Smith & Wesson: A Big Shot at Security?

An investment analyst at River Capital, LLC, an East Coast hedge fund, is researching Smith & Wesson Holding Corporation (S&W) as a potential investment opportunity. The analyst had become interested in S&W when the company announced the acquisition of Universal Safety Response, Inc. (USR). The USR deal represented a significant investment for S&W and therefore created an opportunity for the company to become either undervalued or overvalued by the market. Excerpt UVA-F-1665 May 25, 2012 SMITH & WESSON: A BIG SHOT AT SECURITY? By July 3, 2009, Ben Mackovak already had devoted countless hours researching Smith & Wesson Holding Corporation (S&W) as a potential investment opportunity. With 2009 sales of more than $ 300 million, S&W was one of the world's leading manufacturers of firearms (see Exhibit 2 and Exhibit 3 for financial statements). Mackovak, an investment analyst at River Capital, LLC, an East Coast hedge fund, had become interested in S&W when the company announced the acquisition of Universal Safety Response, Inc. (USR). The USR deal represented a significant investment for S&W and therefore created an opportunity for the company to become either undervalued or overvalued by the market. The acquisition had been announced on June 18, and S&W's 2009 financial statements had just been released on June 30, so now it was time for Mackovak to make his decision about the company. Was USR a good investment for S&W? Did USR's numbers add up? The stock market had reacted strongly at first to the acquisition announcement, and S&W's stock price jumped 22% ($ 4.93 to $ 6.03) before it dropped to its current price of $ 5.58 (Exhibit 1). The question for Mackovak was whether the market was correctly assessing the value added of USR to S&W. Should Mackovak recommend the investment for River Capital at $ 5.58 per share? Company History . . .