CASE: BARRACUDA INC. Barracuda Inc. has diversified beyond itsearly base as a lamp fixture manufacturer into multiple hardwareand plumbing fixture products that it sells to professionals (i.e.,plumbers and electricians) and through the large volumedo-it-yourself (DIY) stores like The Home Depot and Lowe’s. Whilethis successful growth has been achieved primarily throughacquisition, the company tends to let the acquired businesses runindependently. It has done so by looking to fragmented industriesto acquire small firms with efficient operations and goodmanagement teams. It then grows these businesses through acombination of internal cash flow and debt, and directs new salesto the professional and DIY channels. Barracuda has beenparticularly successful in the faucet segment, which it practicallyreinvented though such technological innovations as the washerlessfaucet, and marketing innovations like branding andgood-better-best merchandising. Barracuda has leveraged thismerchandising strategy across its businesses and, coupled with theexplosive growth of the DIY channel, is spectacularly profitablewith a net profit after tax (NPAT) of 18%. The firm’s management islooking to broaden its revenue base and has identified the homefurnishings business as sharing many characteristics with faucets,prior to Barracuda’s entry into faucets. It plans to enter thisindustry through large-scale acquisitions. The landscape of theU.S. home furnishings manufacturing industry consists of manyplayers, none with controlling share, and serious issues ofovercapacity. There are presently 2500 home furnishings firms, andonly 600 of those have over 15 employees. Average NPAT is between 4and 5%, which also reflects the fact that few firms have goodmanagers. While the industry is still primarily comprised ofsingle-business family-run firms, which manufacture furnituredomestically, imports are increasing at a fairly rapid rate. Someof the European imports are leaders in contemporary design.Relatively large established firms are also diversifying into thehome furnishings industry via acquisition. Supplier firms to thehome furnishings industry are in relatively concentrated industries(like lumber, steel, and textiles), and therefore typically offerfewer accommodations to the small furniture manufacturers.Retailers, the intermediate customer of the home furnishingsindustry, are becoming increasingly concentrated and the few large,successful furniture companies actually have their own stores orhave dedicated showrooms in the larger department stores. Customershave many products to choose from, at many different price points,and few home furnishing products beyond those of the largercompanies have established brands. Also, customers can switcheasily among high and low-priced furniture and other discretionaryexpenditures (spanning plasma TVs to the choice of postponing anyfurniture purchase entirely).

1. Why would Barracuda consider acquisition as its preferredmode of entry into furniture?

2. Given the history of Barracuda, (a) what guidelines would yousuggest to management regarding their acquisition strategy in thehome furnishings industry; (2) what threats does Barracuda face inentering the furniture industry through acquisition.