Harvard Business School

9-296-003
Rev. March 13, 1998

Lex Service PLC—Cost of Capital
On November 25, 1993, the directors of Lex Service PLC, received a memorandum from G.
Lionel Harvey, the company’s deputy chief executive, concerning the approaching board meeting on
December 2. Attached to the memo was a report by the L.E.K. Partnership, a London-based consulting firm, concerning Lex’s cost of capital. The report and its implications for management were to be discussed at this board meeting.
Recent developments at Lex had focused top management’s attention on the company’s capital budgeting procedures and its cost of capital. Between 1991 and 1993, various sales of subsidiaries and other assets had provided Lex with more than £340 …show more content…

By May 1993, Lex had sold nearly all of its shares in Arrow Electronics for gross proceeds of £116.8 million.
In the face of the same challenging market conditions, Volvo Car Corporation deemed it necessary to gain greater control over its marketing in the United Kingdom, its second largest market.
In March 1992, Volvo ended its 33-year long import agreement with Lex four years before the scheduled termination date. Upon relinquishing the franchise to Volvo, Lex realized £100 million for the value in the concession.2 Lex’s stock fell 30% to 205 pence per share in response to the news.
While it was clear that this market reaction reflected a major loss in Lex’s value, it was also clear that the cash received would provide Lex with more internal funds to finance future growth initiatives.
Immediately following the termination of its Volvo import agreement, Lex acquired the Swan
National Motor Group, the retail motor distribution arm of Swan National Limited, for a total consideration of £44 million. In March 1993, the company acquired Lucas Autocentres, which operated high-quality fixed-price auto service centers in the United Kingdom, for £13.1 million in cash, and in July 1993, it acquired the Arlington Motor Group for £48.6 million in cash. Arlington operated a series of truck and van distributorships.
Finally, Lex reentered the profitable auto importing business by acquiring a controlling interest in the U.K. importership, Hyundai Car (U.K.), in