Case Number: 5-404-773, Year Published: 2006
HBS Number: KEL259
Equipment Leasing, Information Technology, Merger and Acquisition (M&A), IT Infrastructure, Lease Payments
The case centers on Shilling & Smith’s acquisition of Xteria, Inc. and the resulting need to quickly scale their IT infrastructure to accommodate the acquisition. The case is based upon a real leasing problem faced by a major retail firm in the Chicago area, as they purchased a small credit card processing firm and scaled the operations to handle the retail firm’s credit card transactions. In the actual case the new leasing contract was in excess of $50 million; in order to make the numbers manageable for students the scale of the leasing deal has been reduced to approximately $7 million. The Shilling & Smith case examines how to evaluate different lease options when acquiring data center information technology infrastructure. Specifically, the case addresses software versus hardware leasing, different lease terms, and how to choose between different lease structures depending on the strategy and needs of the company. This case enables students to understand the different types of technology leases and what situations these leases would be employed. Three different lease scenarios are given explicitly in the case: 1. Lease everything over a 36-month term. 2. Lease the hardware only over either a 24-month or 36-month term and purchase the software and professional services. 3. Lease the high-end upgradeable servers (HP Keystone servers) for 36 months, lease the data storage and web servers (EMC and HP Netservers) for 24 months, and purchase the Cisco network equipment, all the software and the professional services. The case also alludes to a fourth scenario, which is the option of a step-up lease whereby the lease payments are delayed six months to match the cash flows of the company. The CIO of Shilling & Smith needs to determine which lease option is the best means of providing the technical infrastructure needed to support Shilling & Smith after the acquisition of Xteria. Several issues drive this decision, including the value and useful life of the equipment, as well as the strategic context of the firm.
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