Reliable Appliances, a leading manufacturer of washing machines and dryers, acquired the stock of competitor, Quality-Built, which had been losing money during the last several years for $100 million in cash. Reliable also assumed $20 million (present value = $18 million) of Quality- Built's outstanding long-term debt. To help minimize losses, Quality-Built reduced its quality- control expenditures and began to purchase cheaper parts. Quality-Built knew that this would hurt business in the long run, but it was more focused on improving its current financial performance in the months prior to being sold. Reliable Appliances saw the acquisition as a way of obtaining market share quickly at a time when Quality-Built's market value was the lowest in 3 years. Quality-Built had been selling its appliances with a standard industry 3-year warranty. Claims for the types of appliances sold tended to increase gradually as the appliance aged. Quality- Built's warranty claims' history was in line with the industry experience and did not appear to be a cause for alarmm. Not surprisingly, in view of Quality-Built's cutback in quality-control practices and downgrading of purchased parts, warranty claims began to escalate sharply within 12 months of Reliable Appliances' acquisition of Quality-Built. Over the next several years, Reliable Appliances paid out $15 million in warranty claims (PV = $12 million). The intangible damage may have been much higher because Reliable Appliances' reputation had been damaged in the marketplace. At the end of the second year, Reliable sold certain non-strategic Quality-Built assets for $2 million, equivalent to a PV of $1.5 million. 1. 2. 3. What was the total consideration, total purchase price (enterprise value), and net purchase price ultimately paid for Quality-Built? Why was it important to Quality-Built to improve its current financial performance? How should Reliable Appliances have been able to anticipate this warranty problem from its due diligence of Quality-Built? 4. How could Reliable have protected itself from the outstanding warranty claims in the definitive agreement of purchase and sale? 5. In what sense had Reliable's reputation been damaged?