share, but we would pay as much as $216,264 per share to avoid
a court decision. Different court decisions could produce hard to predict negative effects
to our retained earnings. A lot more people might decide to sell their shares to Kohler if
a high share price is determined.


Competitor Analysis:

1- American Standard:
It manufactures air conditioning systems, bathroom and kitchen fittings,
and braking and control systems for trucks, buses and utility vehicles.
Sales of each division are as following:
Air conditioning systems 60%
Bathroom and kitchen fixtures 24%

Braking and control systems 16%


2- American Woodmark:
It manufactures kitchen cabinets and vanities.
24

3- Masco:
It manufactures kitchen and bath products e.g. cabinets, appliances,
showers, tubs and other plumbing supplies. In addition to that it also
manufactures home improvement products such as water pumps and
insulation.

4- Briggs & Stratton:
It manufactures horsepower gasoline engines for outdoor equipment e.g.
lawnmowers, pumps and pressure washers for agricultural, industrial and
consumer uses.

5- Cummins Engine:
It manufactures diesel and gas engines. In addition to that, it also
manufactures engine components used in automotive, power generation,
industrial and filtration markets around the world.


6- Detroit Diesel:
It manufactures diesel and other alternate fuel engines for the automotive
and power generation markets. It also provides service for these engines.
Kohler competes with American standard, American Woodmark and Masco in the
plumbing fixtures and furniture market. American Standard and Masco are the big rivals
in this market. The following table presents the comparison of Kohler with its
competitors in terms of sales for 2004 and number of employees.


25


1

As we can see from the table above, the sales for Kohler are not that great as
compared with its competitors. One of the reasons is that Kohler offers high quality
products for higher prices and they dont need to make high volume sales in order to
make profits. Also, the table above indicates sales for the whole company and not just the
furniture and fixtures segment of Kohler and its competitors. American Standard and
Masco are more diversified as compared to Kohler and offer more products. That is why
their sales are higher than that of Kohler. Kohlers sales were higher than American
WoodMark. Also, the sales are kind of directly proportional to number of employees.
American Standard and Masco are much bigger in size as compared to Kohler and that is
why they enjoy higher sales.

1
The figures for sales and employees are taken from the following websites. The sales figures are in Euros. Also we converted the
2005 sales into 2004 sales using the sales growth rate for comparison purposes since sales for Kohler were given for 2004.
For American woodmark : http://www.hoovers.com/american-woodmark/--ID__12620--/freeuk-co-factsheet.xhtml
For Kohler: http://www.hoovers.com/kohler/--ID__40269--/freeuk-co-factsheet.xhtml
For American Standard: http://www.hoovers.com/american-standard/--ID__40026--/freeuk-co-factsheet.xhtml
For Masco: http://www.hoovers.com/masco/--ID__10962--/freeuk-co-factsheet.xhtml

$1 = .733 Euros on December 31, 2004 if we want to see the sales figures in dollars.
http://www.oanda.com/convert/fxhistory

Company Name Kohler American
Standard
Masco American WoodMark
Company Type Private Public (ASD) Public (MAS) Public (AMWD)
Sales in 2004 (in
millions)
1,557 5,528 7,017 350
Employees in 2004
28,000 61,500 62,000 5,904
26
Kohler competes with Briggs and Stratton, Cummins Engine and Detroit Diesel in the
industry for manufacturing engines. Following table represents a brief comparison of
Kohlers performance with its competitors.
2






In the engines manufacturing industry, Kohler is competing with high profile
companies such as Cummins and Briggs & Stratton. Briggs and Stratton is the worlds
largest manufacturer of air cooled gas engines, whereas Cummins is the world leader in
the manufacturing of diesel engines. This tells us that competition is really tough and in
order to stay and compete with these big giants, Kohler has to keep producing quality
products and also come up with new innovations. If they stay private, then they wont
have to disclose financial and other information to the public. This way they can try to
stay ahead of the game. Also, they wont have to justify their investment decisions
triggered towards long run growth to the public.

Product Portfolio:
Kohler enjoys a well diversified product portfolio. Kohler manufactures cabinets,
bath tubs, tiles, engines, generators, furniture, and kitchen and bath accessories. Kohler

2
The figures for sales and employees are taken from the following websites. The sales figures are in Euros. Also we converted the
2005 sales into 2004 sales using the sales growth rate for comparison purposes since sales for Kohler were given for 2004.
For Cummins: http://www.hoovers.com/cummins/--ID__10423--/freeuk-co-factsheet.xhtml
For Briggs: http://www.hoovers.com/briggs-&-stratton/--ID__10231--/freeuk-co-factsheet.xhtml
Company name Kohler Briggs & Stratton Cummins Engine
Company Type Private Public (BGG) Public (CMI)
Sales in 2004 1,557 1,079 4,905
Employees in
2004
28,000 7,732 28,104
27
started business as a manufacturer of plumbing fixtures but then diversified its product
portfolio in order to grow and reduce the risk of a product failure. According to Harvard
Business Report, in 1997 Kohler had 5 divisions which were as following:
Kitchen & Bath Group
Power Systems Group
Interior Groups
Hospitality and Real Estate Group
Elim. & Corp. Var.
Kitchen and Bath Group made a net income of about $87 million followed by Power
Systems Group with net income of about $20.4 million. Elim. & Corp. Var. had a loss of
about $25 million. Kitchen & Bath Group and Power Systems Group in this case are the
cash cows that are providing most of the money for growth of other divisions. However,
they are not at the end of their life. Kohler keeps on innovating kitchen and bath products
and engines so that these divisions remain cash cows for several more years. Elim. &
Corp. Var. is the dog in this case and needs to get rid off since Kohler lost about 25
million dollars in this division in 1997. Interior Groups division is a rising star. It is not
yielding that much income but we are hoping that it will become a cash cow in future.
Hospitality and Real Estate Division is a question mark on the product portfolio.
We looked at Kohlers website and found the following divisions in Kohlers
family of businesses:
3

Golf/Resort Destinations
Kohler Engines, Generators and Rental Services

3
The divisions in Kohlers family of business are taken from the Kohler website which is as following:
www.kohler.com

28
Furniture
Kitchen and Bath
We can see that Kohler got rid of Elim. & Corp. Var. division since it was draining cash
from other divisions and was losing millions of dollars. As of now, Kohler only has 4
divisions. Kohler Kitchen & Bath and Kohler Engines, Generators and Rental Services
are still cash cows. The furniture division is picking up slowly and so is the Golf/Resort
Destinations division.

Rebuttal of Presenting Group
The first thing that the presenting group does not talk about is the idea of having a
backup plan or negotiation strategy. This would be good if they reject our first
offer. What is the presenting group going to do if they get rejected? They should
have a backup plan in place like we do. Its not just all about stock price, its
about how much Kohler wants to stay out of court and how much retained
earnings they are willing to use to avoid court.
In the presenting groups reverse split section on page 6, they make the claim that
reducing the number of shares each owner has will reduce dividend share. This is
not true. Dividends will be proportionate to the amount of stock value the owner
has.
The presenting group claims that Kohler should meet with outside stockholders in
determining the value of the stock price. First of all, outside shareholders only
make up 4% of shares outstanding and they have no voting power or influence on
29
the board of directors. It is not necessary to run all of our plans and strategies by
this small 4% of stockholders. They are not a factor.
While we realize that going to court is not good for our public image, we have
shown in our paper that a counter PR campaign can actually make this publicity
positive for Kohler. The presenting group failed to see this opportunity.
The presenting group uses the average growth rate from 1998-2002 for their
dividend discount model calculations. We have used a more historically accurate
rate averaged from 1993-2002.
The presenting group has used an average of the industry betas. Just by taking the
average, size, market power, and market share cannot be represented in the beta.
Because of this, we have taken a weighted average beta weighted by sales to take
into account the size of the other companies in the industry.
On the price cash flow ratios that the presenting group has calculated, the number
they call Net Cash Flow is actually the increase in cash and cash equivalents
number. They shouldnt even be using net cash flow in the first place, they
should be using OCF. They used the wrong figure here.
When calculating stock price and all ratios that use total shares outstanding, they
do not factor in the restricted shares. We used 7588 shares in all of our
calculations while they used 7445. 7588 is the right number to use because it is
the total number of shares outstanding, not just the total common stock.
We believe that SoGen would not agree with their proposed price of $110,000.
This price is too low. SoGen has invested about $100,000 per share believing that
30
these shares will greatly increase in price in the future. They are not willing to
drop a suit for such a low rate of return (10%). Bottom line, their price is too low.
On page 19, the presenting group talks about how a price of $110,000 would
affect outside shareholders as though we would have to pay all shareholders the
$110,000 if we settle outside of court. Our interview with Huddleston shows that
if we settle outside of court, it has no bearing on the people who already agreed
with $55,400.
The presenting group has no analysis of how the recapitalization will affect
Kohlers cash status and retained earnings standing. We have shown in our paper
how retained earnings will be affected with different settlement prices. This is a
key factor to consider for Kohler and the other group didnt touch it.
On page 13-15, when finding all their ratios, the presenting group used the price
which was calculated in the dividend growth model that they calculated. This is
wrong because if you dont get the right price form the dividend growth model,
then all the ratios will be wrong. Also, the main point of using all different ratios
is to come up with different prices.

Conclusion
Our analysis has shown that going to court has various negative such as, bad
press, unpredictable stock price, court cost, and revealing private information. For these
reasons we recommended settling out of court. The first challenge of settling out of court
is determining our initial share price offer. To figure this offer many methods were used
including the dividend discount model approach, book-value approach, and a multiples
31
approach. We recognized that numbers could be adjusted in many ways to justify any
price imaginable. We also recognized that comparable companies are not exactly like
Kohler and using their averages might not be completely accurate. The initial offer price
we recommend from analysis is $120,120. We showed the effects of this price and other
prices on The Kohler Foundation, the estate of Frederic Kohler, SoGen, and the Kohler
Company. A detailed retained earnings analysis showed the effects of recapitalization on
Kohlers retained earnings. From this retained earnings analysis we recommend that
Kohler be willing to use at most 25% of their projected year 2000 retained earnings.
Using 25% of retained earnings for the entire recapitalization would allow a settlement
price of $216,264 per share for the 811 shares. In the end we recommend Kohler do
everything possible to settle out of court. They have sufficient retained earnings to settle
at almost any price they want, but we believe that $120,125 is very justifiable and more
than fair.










32

Grammatical Errors in Their Paper

Page 2, last sentence first paragraph after the words decision and company there
should be commas. Also, that same sentence is unparallel and has flow issues.
Page 2, last sentence first paragraph effects should be affects
Last sentence on page 2 is a run on.
Page 3 3
rd
sentence has subject verb agreement problems
Page 3, in the middle of the page, the sentence that starts Not only does not
make sense, and good employee relations - what?
Page 3, 2
nd
sentence 2
nd
paragraph, after the word business should be a comma
Page 4, first sentence, they have quotations in wrong spot, and the first quote
never has an end quote.
Also, on page 4, they have a colon in a spot where there should just be a comma
before a quotation, top 1/4
th
of page.
In the middle of page 4, they use the word dependant when it should be dependent
with an E
Page 5 2
nd
paragraph 3
rd
sentence they have it and should be is
Top of page 6 after we think that.. should have the word they in it
Page 6, they use the term split instead of reverse split.
Page 6 last sentence they use the terms amount of stocks , it should be number
of shares
Bottom of page 6, reducing the amount of stock each owner has does not make
dividend per share decrease.
Last paragraph page 7 and into page 8 is all repeated information. Very redundant
Page 7 2
nd
part they use the term shareholders with an apostrophe and there
should be no apostrophe 5
th
sentence 2
nd
part
2
nd
paragraph page 8 3
rd
sentence should have a comma after However and also
should have a comma after enough.
Page 8 2
nd
bullet they use the term made , it should be offered
All of page 9 is repeated information. Very redundant
First paragraph page 10 is all repeated information for about the 3
rd
time
Page 10, 2
nd
sentence should have comma after pros
Page 11 2
nd
sentence first paragraph should have comma after For example
Page 11 3
rd
sentence first paragraph should have comma after settled
Page 12 (top), sentence that ends in future cash flow should have an s for plural
Page 12, first paragraph last sentence should be market RISK premium and so
on throughout the paper
Page 12 first sentence under discount rate should have semi colon after the word
this also should have the before arithmetic average
Page 13, subject verb agreement is wrong in last full sentence on page
Page 16 2
nd
sentence should not have a comma after is
33
Page 17, last sentence first paragraph does not make sense
Page 19 2
nd
paragraph 2
nd
sentence they use the word bided which has no
meaning in this context
Starting on page 19, their citations are the whole website when it should just be
short and simple. This is very picky, but it kind of decreases the eye quality of
their report
Page 19 2
nd
sentence under foundations its should be their
Page 20, they use $675,000 total when it should be per person in the state
Page 22 under advantages for shareholders trail should be trial
Continuous throughout the paper they use the term holders instead of
shareholders, this may be confusing to an outside reader.



































34



March 9, 2006

Mr. Stephen Huddleston
Clarke House
98 West Jefferson Street
P.O. Box 9
Franklin, IN 46131-0009



Mr. Huddleston,

On behalf of our senior seminar group, we would like to thank you for allowing us to conduct an in-person
interview on March 9
th
. Your knowledge on corporate law helped us immensely when preparing our
presentation about the Kohler Co. and their lawsuit situation. We greatly appreciate your time and
consideration.

Thank you,







Chad Hoffman
Zeeshan Malik
Brad Patterson
Nate Roberts












35

WORKS CITED
http://www.masco.com/investors/pdfs/Masco10-K2004.pdf
http://www.mikehenning.com/2005.cfm
http://www.sec.gov/rules/proposed/s7398/singer2.htm
Harvard Business Case
http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=721002
http://www.findarticles.com/p/articles/mi_qn4196/is_19980419/ai_n10430992