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					Boyd Gaming Corporation




              Prepared by:

             Crystal Cranfill

             Chris Deonarine

           Vanessa Hernandez

             Crystal Mathis

            Cyndy Maxhimer

             Sydney Sugarek

               Derek Vest




  Texas A&M University – Corpus Christi

            MGMT 4388.001

         Karen Middleton, Ph.D.

              Spring 2007
                                                                                              Boyd Gaming Corp.   i



                                                 Table of Contents

Table of Contents …………………………………………..….….………………                                                              i

List of Tables………………………………………………….……….………… iii

List of Figures………………………………………………….……….………… iv

Executive Summary ………………………………………….………………..… vii

General Environment Analysis

       Economic Forces …………….………………………..……………..…… 1

       Socio/Cultural Forces ………..……………………………..…………..… 1

       Demographic Forces …………..……………………………..…………… 3

       Political, Legal, and Governmental Forces ……..………….………..…… 4

       Technology Forces ……………………………….………………….…… 8

       Globalization Forces ………………………………..……………….…… 10

Porter‘s Five Forces

       Barriers to Entry ……………...................................................................... 13

       The Bargaining Power of Suppliers ………………………………….…… 15

       The Bargaining Power of Buyers …………………………………….…… 16

       Threat of Substitute Products ...................................................................... 17

       Intensity of Rivalry Among Competitors .................................................... 20

       Analysis of Porter‘s Five Forces …………………………………….…… 22

Firm Level Ratios

       Liquidity Ratios ………………………………………………….….…… 23

       Leverage Ratios ……………...................................................................... 24

       Activity Ratios …..…………………………………….……….……..…. 24
                                                                                                    Boyd Gaming Corp. ii


       Profitability Ratios ………………………………………………….…… 25

       Growth Ratios.............................................................................................. 26

       Stock Analysis ……………………………………………………….…… 27

       Published Industry Rankings …………………………………………….. 27

Competitor Analysis of Strategic Group Members

       Boyd Gaming Corporation …………………………………………..…… 28

       Ameristar Casinos, Inc. ……………........................................................... 30

       MGM Mirage ………………………………………….………………..... 31

       Harrah‘s Entertainment, Inc. ………………………….…………..……… 33

Opportunities and Threats

       Opportunities ……………………………………………………………. 35

       Threats …………………………………………………………………… 36

Internal Environment Analysis

Mission Statement Analysis ……………………………………………………… 38

Financial Ratio Analysis

       Current Ratio …………………………………………………………….. 41

       Quick Ratio ……………………………………………………………… 42

       Debt to Equity Ratio …………………………………………………….. 43

       Total Debts/Total Assets (%) ……………………………………………. 44

       Receivables Turnover ……………………………………………………. 46

       Total Asset Turnover ...…………………………………………………... 47

       Gross Profit Margin ……………………………………………………… 48

       Operating Profit Margin …………………………………………………. 49
                                                  Boyd Gaming Corp. iii


      Net Profit Margin ………………………………………………………... 50

      Return on Assets ………………………………………………………… 51

      Return on Equity ………………………………………………………… 52

Stock Analysis

      5 Year % Change in Stock Price ………………………………………… 53

      Diluted Earnings per Share ……………………………………………… 54

      Year End Price per Earnings Ratio ……………………………………… 55

      Beta Analysis ……………………………………………………………. 56

Corporate Level Strategy ………………………………………………………... 57

Business Level Strategy …………………………………………………………. 59

Core Competencies

      Family Operated Business ………………………………………………. 62

      Geographic Diversity ……………………………………………………. 63

      Mergers and Acquisitions ……………………………………………….. 65

      Strategic Financing ……………………………………………………… 67

      Management and Board Members ………………………………………. 69

Strengths and Weaknesses

      Strengths ………………………………………………………………… 72

      Weaknesses …………………………………………………………….... 73

SWOT Analysis

      SO Strategies ……………………………………………………………. 75

      ST Strategies …………………………………………………………….. 75

      WO Strategies ……………………………………………………………. 76
                                             Boyd Gaming Corp. iv


      WT Strategies …………………………………………………………….. 77

      Recommended Strategies ………………………………………………… 78

Recommended Strategies

      Recommended Strategy 1 ……………………………………………….. 79

      Recommended Strategy 2 ………………………………………………... 83

      Recommended Strategy 3 ………………………………………………... 87

References ……………………………………………………………………….. 93
                                                               Boyd Gaming Corp.   v


                                    List of Tables

Table 1: Analysis of Porter‘s Five Forces ……………………………….………... 22

Table 2: Liquidity Ratios …………………..……………………………………… 23

Table 3: Leverage Ratios ……………………………………………….….……… 24

Table 4: Activity Ratios …………………………………………………………... 24

Table 5: Profitability Ratios …………………………………………….………… 25

Table 6: Profitability Ratios …………………………………………….………… 25

Table 7: Stock Analysis …………………………………………………………… 27

Table 8: Industry Rankings – Revenues ………………………….………………. 27

Table 9: Opportunities and Threats ……….………………………………….…… 35

Table 10: Summarization Chart: Analysis of the Mission Statement ……………. 40

Table 11: Beta Analysis ………………………………………………………….. 56

Table 12: VRIO Test …………………………………………………………….. 62

Table 13: Boyd Gaming‘s Strengths and Weaknesses …………………………... 72

Table 14: SWOT Matrix …………………………………………………………. 74
                                                                    Boyd Gaming Corp. vi


                                      List of Figures

Figure 1: Net Sales Growth ………………………………….………….………... 26

Figure 2: Current Ratio- 5 Year Trend …………………………………………... 41

Figure 3: Quick Ratio- 5 Year Trend …………………………………………….. 42

Figure 4: Debt to Equity- 5 Year Trend ………………………………………….. 43

Figure 5: Total Debt/Total Assets (%) - 5 Year Trend …………………………… 44

Figure 6: Receivables Turnover- 5 Year Trend …………………………………... 46

Figure 7: Total Asset Turnover- 5 Year Trend …………………………………… 47

Figure 8: Gross Profit Margin- 5 Year Trend …………………………………….. 48

Figure 9: Operating Profit Margin (After Depreciation) - 5 Year Trend ………... 49

Figure 10: Net Profit Margin- 5 Year Trend ……………………………………... 50

Figure 11: Return on Assets (ROA) - 5 Year Trend ……………………………... 51

Figure 12: Return on Equity- 5 Year Trend ……………………………………… 52

Figure 13: 5 Year % Change in Stock Price ……………………………………... 53

Figure 14: Diluted Earnings per Share - 5 Year Trend ………………………….. 54

Figure 15: Year End Price per Earnings Ratio - 5 Year Trend ………………….. 55

Figure 16: Current Locations ……………………………………………………. 87

Figure 17: Expansion Locations in Texas ……………………………………….. 89
                                                                             Boyd Gaming Corp. vii


                                      Executive Summary

       This report first analyzes the general environment that is affecting all businesses as well

as businesses specifically in the gaming industry. Next, the internal environment of the Boyd

Gaming Corporation is analyzed. After examining the general and internal environments, the top

management team recommends three strategies to the company.

       Analyzing the general environment reveals that the domestic and global economic factors

currently impacting firms are favorable for growth even though the travel and tourism industry

was affected by the events of September 11, 2001. Emerging markets give businesses the

opportunity to expand which is evidenced by recent mergers and acquisitions. Analysis of the

industry environment using Porter‘s Five Forces shows that the barriers to entry, the bargaining

power of buyers, the threat of substitute products, and the intensity of rivalry among competitors

is high. The bargaining power of suppliers is moderate, but all other facts about the industry

make it unattractive. The competitor analysis evaluates Boyd Gaming against Ameristar Casinos,

Harrah‘s Entertainment, and MGM Mirage. These four firms operate with similar strategies of

expansion and acquisitions, locations, target market and financial ratios.

       The information gathered through research indicates that Boyd Gaming‘s opportunities

are the increase in disposable income, emerging global and domestic markets, mergers and

acquisitions, the changing exchange rates, and a state‘s power to decide on commercial gaming.

The threats facing the company are the effects of the attacks on September 11, 2001, emerging

global markets and limited domestic markets, cutthroat competition, numerous substitute

products, and the National Coalition Against Legalized Gambling.

       Analysis of the internal environment reveals much about the company. The mission

statement demonstrates that Boyd Gaming is most interested in expanding the business and
                                                                              Boyd Gaming Corp. viii


increasing the wealth of the company. Financial ratios for the past five years indicate that Boyd

has a competitive advantage in its ROA, Net Profit Margin, and stock price, but lags behind the

competition in its quick, current, total debt to total assets, and debt to equity ratios. Stock price

analysis demonstrates that the company has valuable stock compared to its strategic group

members.

       Boyd operates with a corporate level strategy of related constrained diversification and a

business level strategy of broad differentiation. The core competencies of the company are being

a family operated business, geographic diversity, successful mergers and acquisitions, strategic

financing, and management and board members. Strengths of the company are its core

competencies, and weaknesses found within the company are vulnerability to state regulations,

lack of short-term solvency, and significant debt.

       Three SO strategies, 4 ST strategies, 3 WO strategies, and 3 WT strategies are developed,

and of these strategies developed, the top management team recommends three. Boyd should:

1.Conserve environmental resources to control costs and reduce long-term debt, 2. Develop and

market entertainment packages for Baby Boomers to increase revenues and decrease debt, and 3.

Exploit expansion opportunities in both the global and domestic markets.

       To conserve environmental resources to control cost and reduce long-term debt, Boyd

will construct the Echelon with a green building design. The company will receive tax benefits,

experience reduced costs associated with operating expenses and human resources, and receive

free advertising and publicity. To market directly to Baby Boomers, a virtual website will be

created that allows Boyd‘s customers to become familiar with the company‘s games and

facilities and offers winnings from online competitions in the form of vouchers. This will raise

revenues because visits to Boyd‘s casinos will increase as Baby Boomer‘s interest in Boyd
                                                                           Boyd Gaming Corp. ix


increases. To exploit expansion opportunities, Boyd will enter the Texas market. The company

will purchase two different racetracks and build a third. After casino-style gambling is legalized

in Texas, Boyd will introduce slot machines to the racetracks, increasing the popularity of the

facilities.
                                                                           Boyd Gaming Corp.         1


                                 General Environment Analysis

Economic Forces

       Disposable Income. Disposable income in the United States has seen an 18% increase

since 2002 (―Average disposable income,‖ 2007). The average disposable income within the

European Union has seen an increase of 36% since 2002.

       Exchange Rates. Exchange rates have proven to be quite volatile. With U.S. presence in

Iraq, the United States has seen depreciation in the dollar against other currencies. From 2000 to

2005, the Euro grew approximately 26% against the dollar (―Exchange rates against the US

dollar,‖ 2007). Along with the Euro, the Japanese Yen has grown against the dollar with 3%

overall growths in the past five years.

       Interest Rates. Interest rates have been declining. In December 2006, the average interest

rates on corporate investment quality bonds were 5.36%, down from years past (Council of

Economic Advisors, 2006). Annual lending rates have stabilized after a fall from 9.23% in 2000

to 5.27% in February of 2007 (U.S. Federal Reserve, 2007).

Socio/Cultural Forces

       Travel and Tourism. Travel and tourism in the United States have greatly been

influenced by impacts of the September 11 terrorist attacks (Haberkon, 2006). America has since

been consumed with the desire for tighter security restrictions to help prevent future attacks and

fight the war on terrorism. These actions have simultaneously caused a tremendous loss of faith

in America‘s image around the world. Foreign travelers‘ interest in visiting the U.S. has

diminished due to increased controls with longer visa applications and thorough airport security

procedures. Since 2000, the United States has experienced a 7% decrease in tourism nationwide.

Although these procedures and precautions are implemented to help restore trust and safety in
                                                                            Boyd Gaming Corp.      2


the American people, the negative perception seen by travelers abroad are unwelcoming and

have convinced them to spend their disposable income elsewhere. Seventy-seven percent of

travel agents worldwide stated the U.S. was more difficult to visit than other countries according

to surveys completed by the Travel Industry Association in June 2006 (Havemann, 2006).

Tourism leaders, including Disney World and Las Vegas, gathered together during 2006 to

introduce the Discover America Partnership, a program dedicated to fighting ―America‘s image

crisis‖ by attracting 10 million new tourists a year and making the Unites States a more

welcoming place (McKenna, 2006). The gaming industry is highly affected by tourism and the

efforts of the U.S. Congress in Washington and travel advocate groups such as The World Trade

Tourism Council and the U.S. Travel and Tourism Advisory Board. These groups are dedicated

to influencing society‘s attitudes about traveling in America. Many foreign countries have

aggressively started fighting for global tourists. These countries believe they have the potential to

exploit post-war images of the United States and to restore interest in their country as a preferred

travel destination.

       Gambling and Addiction. Broad acceptance and increased worldwide exposure to

gambling have been among many reasons why society has been faced with addiction problems.

Society has been facing issues of drug and alcohol addiction for many generations. Gambling has

entered the lives of people around the world, presenting a gambling addiction. Young people,

from ages eighteen to twenty-one, who battle the pressures of school or troubled households,

have made an impact on the gambling scene. Texas Hold ‗Em, a poker game, has become

increasingly popular with these groups (Leinwand, 2006). The Internet has also increased

gambling addiction as it has been a source of gambling that of opportunity and convenience

(Kampen, 2005). Research finds that women seek gambling as an escape from their lives and the
                                                                             Boyd Gaming Corp.       3


stress they feel in their jobs, at home, or even socially. Women gamblers who become addicts

see gambling as a means to ―chase their losses.‖ Female gambling addicts are those who have

been sexually abused, lost their jobs, mothers and housewives, or are going through divorces.

Not only does gambling provide women with a natural high while winning, but they also seek

comfort in the secluded environments. Men are more competitive by nature than women, so a

skill challenging game is often preferred like poker or betting. The games provide the sense of

control which most men feel have been taken away from them in their families, jobs, or

promotions. For example, when men face job losses and are no longer the breadwinners in the

family, or when they face divorces due to affairs, they feel they have lost control of their life.

Dissociation is the term used by health care professionals when describing the state of mind a

problem gambler feels in the desire to escape behind a slot machine, a poker game, or an online

betting race. Since gambling addiction is so widespread, more states are implementing programs

to address gambling addictions by offering counseling to problem gamblers.

Demographic Forces

       Baby Boomers. Households including at least one baby boomer 35-54 typically generate

the highest travel volume in the United States over other age groups (―Domestic research: Travel

market segments,‖ 2004). This age group is close to retirement and doing more traveling. In

2003, this group registered almost 300 million trips. They are also the most likely to stay in a

hotel, motel, or bed and breakfast which lengthens the time of stay as well as money spent on

entertainment. Only 29% of the baby boomers travel for business compared to the 59% that

travel for leisure and stay overnight.

       Age Categories. In the United States, 74.6% of the population is over the age of 18

which gives the domestic tourism business a huge target market (United States Census Bureau,
                                                                           Boyd Gaming Corp.         4


2005b). Young adults, ages 18 to 24, make up 9% of the adult population who are a potential

target for the gaming and entertainment industry. Since they have had limits on what they have

been allowed to see and do, there is definitely a large amount of curiosity among this group once

they attain the legal gambling age. People who are 65 years or older constitute 12% of the adult

population nationwide (United States Census Bureau, 2005b). This group is retired and has more

time to travel than any other age group.

       Gender. In the United States, males over 18 years account for 73.5% of the total male

population (United States Census Bureau, 2005b). They use gaming as a means for excitement

and a way to make extra money (Barr, 2006). There are 75.7% of women over 18 years among

the female population (United States Census Bureau, 2005b). Women are more likely than men

to use gambling for an escape from daily problems and routines (Barr, 2006). Gambling is a

means to relax or to help elevate anxious or depressive moods for women and they tend to

become emotionally attached. As compared to men, gambling has become an increasingly

addictive problem for women.

       Native American Indians. This group only makes up 1% of the total population of the

U.S. and 1.4% of the Nevada population (United States Census Bureau, 2005a). However, they

operate more than 390 casinos with record revenues of $22.7 billion in 2005 (Peterson, 2006).

The American Indian gaming industry grew 3 times faster than the U.S. commercial gaming

industry in 2005. California and Nevada are in the top five states where these facilities realized

the most revenues.

Political, Legal, and Governmental Forces

       Legislation. The Unlawful Internet Gambling Enforcement Act of 2006. The United

States Congress passed a bill that became effective on October 13, 2006 essentially outlawing
                                                                              Boyd Gaming Corp.        5


online gambling (Humphrey, 2007a). This Act makes it illegal for business entities to accept or

transact online payments for gambling that is deemed prohibited. The legislation does not

actually identify prohibited activities, but it does state that banned activities are those that are

previously prohibited by state or federal legislation.

        The Fair Minimum Wage Act of 2007 was passed by the House of Representatives on

January 10, 2007 (Leonard, 2007). The Senate then passed the bill on February 1, 2007 but

included several amendments. The original Act calls for periodic increases to the federal

minimum wage. Over the next two years, the minimum wage could increase from the current

wage of $5.15 to $7.25 an hour. The amendments added in the Senate version include tax breaks

for small businesses. The Act, with amendments, is currently waiting to be approved by House of

Representatives.

        Gaming Industry Tip Compliance Agreement. In 2003, the Internal Revenue Service

decided to carry on this agreement (―IRS and gaming industry partner on voluntary tip

compliance agreements,‖ 2003). Employers participating in the agreement are better protected

against IRS audits because a minimum tip rate specific to different occupations is determined.

Employees working in a specific occupation must report the minimum established unless they

can prove they have not earned the minimum amount. This agreement is not mandatory, but

assists employers and employees when reporting income.

        Licensing and Permits. Businesses wanting to enter into the gaming industry must abide

by the regulations established by the specific state in which they operate and for the particular

type of gaming activity they wish to participate in (―Illinois Gaming Board regulations,‖ 2003;

―Indiana riverboat owner‘s licensees & operating agent,‖ 2007; ―Louisiana gaming control,‖

2007; ―Gaming statutes and regulations,‖ 2006; ―Mississippi Gaming Commission procedural
                                                                          Boyd Gaming Corp.         6


fact sheet for gaming license,‖ 2007). In order to obtain the necessary licenses and permits, the

business must also go through the processes outlined by each state in which in operates. In

general, as established by Jenny Chun v. The State of New York (1992), each state has the right to

make decisions regarding and defining legal and illegal gambling when federal law is not clear

on the issue.

       Political Action Committee. Reviewing contribution trends for the past 16 years reveals

that the gaming and casino industry has contributed nearly $68 million to political campaigns

(―Casinos/gambling: Long term contribution trends,‖ 2006). Over 80 different industries have

contributed to political campaigns and the gaming industry has moved higher on the list ranking

the contributions from industries almost every period. The gaming industry peaked at rank 27 in

2002 and fell slightly the next period. Currently, the gaming industry ranks 31 by contributing a

total of $10.3 million; $3 million and $7.3 million were contributed from individuals and

political action committees respectively. The amount donated to the Democratic Party was $5.4

million and the amount donated to the Republican Party was $4.8 million.

       American Gaming Association PAC. As of December 31, 2006, the American Gaming

Association PAC had received a total of $81,550 and had spent a total of $99,200. Federal

candidates received $58,800 from AMA PAC (―American Gaming Assn: 2006 PAC summary

data,‖ 2007). The Democrats received 53% while 47% went to the Republican Party.

       Boyd Gaming PAC- This PAC received a total of $179,533 and spent $113,020 by the

end of the period ending on December 31, 2006 (―Boyd Gaming: 2006 PAC summary data,‖

2007). The total cash amount left was $126,606. Boyd Gaming PAC contributed a total of

$48,500 to federal candidates with 59% going to Democrats and 41% to Republicans..
                                                                           Boyd Gaming Corp.       7


       Trade Associations. American Gaming Association. In June of 1995, the American

Gaming Association (AGA) was established in Washington, D.C. (―About the AGA: AGA

overview,‖ 2003). The primary focus of the association is to educate different society groups

about gaming and to act as a proxy for the gaming industry. When acting as a proxy, the AGA

deals with issues that affect members of the gaming industry in everyday business activities. The

AGA is also the most accurate source of information regarding industry news.

       The National Coalition Against Legalized Gambling (NCALG), created in 1994, views

gambling as the source of many problems (―Our mission, our team,‖ 2007). Information

regarding the problems gambling can cause, such as decreasing the labor pool, the continuation

of illegal gambling, increasing bankruptcy, poverty, crime and death (―Getting started with basic

gambling facts,‖ 2007) is gathered and then distributed to different social groups (Our mission,

our team,‖ 2007). The organization is committed to informing the public of the negative effects

of gambling that cannot be found elsewhere.

       The Travel Industry Association of America (TIA) serves several different purposes in

the travel industry (―TIA mission and objectives,‖ 2007). The TIA acts a representative for the

industry to government officials and decision makers. The TIA also attempts to make traveling

within and to the United States as hassle free as possible while maintaining the safety of all.

Finally, because tourism to America has decreased in recent years, the TIA is working to

increase travelers to the United States from abroad.

       The Transportation Safety Administration (TSA) was created in 2001 to protect the

country and its citizens from another terrorist attack (Transportation Security Administration,

2007). The TSA is part of a larger administration, the Department of Homeland Security, but
                                                                          Boyd Gaming Corp.        8


also works with lower levels of government. The TSA is committed to making all types, mass

and individual, travel safe.

Technology Forces

       Technology. Advances in technology are changing the way business is being conducted

around the world (―Hospitality & tourism‖, 2005). An increasing number of industries are using

the Internet to market and provide customers with online options. Competition is intensifying as

consumers are becoming savvy at utilizing the Internet to research and make purchases. From

2004 to 2005, there was a 52% increase in consumers using the Internet to book travel versus

using a travel agent. Flight search engines are expanding globally and will support 20 languages

by the end of 2007 (―SkyScanner expands footprint in Europe,‖ 2007). Other technological

advances include the new biometric surveillance system which allows a business to identify

visitors through facial recognition technology for safety and control (Rittenberry, 2006).

       Advertisement. Marketing reaches the target audiences with advertisements in various

mediums including television, radio, newspapers, and the Internet. Technology is providing the

vehicles for a business to convey its message to the consumer. Until recently, Las Vegas was

perceived as a mecca for mobs and adventurous adults, but new advertisements have taken away

the negative perception of casinos.

       Online Gaming. This technology can be viewed as injurious to society with The

Unlawful Internet Gambling Enforcement Act being passed in the United States. The result was

numerous businesses exiting the country to set up shop elsewhere which has left the law virtually

unenforceable (―Brand therapy-sportingbet: All bets are off,‖ 2006). The Vegas casinos have

noticed the amount of money these sites are taking in and now the American Gaming

Association is asking Congress to set up a commission to look at ways to license, regulate, and
                                                                          Boyd Gaming Corp.         9


tax online gambling (Kirby, 2007). If Internet gambling becomes legal again in the U.S., casinos

will likely take advantage of this technology to improve revenues.

       The online gaming became more popular as computer access became more available and

people were given the opportunity to game without having to go to a physical location. Online

casino industries can scrap an underperforming game and download a new casino game though

wireless internet and have the link established in minutes. This saves time and money when

compared to changing a physical unit in a casino.

       Data Mining. Data mining is modern technology that uses RFID (radio frequency

identification) tags in computer chips which gives detailed information of who has used the chips

and surveillance cameras that help the development of a customer database (Reid, 2007). Firms

are using this information for advertising and promotions. This technology also makes it virtually

impossible for their consumers and employees to steal from them. Data mining has decreased

the cost and helped the efficiency of industries.

       Security. Since most companies now use the Internet to conduct at least a portion of their

business, they have started looking into network security such as firewalls, data encryption, and

data restriction. Data must be kept safe from risks both within the company and outside of the

firm. Firewalls and data encryption can help prevent people outside the company from accessing

the network and keeps them away from sensitive data. Data restriction prevents people inside the

company from accessing data not needed for their job but could exploit if obtained. Some of the

major industries that are using this technology are software, gaming, and search engine

companies. Another security technology is physical surveillance technology. Cameras are

becoming more high-tech every day (Jones, 2006). Companies are now able to buy tiny cameras

that they can hide anywhere in a building and have them all connected to one computer which
                                                                            Boyd Gaming Corp. 10


allows them to view the surveillance data in a real time feed or look at past times and days with

the click of a few buttons. This technology enables firms to manage security of various locations

from a main office where managers can view the images.

Globalization Forces

       World Economy. It is anticipated that the global economy will continue to grow (―World

economic prospects 2007,‖ 2007). The world GDP and world per capita GDP are expected to

triple between 2000 and 2015 with most of the prosperity continuing to be in the major

developed countries. The developing countries are predicted to make impressive advances.

Conversely, the economies in the major developed countries are expected to have low growth

rates compared to the world averages. The high price of energy will continue to affect virtually

every industry in the world. The Department of Energy‘s outlook, through 2030, reports that

energy consumption and energy prices will continue to increase worldwide (Energy Information

Administration, 2007). The global stock market is expected to maintain its growth (―Leading

analysts predict soft landing of world economies will sustain growth of equity markets in 2007,‖

2007). Natural disasters such as the 2004 tsunami and the 2005 hurricanes resulted in billions of

dollars spent in aid, insurance claims, and lawsuits. Many industries have been directly affected

with the hurricane insurance losses in the U.S. at more than $60 billion (―Hospitality,‖ 2005).

       Travel and Tourism. The global tourist and travel industry was brought to a virtual

standstill on September 11, 2001 with the New York terrorist attacks. The overseas travel to the

United States is down 17% since 2001 which equates to lost tax revenues of $16 billion and

194,000 jobs lost each year for the U.S. (Huettel, 2007). Worldwide, travel and tourism is

booming while the United States‘ share has gotten relatively smaller (Havemann, 2006). Foreign

tourists are visiting other countries besides the U.S. due to anger towards the war in Iraq, the
                                                                            Boyd Gaming Corp. 11


threat of terrorism, and the additional security restrictions. The recently enacted Western

Hemisphere Travel Initiative (WHTI) puts restrictions on travelers from Mexico and Canada into

the United States (―Hospitality,‖ 2005). This has resulted in convention planners delaying

bookings and potential visitors hesitant to go through the complicated and costly requirements.

The global annual growth of tourism is forecasted to be 5% as long as there are not any

unfavorable events in the future. The United States is predicted to recover in its tourist arrival

numbers, but the WHTI may inhibit a larger growth than expected. Other factors affecting

international travel are the rising energy costs and the threat of a possible human flu epidemic.

The 2003 SARS outbreak affected the travel industry worldwide, but if the current avian flu

mutates and begins to spread by humans, it could devastate the global tourism business.

       Mergers and Acquisitions. Hotel mergers and acquisitions to increase holdings

worldwide are predicted to accelerate with the anticipated global economic growth

(―Hospitality,‖ 2005). There are estimated to be 100,559 guestrooms added in 2007 in the U.S.

alone. The hospitality industry is investing in modern amenities including wireless technology,

flat-screen televisions, and alarm clocks designed for Apple iPods. The hotel conglomerates

anticipate growth by appealing to groups such as the baby boomers that have disposable incomes

to spend on travel.

       Emerging Global Markets. Emerging markets in India, China, and other small

developing countries such as Vietnam will be strong in the next few years (―Travel and tourism-

world,‖ 2007). These countries are improving infrastructures and promoting tourism to continue

their economic growths. All of Asia has significantly increased its tourism into the country, has a

booming hotel industry, and better air travel options with no indications of slowing down in

2007. China is predicted to become a world leader, only behind the U.S., in the travel and
                                                                          Boyd Gaming Corp. 12


tourism industry within the next 10 years (―Over the next decade China is expected to become

the second largest travel & tourism industry in the world,‖ 2006). Major hotels are gearing up for

the 2008 Olympics in Beijing and will be a major force in the industry after the games. However,

the Chinese government has not added the Unites States on the list of countries its citizens are

allowed to visit on leisure (Fingleton, 2006). The Chinese have become a major part of the world

travel numbers, but the U.S. is not reaping the benefits of these travelers. Within China, Macau‘s

tourism and gambling industries are the main reasons for its economic boom in the last several

years after it opened its gaming industry to foreigners in 2001 (―Asia‘s travel industry charges

into 2007,‖ 2007). Macau added 7 new casinos in 2006 with revenues at nearly $7 billion,

making it the number one gambling hub of the world. Within the tourist industry attractions,

casinos are the leaders with large amounts of money flowing through them (―Travel,‖ 2007).

Global casino revenues have experienced enormous growth between 2000 and 2005; however,

Hurricane Katrina destroyed a portion of the casino market in the United States.
                                                                           Boyd Gaming Corp. 13


                                       Porter’s Five Forces

Barriers to Entry: Threat of New Entrants

       The barriers to entry in the casino industry are high which causes the threat of new

entrants to existing companies to be low. Making the barriers to entry high are the impacts of

economies of scale, product differentiation, capital requirements, switching costs, government

policies, and expected retaliation.

       Economies of Scale. Casinos are filled with slot machines, card tables, and other game

tables such as roulette. As a casino acquires more of these items, the higher the casino‘s potential

for profit is. Slot machines alone are expected to bring in as much as 70% of a casino‘s cash

equaling, in some cases, to $300 million (―Slot machine history: Slots through the years,‖ 2007).

       Product Differentiation. Casinos are in the business of creating loyal customers. In order

to attract and retain customers, many casinos offer price reductions in the form of comping some

customer expenses. Transportation may be provided on behalf of the casino in order to get the

customer in the door (Mondello, 1992). Other casinos may offer special rates for groups

(―Meetings and banquets,‖ 2007), extend credit offers (―Casino credit,‖ 2007), or offer different

types of promotions throughout the year (Casino promotions,‖ 2007). Companies in the casino

industry also differentiate their product by designing their properties based on a specific theme

such as Renaissance or New Orleans themed resort (―Boyd buzz,‖ 2006).

       Capital Requirements. The capital requirements necessary to enter into the casino

industry are high. In order to construct a new building that the hotel and casino will operate in

can cost into the billions of dollars (―Boyd Gaming: Investor information,‖ 2006). Updating an

existing building alone can cost into the hundreds of millions of dollars. Construction of the

buildings does not cover other expenses necessary to operate a casino. Other costs such as
                                                                           Boyd Gaming Corp. 14


alcohol, food, advertising, and training increase the amount of capital needed to enter the

industry. The total expenses of a casino can run from a low of $1 million to nearly $10 million

depending on the size of the resort (―Boyd Gaming Corporation: As reported annual income

statement,‖ 2005; ―Harrah‘s Entertainment, Inc: As reported annual income statement,‖ 2005).

       Switching Costs. The switching costs a customer incurs by going to a different casino are

relatively low in most cases. Many casinos are grouped together making leaving one and

entering another as simple as walking across the street. In some cases though, the switching cost

can be higher if a casino offers a reward card (Kontzer, 2004). These cards are used to earn

points on machines in addition to any monetary winnings. The points can then be used for certain

amenities offered by the casino. If a customer leaves a casino and enters another that isn‘t owned

by the same company, he or she will spend money without earning points on the reward card.

       Government Policies. The government policies and regulations can make it difficult to

enter the casino industry. The requirements that must be met in order to obtain proper permits

and licenses vary in each state (―Illinois,‖ 2003; ―Indiana,‖ 2007; ―Louisiana gaming control,‖

2007; ―Gaming statutes and regulations,‖ 2006; ―Mississippi,‖ 2007). In addition to the

requirements differing to obtain permits and licenses, each state varies in the type of gaming

allowed (Smith, 2004). Some states allow lotteries or bingo, but forbid slot machines or card

tables. The Tenth Amendment gives states the authority to regulate these activities.

       Expected Retaliation. Expected retaliation from competitors is high. Casino owners can

expect that if they build a resort and casino, a competitor will come behind them and build bigger

and better accommodations for the same target customers (Shuman, 2006). Companies can also

expect that where they go, others will follow. A recent trend for casino owners is to build in
                                                                            Boyd Gaming Corp. 15


China and American companies are currently competing in China the same way they have in

America for decades.

The Bargaining Power of Suppliers

       Equipment. The bargaining power of suppliers for gaming industry equipment and

machinery is typically low. There are many companies of all different sizes that furnish the

various sections of casinos, hotels, and other tourist attractions in the industry, giving many

options to the corporations to choose from. Since there are a number of different games to be

played at casinos, all of which attract different crowds, most suppliers make sure to have the

traditional slot machines and gaining equipment as well as the newer machines that will attract a

younger audience (―Franklin International Gaming,‖ 1999-2007). This aggressive competition

among the suppliers in the industry keeps them from gaining the bargaining power that some

suppliers may use as an advantage.

       Labor Force. The national unemployment rate is 4.6% as of January 2007 compared to a

5.8% unemployment rate in Las Vegas, Nevada (U.S. Department of Labor, 2005). In the

gaming industry, there were 177,000 jobs available in 2004 with projections of fast growth

through 2014. The recent economic recessions did not affect casino revenues which are growing

each year due to the increasing population and disposable incomes. This industry continues to

expand and generates competition for the job openings that become available.

       Alcoholic Beverages. The power of alcoholic beverage suppliers among companies in the

gaming industry is high in comparison to other merchandise providers. The specific preferences

among customers in this industry regarding alcohol are strong, allowing those favored brands to

dominate that part of the industry. It is very important for the gaming firms to satisfy their

customers in every way and they make sure there is an assortment of beverages to choose from at
                                                                            Boyd Gaming Corp. 16


each facility. Suppliers are well aware of this operation and maintain a large amount of power

among the industry and are able to generate high sales volumes at negotiable prices.

       Entertainment. Bargaining power regarding entertainment suppliers in the industry is

somewhat high due to the extremely differentiated products available. There are a few

entertainment acts and shows each year that gain popularity in the United States. This small,

competitive market is able to demand a particular amount for a specified number of shows and

maintains power over the companies in need of entertainment. As long as popularity among

entertainers is high, the gaming corporations will be able to gain profitability by raising ticket

prices with each increase in supplier costs. However, if entertainment attractiveness declines,

there is a chance these companies could lose the market share to substitute products such as

theatrical productions, amusement parks, or racing tracks.

       Air Travel. Bargaining power of the air travel industry has changed over the last few

years. The economic recession that began in 2001 channeled a decrease in demand of the airline

industry which caused profitability loss for many companies (U.S. Department of Labor, 2005).

Productivity in this supply field has had a tremendous influence over control costs, making it

difficult to profit. Due to the small amount of air travel suppliers and small demand for major

aircraft, there is a low bargaining power over the gaming industry. The two companies must

work together in this case to help generate profit and maintain a stable relationship that links

travel and tourism for the future economy.

The Bargaining Power of Buyers

       Tourists & Gamblers. The most significant group of buyers among the gaming industry is

the tourist customers, particularly the gamblers. Tourism in the United States ranks as the third

largest retail industry, giving that group of customers a large amount of bargaining power
                                                                           Boyd Gaming Corp. 17


(―Hospitality,‖ 2005). Hotels are doing major reconstructions to add new and innovative

facilities for their customers in order to continue the attraction which attains higher proceeds and

satisfy increasing tourist expectations. Due to the extensive lengths companies will go in the

gaming industry, customer satisfaction is becoming harder each year to achieve. Tourists want

greater entertainment and services and gamblers are expecting more and high quality machinery

in the casinos, all at lower prices than their competitors. There are also almost no switching costs

for them to use other facilities with very similar products and attractions making it important for

the existing company to maintain a certain level of approval. This aggressive competition among

gaming corporations led by their buyers show that there is a considerable amount of bargaining

power in the industry.

Threat of Substitute Products

Gaming:

       Lotto and Scratch-offs. Gambling isn‘t always someone sitting at a poker table or behind

a slot machine. Casinos are one of the most popular gambling scenes for visitors, but with new

attractions like playing the lottery and buying scratch-offs, gambling has taken a new face. State

lotteries have gained a significant audience since the colonial times when lotteries were first

introduced for projects such as paving streets and building churches (Berry, 2006). With an

increased popularity for gambling, and thanks to the Internet for providing easier access and

convenience, playing the lottery online has also made a significant impact to the gaming

industry. Some online lottery games mirror those that can be found on the Las Vegas Strip and

some even offer payouts competitive to other gambling facilities (Mapes, 2006). Not all lottery

games are played online, but some are played because buying tickets is fairly convenient and the

chance to win huge is enticing. Some of these games are Powerball, Take Five, and Mega
                                                                           Boyd Gaming Corp. 18


Millions. Scratch-off cards have also become increasingly popular for their convenience,

accessibility, low cost, and, most importantly, instant win.

       Video Lottery Terminals. Video lottery terminals, or VLT‘s, are an alternative to

gambling as the devices resemble traditional slot machines, but they calculate winners differently

(―Video gaming stalled,‖ 2006). Unlike gambling for money, VLT‘s do not qualify as gambling

because you are technically competing in a contest. VLT‘s offer prizes and awards to winners of

the contest versus awarding money (―Gambling law U.S.,‖ 2006). Players of the VLT‘s are not

able to tell the difference between a regular slot machine and a VLT. Generating millions of

dollars last year, VLT‘s have proven to be successful in New York. As stated before, VLT‘s

have also proven to be successful in generating an increase in traffic for racing parks (Coin,

2006; ―Playing slots while the horses trot,‖ 2004).

       Horse and Greyhound Racing. While football remains the number one spectator sport

and gambling event, increased attendance over the past year has made horse racing a close

second place (―Jump racing is pulling in crowds,‖ 2006). With the majority of the audience being

males ranging in age between 35 and 54, this sport shows no sign of slowing down. Racing has

brought about a new segment known as jump racing which is also beneficial in attracting many

race goers to the tracks. Figures show that although people‘s interests have turned from flat

racing to jump racing, there is no concern of a decrease in the population of the sport as a whole.

       Another form of gambling at the tracks is enjoying a night out at the Greyhound Parks.

Greyhound racing has become popular with the younger generation by allowing them to attend

training, feeding, and grooming classes to ultimately give them the opportunity to race their own

dogs (Keller, 2006). Greyhound racing has found to be most popular in states with high poverty

rates due to their low cost betting system (―Gone to the dogs,‖ 2005). Many parks are seeking
                                                                            Boyd Gaming Corp. 19


regulatory approval to add video lottery terminals and slot machines to their venues in hopes of

attracting more people to the sport. Racinos, which are racetracks that harbor video lottery

terminals and slot machines as well, are a way of saving the racetracks and generating state

revenue (―Playing slots,‖ 2004). Gamblers can now not only bet on the races, but also enjoy the

excitement of gambling machines all in one trip to the racetracks.

Non-Gaming:

       Amusement Parks. Forecast for the future shows that spending on theme parks and

amusement parks will increase worldwide between 2006 and 2010 (Golden, 2007). This overall

industry growth is accredited to improvements in global economic conditions that create the

tourist environment such as communication, technology and security, as well as regional changes

that have helped maintain growth on microeconomic levels. In the amusement and theme park

industry, the United States remains the largest market generating 300 million annual visitors

bringing in revenues at $11.2 billion. It is obvious that theme parks remain attractive or else they

would not continue to grow.

       Theatrical Productions/Broadway. The entertainment industry was one of many to feel

the negative effects from the terrorist attacks on September 11, but the popularity of Broadway

shows and theater productions have since been on the rise. Demographic shifts and prices of the

shows have been among many reasons why theater has made a comeback in the entertainment

industry (―Backstage,‖ 2006; Hay, 2003). Casting famous stars like Toni Braxton and Elton John

in popular Broadway musicals have helped attract bigger audiences to the theatrical scene.

Shows like ―Chicago,‖ ―Rent,‖ and ones based on music by ABBA and Elvis Presley, have

experienced enhanced audiences in recent years as well. Just like people have brand loyalty to

certain products, they are also loyal to following their favorite entertainers. The increased
                                                                           Boyd Gaming Corp. 20


attendance to shows can also be attributed to rewards programs offered by Nederlander

Organization, a theatre-chain owner, and Theatre Communication Group, a national organization

for American theatre. Theatergoers are rewarded for their loyalty and attendance by earning

eligibility for VIP access, souvenirs, and even free tickets.

       Disney Theater Productions has not only experienced continued success nationwide, but

has had increased popularity worldwide as well (―Disney Theatrical Productions announces

plans for 2007: On Broadway, on the road, and across the globe,‖ 2007). While enthusiasm for

family-oriented entertainment is on the rise, Disney has seen a positive response nationwide to

shows like ―Tarzan,‖ ―Mary Poppins‖ and ―The Little Mermaid.‖ ―The Lion King‖ is Disney‘s

most celebrated international production, currently bringing in over 2 million guests with more

than 1,000 performances in Australia, China, London, Tokyo, and nationwide tours in the United

States. Leisure and entertainment have widely expanded to areas other than just casinos and

gambling venues.

Intensity of Rivalry Among Competitors

       Existing Gaming Markets. Casinos were legal only in Nevada and Atlantic City until

1985. Today, they operate in more than 20 states and earn billions of dollars annually (Bjorke,

2006). The American Gaming Association reports that a quarter of the U.S. population visited a

casino at least once in 2005 and the number increases every year (―Can gaming‘s hot streak

continue,‖ 2006). Despite these figures, the rivalry within the casino industry is intense and

considered to be cutthroat competition. The growth of the gaming industry in the U.S. is stifled

by the limited number of new markets that are available for expansion. Casinos are competing in

existing markets with mergers, acquisitions, and expansions (Bjorke, 2006). The big casinos

aggressively compete for the premium table game players with incentives, discounts, and
                                                                           Boyd Gaming Corp. 21


amenities (Salmon, Lucas, Kilby, & Dalbor, 2004). The lower end casino operators compete in

the existing markets by purchasing properties that the large casinos do not want to sell to their

main competitors (Tully, 2005). These value-oriented casinos are able to gross profits in the

millions annually from slots and hamburgers.

       New Markets. In the United States, Pennsylvania has opened up the state to gambling

with 14 licenses being applied for by 20 firms. These casino developers are anxiously waiting

with plans and finances in hopes their application is approved. The casino development in this

new market is expected to be in the billions of dollars (―Can gaming‘s hot streak,‖ 2006).

Globally, casinos contribute the majority of the revenues in the tourist industry. Macau has

become a major gambling destination in the world with several U.S. companies taking advantage

of the new market by building resorts in this location. Gambling operators are becoming global

casino companies by expanding into gaming interests worldwide with the help of mergers and

acquisitions (Bjorke, 2006). The rivalry will intensify as new opportunities emerge in new

gaming markets.
                                                                             Boyd Gaming Corp. 22


                                 Analysis of Porter’s Five Forces

       The Porter‘s Five Forces research reveals that the gaming industry is unattractive. The

entry barriers are extremely high with strict government regulations and significant capital

required to get established in this industry. The supplier power is moderate, but with the product

being offered a commodity, the power of the buyer drives the industry with low switching costs

and numerous substitutes available. The intensity of the rivalry among the gaming competitors is

considered cutthroat and entry into the industry will result in retaliation from the competition.

                                              Table 1

                                 Analysis of Porter’s Five Forces

             Barriers To Entry                                High

             Bargaining Power of Buyers                       High

             Bargaining Power of Suppliers                    Moderate

             Threat of Substitute Products                    High

             Intensity of Rivalry                             Cutthroat

             Attractiveness of Industry                       Unattractive
                                                                             Boyd Gaming Corp. 23


                                         Firm Level Ratios

       The strategic group members are Boyd Gaming Corporation, Ameristar Casinos, Inc.,

MGM Mirage, and Harrah‘s Entertainment, Inc. These firms were selected on the basis of

similar strategies currently and in the future, the same target market, and doing business in

multipoint competition. Information was gathered in relation to their future objectives, current

strategy, assumptions, and capabilities. The analysis will better equip our firm to compete in the

gaming industry by being aware of how our competition is operating.

Liquidity Ratios

       Boyd Gaming shows a relatively low current and quick ratio (―Boyd Gaming:

Comparison reports,‖ 2005). This indicates to investors a potential lack in short-term solvency.

The cause of this lack in solvency is due to the increase in current liabilities incurred in the

acquisition of new property, plant, and equipment in 2004 (―Boyd Gaming: Financials,‖ 2005).

Although the ratios show a lack of solvency, this may be the result of a financing decision made

on the part of Boyd.

       Ameristar Casinos shows a high level of liquidity (―Locations & factsheets,‖ 2007). The

main reason behind this may be because of its lack of presence in the highly competitive strip of

Las Vegas. Ameristar‘s assets are in outlying areas such as Missouri and Jackpot, Nevada where

capital costs are much lower.

                                               Table 2

                                           Liquidity Ratios

                    Boyd         Ameristar       Harrah’s       MGM            Industry
Current Ratio       0.66           1.23            1.02         0.66             1.68
Quick Ratio         0.53           1.04            0.77         0.48             1.34

Source: ―Standard & Poor‘s: Research Insight on the Web: Annual Ratios,‖ (2005)
                                                                         Boyd Gaming Corp. 24


Leverage Ratios

       Boyd Gaming‘s leverage ratios indicate that the firm has above the average of credit risk

and a high amount of long term debt (―Boyd Gaming: Ratios and returns,‖ 2007).



                                               Table 3

                                           Leverage Ratios

                   Boyd         Ameristar       Harrah’s       MGM           Industry.
Debt/Equity         2.32          2.02            1.95          3.82            1.23
Debt/Assets        57.82         56.39           53.84         59.71           43.67

Source: ―Standard & Poor‘s,‖ 2005



Activity Ratios

       Boyd Gaming holds one of the highest efficiency rates of any of the corporations in its

industry (―Boyd Gaming: Ratios,‖ 2007). This will be a competitive advantage if the firm

maintains this trait while moving forward with growth plans.



                                               Table 4

                                           Activity Ratios

                   Boyd        Ameristar         Harrah’s      MGM          Industry
Receivables        54.03        164.39            20.88        23.28          14.52
Turnover
Total Asset        0.53             0.71            0.49        0.41           0.46
Turnover

Source: ―Standard & Poor‘s,‖ 2005
                                                                            Boyd Gaming Corp. 25


Profitability Ratios

       The strategic group falls below the industry average in both the return on assets and

return on equity. Boyd Gaming‘s return on assets is much higher than the strategic group even

though they have a large amount of assets not generating revenue with the Echelon Place

opening in 2010 (―Boyd Gaming: Financials,‖ 2005). This relatively high return on assets is due

to a higher level of net profit margin.

                                                Table 5

                                          Profitability Ratios

                       Boyd      Ameristar         Harrah’s      MGM          Industry
    ROA                 3.64       4.79              1.28         2.14           6.26
    ROE                14.67      17.27              4.65        13.70          17.76

Source: ―Standard & Poor‘s,‖ 2005

                                                Table 6

                                          Profitability Ratios

                         Boyd      Ameristar        Harrah’s       MGM              Industry
  Gross Profit
    Margin               46.29        45.87           48.05         45.28             46.37
   Operating
 Profit Margin           16.72        17.64           18.03         18.59             21.62
   Net Profit
    Margin               7.24         6.89             3.71         6.84              9.32

Source: ―Standard & Poor‘s,‖ 2005
                                                                                             Boyd Gaming Corp. 26


Growth Ratios

                               Boyd Gaming has seen dramatic rates of growth in the past (―Boyd Gaming: Financials,‖

2005). Boyd reported a growth in net sales of 28.2% in 2005.



                                                                    Figure 1

                                                                 Net Sales Growth

                             2,500




                             2,000
Net Sales ($ in Millions)




                            1,500



                             1,000




                              500



                               0

                                           2002                 2003                2004               2005
                                                                          Year



                                                     2005 Sales ($ in Millions)             $2,223.0
                                                       1-Year Sales Growth                  28.2%
                                                  2005 Net Income ($ in Millions)           $144.6
                                                   1-Year Net Income Growth                 29.8%
                                                         2005 Employees                     23,400
                                                    1-Year Employee Growth                  21.3%

                                      Source: ―Boyd Gaming: Financials,‖ 2005
                                                                          Boyd Gaming Corp. 27




Stock Analysis

       Boyd Gaming‘s stock is rated by analysts as a strong buy and hold stock (―Boyd Gaming:

Comparison,‖ 2005). It is predicted to be privately bought out like their competitor Harrah‘s, but

at a much higher price (Lipton, 2006). Boyd Gaming‘s growth and overall financial stability give

Boyd‘s stock well rated prices on the open market (―Boyd Gaming: Comparison,‖ 2005).

                                             Table 7

                                          Stock Analysis


                       Boyd         Ameristar       Harrah’s         MGM            Industry
   Stock Price          46.5         31.95           70.31           85.02           58.445
   EPS                  1.80          1.04            2.85            2.29
   P/E                 25.16         29.59           29.68           26.31

Source: ―Standard & Poor‘s,‖ 2005
                                             Table 8

                                  Industry Rankings - Revenues

                      Harrah‘s                         1

                      MGM Mirage                       2

                      Boyd Gaming                      7

                      Ameristar Casinos                13


                     Source: ―Casinos & gaming: Company rankings,‖ 2007
                                                                          Boyd Gaming Corp. 28


                       Competitor Analysis of Strategic Group Members

Boyd Gaming Corporation

       Future Objectives. Boyd Gaming is an industry leader in every market that includes their

properties (―Boyd Gaming annual/ report,‖ 2005). The main emphasis in all the locations will

continue to be the slot revenues since they comprise the majority of the profits for all gaming

activities combined. Boyd plans to progress in the industry with a strategy of expanding existing

properties, develop new markets, and use acquisitions to obtain market share as the competition

is expected to intensify in existing markets.

       Current Strategy. Boyd is consistently assessing opportunities to expand the business,

especially in new markets that are opening up to gambling for the first time (―Can gaming‘s hot

streak,‖ 2006). In 2006, Pennsylvania announced it would begin to accept applications for

gambling establishments. Boyd immediately purchased land near Philadelphia and applied for a

license. Boyd closed the Stardust, a landmark on the Las Vegas strip, during 2006 and will

demolish the building in early 2007 (―Boyd Gaming Corporation,‖ 2007). There will be a resort

hotel, casino, and spa built in its place with plans to open in 2010.

       Las Vegas is a global entertainment center and the fastest growing market for business in

the United States (―About Las Vegas,‖ 2007). Boyd owns several well positioned properties in

this market, but continues to add other amusements to attract customers including bowling,

movie theaters, spas, golf, and RV parks (―Boyd Gaming annual,‖ 2005). Some properties

enhance the gambling experience with horse racing and riverboat gambling. Boyd owns a travel

agency in Hawaii for the main purpose of selling trip packages to Las Vegas. Three of the

downtown Las Vegas properties gain most of their revenues from these Hawaiian visitors.
                                                                           Boyd Gaming Corp. 29


       Assumptions. There is predicted to be fewer new markets to allow new development in

the gaming industry. Boyd understands this will intensify the competition in the existing

markets. The competitors are developing aggressive marketing strategies to overcome market

share loss, but Boyd is committed to maintaining their leadership role in the industry.

       Capabilities. Boyd Gaming is geographically diverse with properties located inside or

within driving distance of major metropolitan areas including Las Vegas, Atlantic City, Houston,

Memphis, and Chicago. In 2006, government agencies in New Jersey closed briefly due to

unresolved budget issues (―No dice, Atlantic City,‖ 2006). The Casino Control Commission and

all casinos in the state were closed. This was a financial blow to Boyd‘s Borgata property in

Atlantic City (―Boyd Gaming annual,‖ 2005). The Gulf Coast hurricanes in 2005 brought

considerable damage to casinos in that area which resulted in tremendous revenue loss. These

setbacks were not detrimental to the overall operations since Boyd‘s properties are located in

various markets.

       Private equity firms are targeting the gaming industry and Boyd is reportedly on the

takeover list (Lipton, 2006). The majority of the ownership is held by the founding family

members, so a takeover is unlikely without the family behind it.

       Boyd‘s future plans of expanding, developing, and renovating will increase their long

term debt already on the books (―Boyd Gaming annual,‖ 2005). All their real and personal

property, not including stock and equity interest, is secured as collateral. The long term debt will

increase susceptibility to adverse conditions in the economy and industry. To accomplish growth

goals, Boyd will need to assure the cash flow in operations will be adequate to pay obligations

for current and future debts.
                                                                           Boyd Gaming Corp. 30


Ameristar Casinos, Inc.

       Future Objectives. Ameristar Casinos has a central business strategy of developing first

class gaming properties (―Ameristar Casinos annual/10k report,‖ 2005). The plan is to evaluate

expansion opportunities to enter new markets in the United States as well as the overseas market.

A joint venture would be considered as part of an expansion opportunity to own and operate new

properties. In addition to expanding, Ameristar hopes to renovate existing properties.

       The recent death of the founder and CEO of Ameristar left behind a vision for growth

(Miller, 2007). The top management contends it will continue to strive to be the best in its

markets and has emphasized that the firm is not for sale due to the death of the founder. (―New

Ameristar executives say company not for sale,‖ 2007). An aggressive plan will be developed for

doubling the size of the organization within the next five years

       Current Strategy. Ameristar uses a hands-on management style and developed a ―best

practice‖ strategy system to increase revenues and minimize costs (―Ameristar Casinos annual,‖

2005). The firm attempted to strengthen its brand by increased marketing during 2005. The

results of these efforts were realized in 2006 when Ameristar broke its records with $1 billion in

net revenues which have been allocated for acquisitions (Bansal & Reiter, 2007).

       Assumptions. Ameristar believes that the competition is not only in the same geographic

markets, but in other locations that take customers from Ameristar including Las Vegas, lotteries,

racetracks, and American Indian casinos (―Ameristar Casinos annual,‖ 2005). The competitors

have the financial resources to increase their holdings with numerous developments. The

allocated funds for acquisitions will give Ameristar the opportunity to successfully grow and

expand in the near future to overcome the competitive advantage of other firms.
                                                                           Boyd Gaming Corp. 31


       Capabilities. Ameristar has properties in six markets and offers restaurants, sports bars,

RV parks, theatres, golf, and hotels to complement the gaming business. Recent acquisitions and

expansion projects in several states are projected to give Ameristar more market share in these

areas (―Ameristar Casinos Inc,‖ 2006). The 2005 Gulf Coast hurricanes left coastal casinos

devastated, but increased customers to the Vicksburg, Mississippi market. This resulted in an

increase in operating income by 40%, or $11.2 million in the same year for Ameristar‘s

Vicksburg location. The 2006 revenues are projected to increase as well, but will probably

decrease in subsequent years as the customers return to the coastal casinos. This set of new

customers will likely return to the Vicksburg casino as an alternative location to gamble in the

future (―Ameristar Casinos annual,‖ 2005).

       Existing markets are changing and increasing the competition within them. The St. Louis

market will have several large casinos built in the next few years which are expected to have an

adverse effect on Ameristar with increased marketing costs and lost revenues. Several Ameristar

casinos are located near states that prohibit gambling, but more of these areas are passing laws to

ease restrictions or legalize gambling which could effect their position in those markets.

       Native American casinos are increasing and the regulations are not as strict. They are not

taxed as stringently which gives them extra revenue for increased marketing. This gives them a

competitive edge over Ameristar which has several casinos near Native American sites.

MGM Mirage

       Future Objectives. MGM Mirage is one of the largest gaming organizations in the world

(―MGM Mirage annual/10k report,‖ 2005). Opportunities for expansion or acquisition are

frequently considered to ensure the firm will provide a complete resort experience for the

customer. MGM Mirage has invested capital over the last several years in existing operations to
                                                                             Boyd Gaming Corp. 32


guarantee a competitive advantage, especially in Las Vegas where the bulk of the revenues are

generated. The MGM Grand Macau will open in 2007 at a cost of $1 billion (―Gambling stocks

start ‘07 with January jolt,‖ 2007). Other future developments include the first urban metropolis

in Las Vegas that will open in 2009 with residential space (―MGM Mirage annual,‖ 2005).

       Current Strategy. MGM Mirage markets its properties to a broad segment of the Las

Vegas gaming market from upper end to travelers looking for value (―MGM Mirage annual,‖

2005). With the majority of the properties located on or nearby the Las Vegas strip, they have

established a competitive edge with properties in locations that are desirable to leisure and

business travelers alike. The few properties that are located outside of Nevada mainly compete

for business from local gamblers. The location and amenities are vital for the success of these

establishments. Technology has aided in maximizing revenues and operational efficiency with

the use of a player card which allows customers to visit any MGM Mirage resort. Customer

information from these cards helps market for repeat business with awards and incentives.

       Assumptions. The gaming industry generates a significant amount of cash flow and

MGM Mirage depends on its net revenues to repay debts, provide funds for capital investment,

and surplus cash for its planned future developments. MGM Mirage has long term debt of $12.4

billion with a large part consisting of interest, but the firm is confident it can borrow additional

funds as needed. During the off-peak periods in the industry, conventions and premium gamers

are relied on for occupancy. MGM Mirage sees its competitors as not being limited to the

geographic regions it has properties in, but rather all the operations in other states and countries

that market to the same set of customers.

       Capabilities. MGM Mirage owns some of the premier gaming resorts in the world on the

Las Vegas strip and is continually acquiring and developing additional properties. It has been
                                                                            Boyd Gaming Corp. 33


successful in entering into joint ventures with its competitors as in the Borgata located in

Atlantic City where Boyd Gaming has a 50% ownership interest (―MGM Mirage,‖ 2006).

         MGM is overall not diverse in geographic locations with the majority of their properties

located on the Las Vegas strip where prices are higher than in other markets. Native American

gaming facilities have expanded rapidly in California and have had an adverse impact on the

entire Nevada gaming industry, including Las Vegas.

Harrah’s Entertainment, Inc.

       Future Objectives. Harrah‘s acquired Caesar‘s Entertainment in 2005 and will use the

most recognized gaming brand in international developments (―Harrah‘s Entertainment

annual/10k report,‖ 2005). The firm intends to expand into Singapore, the Bahamas, Spain, and

Slovenia. In 2005, the Imperial Palace was acquired by Harrahs‘ which is located across from

Caesar‘s Palace. This was an intentional move to position the organization for future expansion

and to have a continuous physical presence on the strip.     .

       Current Strategy. In December 2006, Harrah‘s accepted an offer from two private equity

firms to buy the corporation for $27.8 billion (Stutz, 2006). The deal will take more than a year

to finalize with approvals needed from stockholders and gaming regulators. The new owners will

maintain the management team of Harrah‘s and supports the current strategy of major expansion

projects worldwide.

       Assumptions. When the ownership changes in 2008, Harrah‘s management believes it

will have more latitude to accomplish the planned developments since the investments will not

have to be analyzed by shareholders. The operations and vision of the firm will continue as

usual before and after the buyout is finalized.
                                                                          Boyd Gaming Corp. 34


       Capabilities. Harrah‘s is considered the largest provider of branded gaming activities in

the world which was accomplished through acquisitions of the Caesars and Horseshoe brands

(―Harrah‘s Entertainment,‖ 2006). They also own the World Series of Poker along with casinos

in London, Canada, and Uruguay. During the last decade, Harrah‘s contracted an extensive

research and survey study to gain information on the characteristics of casino players. The firm

sees this as a competitive advantage in understanding the customer and knowing how to respond

to them. Harrah‘s implements advanced marketing tools to reward loyal customers with cash,

incentives, and comps to ensure they return to one of the Harrah‘s properties when gambling.

       Harrah‘s diminished the competitive advantage of the growing Native American casino

market by managing several of the properties. This strategy gives them a competitive edge over

other firms that lose customers to this market (―Harrah‘s Entertainment annual,‖ 2005).

       The aggressive expansion plan in Las Vegas has resulted in disruption of normal

operations which in turn can be beneficial to other gaming organizations in the same area.

Fewer new markets are opening up for gaming development, so competitors are reinvesting in

current locations. The result is a supply that is growing faster than the demand. The short term

effect has been negative for Harrah‘s, but the long term consequences have not been determined.
                                                                           Boyd Gaming Corp. 35


                                   Opportunities and Threats

       The following table shows the opportunities and threats in the external environment and

listed in order of importance.

                                              Table 9

                                    Opportunities and Threats

              Opportunities                                        Threats

Disposable Income                              September 11, 2001

Emerging Global/Domestic Markets               Emerging Global /Limited Domestic Markets

Mergers and Acquisitions                       Cutthroat Competition

Exchange Rates                                 Substitute Products

Jenny Chun v. The State of New York            NCALG



Opportunities

       Disposable Income. The disposable income of the economy continues to rise and gives

the gaming industry continuing success. The baby boomer generation is traveling at a record

pace and has the resources to contribute a great deal to the bottom line of the industry.

       Emerging Global and Domestic Markets. Global markets are opening up for the gaming

industry to expand worldwide. In the United States, laws are being enacted to allow the industry

to expand into new domestic markets as seen recently in Pennsylvania. These new markets will

lessen the competitiveness among the gaming industry firms.

       Mergers and Acquisitions. The current economic climate is encouraging the firms in the

gaming industry to be partners in properties or acquire casinos from other firms. This is

allowing the big casino owners to enlarge their holdings and market share.
                                                                            Boyd Gaming Corp. 36


       Exchange Rates. The American dollar has depreciated in comparison to foreign

currencies. This gives the tourism industry the ability to attract foreign tourists which will

enhance sales in the United States.

       Jenny Chun v. The State of New York. This case allows states to define the legality of

gambling laws in their jurisdictions if the federal laws are unclear. Firms in the gaming industry

can exploit this law to entice states to enact legalized gambling.

Threats

       September 11, 2001. This event in the United States has resulted in a decline of foreign

tourists into the country due to fears of further terrorists attacks and the new regulations when

traveling to the U.S. The resulting war in Iraq has given foreigners a distasteful attitude towards

the U.S. which has kept many people from traveling into the country.

       Emerging Global Markets and Limited Domestic Markets. The gaming industry in

Macau has succeeded in becoming the top location for gambling in the world, surpassing Las

Vegas. Gamblers are choosing to visit this destination which takes revenues away from the

gaming properties in the United States. With very few domestic markets opening up, gaming

firms are highly competitive due to the limited number of available operating locations.

       Cutthroat Competition. The extreme power of the buyer in the gaming industry results in

gaming firms constantly looking for methods to lure the gambler away from the competitors. The

mergers and acquisitions of rival firms, along with new competitors such as the American Indian

reservations, will enhance this rivalry for many years in the future.

       Substitute Products. The switching costs for a gambler is virtually nonexistent. It is

relatively easy to go from one type of gambling to another and go between different locations.
                                                                           Boyd Gaming Corp. 37


With many types of entertainment available, it takes little effort for the consumer to replace

gambling with an alternative.

       NCALG. The National Coalition Against Legalized Gambling can be damaging to the

industry by spreading information about the harmful effects of gambling. Individuals that have

not been a part of this industry may be convinced to not participate in this type of entertainment.
                                                                            Boyd Gaming Corp. 38


                                  Internal Environment Analysis

                                   Mission Statement Analysis

       Boyd Gaming Corporation‘s mission statement reveals what is most important to the

company. Expanding the business and increasing shareholders‘ wealth are some of the top

priorities while defining a specific group of customers and market is not. These conclusions and

others are drawn from comparing the mission statement found below to the nine components of

an effective mission statement.

               ―We, as members of Boyd Gaming Corporation, operate with only

       the highest degree of integrity, and rely on the competence and

       friendliness of each person in our organization to provide entertainment

       and service to satisfy our customers' wants.

               Through teamwork, we strive to maximize shareholder value, to be

       among the leading companies in our industry and to provide opportunities

       for all while we support and enhance our communities (―About us:

       Corporate mission,‖ 2007, para.1&2).‖

       Three of the nine components of effective mission statements are not addressed by Boyd

Gaming in its mission statement (See Table 1). The components not addressed are identification

of customers, identification of markets, and technology. Boyd‘s mission statement does not

directly identify customers. The statement does mention satisfying customers‘ wants, but does

not specifically or generally state who the customers are. The next component not addressed

refers to identifying where Boyd competes, or, its market. Boyd Gaming operates in a total of six

different states (―About us: Company history,‖ 2007), but the mission statement does not state

this fact or name the states that it competes in. Finally, the statement does not address whether its
                                                                            Boyd Gaming Corp. 39


facilities or operations are up to date with the latest technology or any type of technology used

by the company.

       Boyd Gaming Corporation‘s mission statement does address other critical components of

mission statements (See Table 10). The remaining components are products and services,

concern for survival, growth, and profitability, the company‘s philosophy, its self-concept,

concern for public image, and concern for employees. First, the products and services are

addressed. The company uses the broad term of entertainment and services to identify the

product it offers. The mission statement does demonstrate concern for survival, growth, and

profitability obvious by the statement regarding shareholder value and the firm‘s desire to

maximize this value. Boyd also wishes to be an industry leader. Maximizing shareholder value

and becoming an industry leader are critical for a business‘s longevity. Next, the basic

philosophy of the firm is to operate with integrity. This is an ethical priority of the company.

Boyd Gaming has a clear self-concept. By stating that the company relies on its employees to

provide customers with entertainment and other services, it is clear that the employees and

customer service are distinctive competencies. The firm is also concerned for its public image.

The mission statement reveals that the company will take actions that improve the quality of the

community. Finally, Boyd Gaming recognizes that its employees are valuable assets to the

company. Relying on the employees and their competence and friendliness suggests that without

the employees, the company would not be able to provide entertainment and other services that

customers expect.
                                                                Boyd Gaming Corp. 40


                                     Table 10

               Summarizing Chart: Analysis of the Mission Statement

                                                    Boyd Gaming Corporation's
                   Component                            Mission Statement
Customers                                                       No
Products or Services                                            Yes
Markets                                                         No
Technology                                                      No
Concern for Survival, Growth, and Profitability                 Yes
Philosophy                                                      Yes
Self-Concept                                                    Yes
Concern for Public Image                                        Yes
Concern for Employees                                           Yes
  Source: ―About Us: Corporate Mission,‖ 2007
                                                                            Boyd Gaming Corp. 41


                                        Financial Ratio Analysis

                                              Figure 2

                                   Current Ratio – 5 Year Trend

                                   Current Ratio
           2

         1.5                                                                      Boyd
                                                                                  Ameristar
           1                                                                      Harrah's
                                                                                  MGM
         0.5
                                                                                  Industry
           0
           2001           2002         2003              2004        2005
                                    Fiscal Year
                         2001         2002         2003         2004          2005
       Boyd              0.78         1.49          0.80         0.81         0.66
       Ameristar         0.69         0.91          1.33         1.75         1.23
       Harrah's          1.09         1.10          1.17         1.04         1.02
       MGM               0.75         0.81          0.99         0.88         0.66
       Industry          1.09         0.86          1.13         1.45         1.68
       Source: ―Standard & Poor‘s: Research Insight on the Web: Annual Ratios,‖ 2005

       Boyd Gaming‘s current ratio has been below the industry level four out of the last five

years. The current assets have remained stable, but the current liabilities have increased as a

result of new acquisitions and expansions (―Boyd Gaming Corporation: As reported annual

balance sheet: Five years,‖ 2005). Ameristar has shown a strong short term solvency in the last

three years which could be attributed to the location of assets in areas where capital costs are

lower than other markets (―Ameristar Casinos, Inc.: As reported annual balance sheet: Five

years,‖ 2005). Harrah‘s current ratio has slightly declined and could lead to a trend of short-term

insolvency if current assets and current liabilities are not managed properly. MGM Mirage has

consistently operated under the industry average. This shows a possible inability to repay debts if

all debts become due at the same time, which could result in possible bankruptcy.
                                                                             Boyd Gaming Corp. 42


                                               Figure 3

                                    Quick Ratio – 5 Year Trend


                                    Quick Ratio
          1.5
                                                                                  Boyd
            1                                                                     Ameristar
                                                                                  Harrah's
          0.5                                                                     MGM
                                                                                  Industry
            0
            2001          2002          2003          2004          2005
                                    Fiscal Year


                        2001          2002                2003             2004         2005
       Boyd             0.64          1.30                0.64             0.66         0.53
       Ameristar        0.51          0.74                0.89             1.03         1.04
       Harrah's         0.88          0.88                0.92             0.88         0.77
       MGM              0.41          0.47                0.43             0.69         0.48
       Industry         0.69          0.58                0.83             1.12         1.34
       Source: ―Standard & Poor‘s,‖ 2005

       All the firms in the strategic group fell below the quick ratio industry average for the two

most recent years in the trend analysis. Removing inventory from the current assets shows a

better picture of how liquid a company is. If all the short-term loans become due, according to

the quick ratio, none of these firms would have the ability to pay their current liabilities.

Ameristar is the only company in the strategic group that has consistently improved over the past

five years which shows a trend of efficiently trying to repay debts and increase the most liquid

assets available.
                                                                             Boyd Gaming Corp. 43


                                                Figure 4

                                   Debt to Equity - 5 Year Trend



                                   Debt to Equity
       5.00

       4.00                                                                         Boyd
                                                                                    Ameristar
       3.00
                                                                                    MGM
       2.00
                                                                                    Harrah's
       1.00                                                                         Industry
       0.00
          2001            2002           2003              2004       2005

                                         Fiscal Year


                     2001         2002                 2003        2004             2005
     Boyd            3.23         3.00                 2.49        2.44             2.32
     Ameristar       3.97         3.76                 2.79        2.37             2.02
     MGM             2.11         1.96                 2.18        1.97             3.82
     Harrah's        2.71         2.56                 2.11        2.53             1.95
     Industry        1.65         1.85                 1.84        0.92             1.23
       Source: ―Standard & Poor‘s,‖ 2005

       Every company within the strategic group operates above the industry average of debt to

equity. This indicates that each firm is viewed as having an above average level of credit risk.

Boyd Gaming has expanded at an aggressive rate within this time period as compared to the

other firms (―Ameristar Casinos, Inc.: As reported annual balance sheet: Five years,‖ 2005;

―Boyd Gaming Corporation: As reported annual balance sheet: Five years,‖ 2005; ―Harrah‘s

Entertainment, Inc.: As reported annual balance sheet: Five years,‖ 2005; ―MGM Mirage: As

reported annual balance sheet: Five years,‖ 2005). However, Boyd has managed to improve its

debt to equity ratio despite additional debt.
                                                                           Boyd Gaming Corp. 44


                                             Figure 5

                           Total Debt/Total Assets (%) - 5 Year Trend


                        Total Debts/Total Assets (%)

      80.00
                                                                                  Boyd
      60.00
                                                                                  Ameristar
      40.00                                                                       Harrah's
                                                                                  MGM
      20.00
                                                                                  Industry
        0.00
           2001           2002          2003            2004        2005
                                    Fiscal Year


                     2001          2002            2003           2004              2005
    Boyd             65.29        64.24            58.68          58.94             57.82
    Ameristar        71.01        69.00            62.06          58.25             56.39
    Harrah's         61.22        60.23            55.84          60.02             53.84
    MGM              52.07        49.71            51.64          49.16             59.71
    Industry         51.95        53.57            52.63          30.35             43.67
      Source: ―Standard & Poor‘s,‖ 2005

       The debt to assets ratio is the percentage that a business is financed through debt. The

strategic group members have operated above the industry average with the exception of MGM.

MGM fell slightly below the average in 2002. The industry average dropped significantly in

2004 even though the industry was gaining momentum through renovations and acquisitions.

Boyd Gaming has had a consistent debt to assets ratio during the last several years. The addition

of new debt associated with newly acquired properties has not increased this ratio which is

evidence of Boyd‘s ability to successfully manage growth. MGM‘s debt increased by $7 million

in 2005 due to major renovations at existing properties (―MGM Mirage: As reported annual

balance sheet: Five years,‖ 2005) and Harrah‘s acquired Caesar‘s in 2004 (―Harrah‘s
                                                                       Boyd Gaming Corp. 45


Entertainment, Inc. Annual/10K Report,‖ 2004) which accounts for the considerable increase in

their debt to asset ratios.
                                                                               Boyd Gaming Corp. 46


                                              Figure 6

                               Receivables Turnover - 5 Year Trend


                                   Receivables Turnover

         200.00
                                                                                      Boyd
         150.00
                                                                                      Ameristar
         100.00                                                                       Harrah's
                                                                                      MGM
          50.00
                                                                                      Industry
           0.00
              2001          2002            2003              2004            2005
                                        Fiscal Year


                      2001          2002              2003            2004             2005
     Boyd             63.42        56.64              55.35           51.31            54.03
     Ameristar        93.11        69.19              69.68          138.63           164.39
     Harrah's         23.38        29.98              32.75           29.95            20.88
     MGM              19.65        27.13              27.02           23.98            23.28
     Industry         14.87        21.37              23.93           20.34            14.52
       Source: ―Standard & Poor‘s,‖ 2005

         The five year receivable turnover timeline demonstrates Boyd Gaming‘s impressive

standing against the industry average. Boyd‘s turnover rate more than doubles the turnover rate

of MGM and Harrah‘s. The timeline also shows that Boyd‘s receivable turnover has decreased

consistently over the past five years. Boyd‘s turnover rate, however, is less than a third of its

competitor Ameristar Casinos. This advantage has helped Ameristar remain the group leader in

liquidity as well. As liquidity is a risk mentioned in Boyd‘s annual report, a more efficient

collection system may help reduce this risk (―Boyd Gaming corporation annual/10K report,‖

2006).
                                                                              Boyd Gaming Corp. 47


                                                Figure 7

                                Total Asset Turnover – 5 Year Trend


                                Total Asset Turnover
        0.80
                                                                                      Boyd
        0.60                                                                          Ameristar
        0.40                                                                          Harrah's

        0.20                                                                          MGM
                                                                                      Industry
        0.00
            2001           2002          2003              2004        2005
                                      Fiscal Year


                      2001          2002              2003            2004              2005
     Boyd             0.66          0.67              0.66            0.60              0.53
     Ameristar        0.70          0.68              0.68            0.69              0.71
     Harrah's         0.66          0.66              0.67            0.60              0.49
     MGM              0.37          0.38              0.37            0.39              0.41
     Industry         0.49          0.53              0.55            0.49              0.46
       Source: ―Standard & Poor‘s,‖ 2005

       Evaluation of total asset turnover shows Boyd Gaming‘s consistent performance above

the industry average for the past five years. Although the turnover average has been declining,

this is a result consistent with the company‘s plan of expansion and differentiation. At this time,

Boyd owns large amounts of assets that are not yet generating revenue. One example is Echelon

Place; a 24 acre casino on Las Vegas‘s strip which will open in 2010 (―Boyd Gaming unveils

Las Vegas strip development plan,‖ 2006). MGM‘s total asset turnover has remained consistent,

but Harrah‘s plummeted significantly in 2005. Ameristar, however, has shown only slight

variation in its total asset turnover ratio. Although it is higher than Boyd‘s, it is consistent with

Ameristar‘s plan to focus on renovation of existing properties (―Ameristar Casinos, Inc.

Annual/10K Report,‖ 2005).
                                                                          Boyd Gaming Corp. 48


                                             Figure 8

                               Gross Profit Margin - 5 Year Trend

                                   Gross Profit Margin

         60
         50                                                                 Boyd
         40                                                                 Ameristar
         30                                                                 Harrah's
         20                                                                 MGM Mirage
         10                                                                 Industry
          0
          2001         2002         2003         2004        2005
                                Fiscal Year

                      2001          2002           2003           2004            2005
      Boyd            42.36        44.09           41.32          43.58           46.29
      Ameristar       45.31        46.67           45.21          45.72           45.87
      Harrah's        26.50        27.80           46.75          47.09           48.05
      MGM             44.95        45.55           44.69          45.90           45.28
      Industry        39.78        41.03           44.49          45.57           46.37
       Source: ―Standard & Poor‘s,‖ 2005

       Boyd Gaming ended 2005 with its gross profit margin at the highest level over the five

year analysis. Boyd and the strategic group members have been relatively consistent in

maintaining the gross profit margin near the industry average. These figures show that the

gaming industry has opportunity for all the firms to make substantial profits despite the intense

competition.
                                                                           Boyd Gaming Corp. 49


                                             Figure 9

                   Operating Profit Margin (After Depreciation) - 5 Year Trend


                       Operating Margin (After Depreciation)

        25.00
                                                                                 Boyd
        20.00
                                                                                 Ameristar
        15.00
                                                                                 Harrah's
        10.00
                                                                                 MGM
         5.00
                                                                                 Industry
         0.00
            2001           2002         2003            2004        2005
                                     Fiscal Year


                        2001          2002         2003           2004             2005
    Boyd               10.51         13.69         12.27          13.06            16.72
    Ameristar          18.32         17.25         18.10          18.68            17.64
    Harrah's           16.33         18.88         17.09          17.67            18.03
    MGM                16.68         17.93         17.04          19.75            18.59
    Industry         12.75        15.07            15.25          17.48            21.62
      Source: ―Standard & Poor‘s,‖ 2005

       The five year timeline of Boyd Gaming‘s strategic group gives good insight into

management efficiency. Boyd‘s operating margin over the five year period shows margins

consistently below that of the industry average and competitors. However, Boyd does

demonstrate an increase in its margins over the period, giving hope that the margins will

continue to improve. Ameristar, MGM, and Harrah‘s also show operating margins below that of

the industry average in 2005.
                                                                           Boyd Gaming Corp. 50


                                              Figure 10

                                Net Profit Margin - 5 Year Trend


                           Net Profit Margin

        10
                                                                                 Boyd
         8
                                                                                 Ameristar
         6
                                                                                 Harrah's
         4
                                                                                 MGM
         2
                                                                                 Industry
         0
         2001           2002           2003           2004          2005
                                   Fiscal Year

                     2001          2002             2003           2004             2005
    Boyd             2.26          3.92             3.27           6.43             7.24
    Ameristar        5.31          5.81             6.09           7.25             6.89
    Harrah's         5.63          7.85             6.75           7.24             3.71
    MGM              4.29          7.28             6.07           8.26             6.84
    Industry         1.37          4.87             4.76           7.07             9.32
      Source: ―Standard & Poor‘s,‖ 2005

       The net profit margin is shown as a percentage of sales. The five year timeline reveals

that the entire strategic group falls below the industry average in 2005. A huge change occurred

in the net profit margin for Harrah‘s Entertainment. The margin fell from 7.24 in 2004 to 3.71 in

2005. Boyd however, led the strategic group in 2005 with a far superior margin of 7.24. This

staggering margin, in comparison with the strategic group, still falls below the industry average.

However, Boyd shows impressive growth in its net profit margin over the five year timeline.
                                                                          Boyd Gaming Corp. 51


                                             Figure 11

                             Return on Assets (ROA) - 5 Year Trend


                         Return on Assets (ROA)

         8
                                                                                Boyd
         6                                                                      Ameristar
         4                                                                      Harrah's

         2                                                                      MGM
                                                                                Industry
         0
          2001          2002          2003           2004          2005
                                   Fiscal Year


                     2001          2002            2003           2004             2005
    Boyd             1.42          2.52            2.19           2.84             3.64
    Ameristar        3.73           3.5            4.12           4.71             4.79
    Harrah's         3.41          5.11            4.44           3.84             1.28
    MGM              1.63          2.79            2.21           3.15             2.14
    Industry         0.56          2.61            2.51           3.12             6.26
      Source: ―Standard & Poor‘s,‖ 2005

       The return on assets ratio over a five year period shows dramatic growth for Boyd

Gaming. Ameristar Casinos, holds an impressive return on assets, but doesn‘t show the growth

that Boyd does over the five year period. This ratio is impressive for Boyd taking into

consideration the amount of assets purchased in this five year period and the consistent growth in

return even though not all of the assets purchased are generating profit (―Boyd Gaming

Corporation: As reported annual balance sheet: Five years,‖ 2005).
                                                                           Boyd Gaming Corp. 52


                                             Figure 12

                                 Return on Equity - 5 Year Trend


                            Return on Equity

         25
                                                                                 Boyd
         20
                                                                                 Ameristar
         15
                                                                                 Harrah's
         10
                                                                                 MGM
          5
                                                                                 Industry
          0
          2001           2002         2003          2004          2005
                                  Fiscal Year


                      2001          2002            2003           2004              2005
     Boyd              7.05        11.80             9.28          11.81             14.67
     Ameristar        21.16        20.05            18.61          19.29             17.27
     Harrah's         15.21        22.07            16.79          16.19              4.65
     MGM               6.79        10.99             9.36          12.62             13.70
     Industry          1.79         9.47             8.80           9.49             17.76
       Source: ―Standard & Poor‘s,‖ 2005

       The return on shareholder investments for all companies in the strategic group stayed

above the industry average until 2005. At that time, the entire strategic group fell under the

industry average as it almost doubled from the year before. Boyd shows an overall upward trend

in providing shareholders a profitable return on their investments in the company. Harrah‘s

profitability for shareholders fell significantly in 2005 due to increased operating expenses,

interest expenses, and income taxes (―Harrah‘s Entertainment, Inc. Annual/10K Report,‖ 2005).
                                                                          Boyd Gaming Corp. 53


                                         Stock Analysis

                                             Figure 13

                                  5 Yr % Change in Stock Price




Source: Price History, 2007

       Boyd gaming shows impressive dominance over its strategic group in stock growth. In

2005, Wall Street Journal‘s Shareholder Scoreboard ranked Boyd‘s stock sixth for best

performing companies for highest five year return (―Boyd Gaming annual report 2005,‖ 2006).

Boyd‘s stock shows fluctuations throughout 2006 following the October sale of South Coast

Hotel and Casino and repurchase of 3.4 million shares of common stock (―Boyd Gaming

Annual/10K Report 2006,‖ 2007). Boyd‘s stock price has a current 52-week high of 54.72 and is

presently being traded below the price of its strategic group members, MGM Mirage and

Harrah‘s Entertainment (―Boyd Gaming: Stock quote,‖ 2007; ―Price history,‖ 2007). With a 52-

week low, however, of only 33.10 Boyd‘s current trading price is still higher than that of

Ameristar Casinos (―Price history,‖ 2007).
                                                                          Boyd Gaming Corp. 54


                                              Figure 14

                           Diluted Earnings per Share - 5 Year Trend

                     Diluted Earnings Per Share
        3.5
          3
        2.5                                                                      Boyd
          2                                                                      Ameristar
        1.5                                                                      Harrah's
          1
                                                                                 MGM
        0.5
          0
           2002          2003          2004          2005          2006

                                  Fiscal Year

                      2002         2003        2004          2005            2006
    Boyd              0.73          0.62        1.42          1.82            1.80
    Ameristar         0.75          0.88        1.11          1.16            1.04
    Harrah's          2.07          2.65        3.26          1.57            2.85
    MGM               0.93          0.82        1.48          1.56            2.29
      Source: ―Ameristar Casinos, Inc. Annual/10K Report,‖ (2006), ―Boyd Gaming
      Corporation Annual/10K Report,‖ (2006), ―Harrah‘s Entertainment, Inc. Annual/10K
      Report,‖ (2006), ―MGM Mirage Annual/10K Report,‖ (2006).

       The diluted earnings per share ratio (EPS) takes into account all of a firm‘s potential

outstanding shares developing a more precise picture of how much profit has been generated for

every share of stock. Boyd Gaming has shown impressive improvements with a 150% increase

in EPS over the last five years. However, the EPS does not take into account the increase or

decrease in assets. Boyd has been acquiring assets and has become the fifth largest gaming firm

in the U.S. (Hoover‘s company records- In-depth records: Boyd Gaming Corporation, 2007). The

addition of Echelon Place and a Florida property will increase Boyd‘s assets further in the next

few years (―Boyd Gaming annual report,‖ 2006). Taking into account additional assets, Boyd has

successfully grown while simultaneously increasing earnings. Since 2002, MGM Mirage has

increased its EPS by 150%. Ameristar and Harrah‘s have increased their EPS by 38%.
                                                                             Boyd Gaming Corp. 55


                                              Figure 15

                        Year End Price per Earnings Ratio - 5 Year Trend

                           Year End P/E Ratio

          40

          30                                                                     Boyd
                                                                                 Ameristar
          20
                                                                                 Harrah's
          10                                                                     MGM
           0
            2002         2003          2004         2005         2006
                                   Fiscal Year


                       2002           2003           2004            2005           2006
       Boyd           19.27           26.09          29.24           26.24          25.16
       Ameristar       9.39           13.94          19.35           19.56          29.59
       Harrah's       15.93           21.05          23.65           33.85          29.68
       MGM            18.22           24.76          30.48           24.96          26.31
       Source: ―Ratios,‖ (2007).

       Investor confidence in the gaming industry is revealed in the price per earnings (P/E)

ratios over the last five years. Boyd Gaming‘s income and stock prices have steadily increased

over this time period. A slight decrease in the P/E ratio occurred at the end of 2005 for Boyd and

MGM Mirage because several properties were closed as a result of the Gulf Coast hurricanes.

Ameristar has caught the attention of the investors as its P/E ratio has tripled since 2002.

Harrah‘s had a significant earnings increase in 2005 after the 2004 purchase of Caesar‘s which is

reflected in its ratio. At the end of 2006, the private equity firm‘s buyout of Harrah‘s was

announced and the anticipated decrease in stock prices resulted in a lower P/E ratio. Overall,

increases in the ratios over the past 5 years indicate that investors are expecting higher earnings

growth in the future for the strategic group members.
                                                                             Boyd Gaming Corp. 56


                                             Table 11

                                          Beta Analysis

                     Company                                     Beta Coefficient

                       Boyd                                            .13
                     Ameristar                                         1.01
                       MGM                                             .59
                     Harrah‘s                                          .57
                 Industry Average                                      1.41
       Source: ―Ratios,‖ 2007

       The beta coefficient shows sensitivity a stock has to the movement of the market. The

beta for all of the stocks falls below the industry average. Ameristar Casinos holds a beta of 1.01

and is closest to the industry average of 1.41. Boyd‘s stock has a beta of .13. This shows that

Boyd‘s stock is less sensitive to the movement of the market than that of its competitors. This

sensitivity may attract risk adverse investors, especially during times of possible economic

turmoil.
                                                                          Boyd Gaming Corp. 57


                                   Corporate Level Strategy

       Boyd Gaming divides the business units into five geographic regions: Las Vegas locals,

Stardust, Downtown Las Vegas, Central Region and The Borgata. The Las Vegas locals segment

consists of Gold Coast Hotel and Casino, The Orleans Hotel and Casino, Sam‘s Town Hotel and

Gambling Hall, Suncoast Hotel and Casino, Eldorado Casino, and Jokers Wild Casino (―Boyd

Gaming Annual/10K Report 2006,‖ 2007). The Downtown Las Vegas properties include Boyd‘s

unique market niche of a large Hawaiian tourist customer segment. It also includes the California

Hotel and Casino, Fremont Hotel and Casino and Main Street Station Casino, Brewery and

Hotel. Sam‘s Town Hotel and Gambling Hall, Par-A-Dice Hotel Casino, Treasure Chest Casino,

Blue Chip Casino and Hotel, Delta Downs Racetrack Casino and Hotel, and Sam‘s Town Hotel

and Casino are all properties that create Boyd Gaming‘s Central Region. The Borgata business

unit, Boyd‘s joint venture with MGM Mirage, located in Atlantic City, New Jersey, completes

Boyd‘s geographic regions.

       Each geographic region contributes a certain percentage of gross revenues to Boyd‘s

operations. The Las Vegas locals‘ market represents 38% of gross revenues as of the year-end of

2006 (―Boyd Gaming Annual/10K Report 2006,‖ 2007). The Stardust contributes 5% of gross

revenues, the Downtown Las Vegas properties region represents 11%, and the Central region

contributes the largest percent with 43% of gross revenues. The newly developed property,

Borgata, amounts to only 3% of Boyd‘s gross revenues at 2006 year-end.

       Boyd’s Related Constrained Diversification Strategy. Boyd Gaming achieves corporate

relatedness through sharing management expertise, supplier relationships, employee based

diversification, and cash flow (―Boyd Gaming annual report 2005,‖ 2006). By sharing these

significant support resources and capabilities, Boyd is adding value to each business unit. To
                                                                            Boyd Gaming Corp. 58


continue to support expansion and growth, Boyd made changes in 2005 which enhanced the

management team and their initiatives. Throughout 2004, increased strength and performance

was evident in the company. Broad diversification benefits delivered by outstanding

management expertise were the cause of increased strength and performance. With newly

diversified management expertise, Boyd was able to successfully implement a strategic supplier

procurement program called BeST. This program utilizes the Internet to efficiently conduct

business-to-business transactions between current and potential suppliers and Boyd.

       Boyd Gaming‘s business operations are largely dependent upon their goals for diversity

in employees. Boyd believes that by conducting transactions with both minority- and women-

owned businesses, there are endless opportunities to achieve shared information and experience.

The company uses the BeST supplier portal to embrace new and valuable opportunities and

increase Boyd‘s diversity among employees and suppliers. Boyd is also dedicated to sharing

financial economies of scope by market segment and globally. Focusing on large cash flow

business units allows Boyd to continue its mission of expansion and growth with a specialized

value creating focus. The strong operational and financial base helps Boyd strategically focus on

stable tax and regulatory structures. Diversifying resources also allows Boyd to expand

successful business units, creating significant cash flows. With initiatives focused on market

leading properties in prime markets, Boyd is able to monitor potential opportunities for growth.

       Boyd has successfully gained a competitive advantage over its strategic group members

by efficiently implementing a value creating corporate level strategy. Boyd‘s corporate related

linked diversification strategy is achieved by their use of shared support activities across each

business unit.
                                                                          Boyd Gaming Corp. 59


                                    Business Level Strategy

       Before deciding on a business level strategy, Boyd‘s management team had to decide

who its customers would be, what needs they would have, and how their needs would be met. A

person must be 21 years old to gamble so Boyd‘s customers are a large segment of the

population. Individuals age 21 or older can participate in any of the entertainment the company

offers. Because the target customer is so varied, deciding what needs the customer has can be

more difficult. Gamblers can enjoy several different types of games while other customers may

visit a Boyd location for non-gaming entertainment.

       Boyd Gaming Corporation operates under a business level strategy of broad

differentiation. The products the company offers increase the level of entertainment customers

experience and target a broad segment of the population. The company operates in six different

states, owns sixteen properties either entirely or partially (―About us: Company history,‖ 2007),

and offers numerous types of entertainment (―Boyd Gaming: Properties,‖ 2007). In a sense,

Boyd has some sort of entertainment for everyone, but not all entertainment is valuable to all

customers.

       Through research and development, Boyd has identified themes and specific types of

entertainment that create value for different customers. Studying trends in the economy and

popular culture has lead the company to develop entertainment packages, hire certain performers,

and adjust monetary rates for guest rooms, gambling, and other services. For example, at Sam‘s

Town Las Vegas, Professional Bull Riders (PBR) packages are available (―Boyd Gaming:

Package deals,‖ 2007). The packages range from $230 to approximately $1,300. If package

features increase the level of entertainment a customer experiences, then the customer is willing

to pay more for the desired features. Room prices also vary throughout Boyd‘s properties. At the
                                                                             Boyd Gaming Corp. 60


Blue Chip Hotel and Casino, a non-smoking room with a king size bed is currently available for

$95.00 (―Rates and availability: Arrival and room information,‖ 2007), but a similar room at the

Borgata for the same night starts at $229 (Reservationist, personal communication, March 31,

2007).

         Differences in prices at different locations are due to the features and other amenities

available at the hotels and casinos. The Blue Chip Hotel and Casino offers several entertainment

acts, but most acts are cover bands or relatively unfamiliar local bands (―Blue Chip

entertainment,‖ 2007). On the other hand, the Borgata offers better known acts such as legendary

Diana Ross, American Idol Taylor Hicks, and Rod Stewart (―Borgata‘s event calendar,‖ 2007).

Spa treatments offering massages and facials, as well as, a salon located inside the resort also

differentiate this property from others in the Boyd Gaming Corporation (―Spa Toccare,‖ 2007).

Other Boyd locations offer entertainment such as a brewery located in a resort, a bowling alley, a

golf course, and even bingo (―Boyd Gaming: Properties,‖ 2007).

         Boyd differentiates gaming activities as well. While most properties are traditional slot

machine and game table casinos located on land, Boyd does offer riverboat casinos and horse

racing to its customers (―Boyd Gaming: Properties,‖ 2007). In addition, the slot machine and

game table monetary requirements vary. For example, the Treasure Chest Casino promotes a

Penny Parlor and notes that a $5,000 maximum exists for certain table games (―Casino,‖ 2007).

At the Borgata, a registration fee is required to enter card game tournaments (―Borgota‘s poker

tournaments,‖ 2007). All of these, and more, differences create value for individual customers.

Research and development has allowed Boyd to recognize that these differences are important.

         The Boyd Gaming Corporation is also able to differentiate its products because of the

core competencies in its management team and successful mergers and acquisitions. The
                                                                           Boyd Gaming Corp. 61


management team is composed of several members who are also on the board of directors for

banks and individuals with long term experience in the gaming industry and legal field (―About

us: Executive bios,‖ 2007). This knowledgeable management team makes decisions that have

proven to be beneficial for the company. Because of the experience the team has, they are aware

of what makes casinos profitable when trying to differentiate a property. Management has been

able to identify and create value adding services and amenities. Successful mergers and

acquisitions have also enabled Boyd to differentiate its products. By acquiring properties, Boyd

is able to add new themes or new services to its line of products. The product offered by the

previous owner becomes a product that Boyd offers. Merging with a company creates similar

benefits as acquiring properties.

       Online advertising is an important part of the business level strategy. Boyd‘s corporate

website is not as detailed as the websites for individual properties. Individual property websites

display pictures of customers, services, and appearances of the facilities, and each website is

very different. When looking at the Borgata website, pictures of upscale rooms, lounges, and

playing rooms are displayed along with images of younger, attractive guests (―Stay,‖ 2007).

Other locations show less glamorous lodging and gaming rooms and sometimes picture an older

generation of guests (―Casino,‖ 2007; ―Main Street Station: Brewery, Casino and Hotel,‖ 2007;

―Blue Chip Casino and Hotel,‖ 2007). Online advertisements demonstrate to potential customers

what the facilities offer putting the customer in a better position to choose which location is more

valuable to him or her.
                                                                             Boyd Gaming Corp. 62


                                          Core Competencies

                                                  Table 12

                                               VRIO Test

                                         Costly to    Organizationally    Competitive       Economic
 Competency       Valuable      Rare     Imitate         Exploited        Implication      Performance
                                                                           Sustained
Family Operated                                                           Competitive            Above
   Business          Yes        Yes         Yes              Yes           Advantage             Normal
                                                                           Sustained
 Geographic                                                               Competitive            Above
  Diversity          Yes        Yes         Yes              Yes           Advantage             Normal
  Mergers                                                                  Sustained
    and                                                                   Competitive            Above
 Acquisitions        Yes        Yes         Yes              Yes           Advantage             Normal
                                                                           Sustained
   Strategic                                                              Competitive            Above
  Financing          Yes        Yes         Yes              Yes           Advantage             Normal
 Management                                                                Sustained
      and                                                                 Competitive            Above
Board Members        Yes        Yes         Yes              Yes           Advantage             Normal

   Family Operated Business

           Boyd Gaming was founded 30 years ago by the Boyd family and today the family owns

   36% of the outstanding shares of Boyd‘s common stock (―Boyd Gaming,‖ 2006). The family‘s

   ownership influences the firm‘s operations on all levels. The election of directors and the

   approval or disapproval of stockholder decisions, including mergers and the sale of assets, is

   essentially controlled by Boyd family objectives. The majority ownership of the firm by the

   family is a valuable asset in the current takeover climate. Buyouts of U.S. gaming firms are

   expected to increase in 2007 with appreciating values in real estate and numerous options in

   financing available (Aubin, 2007). Boyd Gaming is positioned to neutralize takeover threats in

   the external environment because ownership will not be taken over unless the family is willing to

   sell.
                                                                            Boyd Gaming Corp. 63


       Family operated gaming firms with majority ownership are rare in the gaming industry.

Strategic group members do not benefit from this opportunity in the marketplace. Ameristar‘s

CEO and founder owned 56% of the company‘s common stock at his death in November 2006

(―Ameristar Casinos, Inc. Annual/10K Report,‖ 2006). These shares have been passed to the

estate with a majority going to a private foundation. The estate, beneficiaries, and private

foundation will sell shares to pay estate taxes and legal obligations further diluting the majority

ownership of the founding family member. MGM Mirage is 56% owned by an investment

corporation (―MGM Mirage Annual/10K Report,‖ 2006). Harrah‘s was recently bought out by

private equity firms and will no longer be a publicly traded company (―Harrah‘s Entertainment,

Inc. Annual/10K Report,‖ 2006).

       A family operated business has a unique culture and stakeholder relationships. It is

difficult to duplicate this type of corporate environment and could be costly for family members

to become majority shareholders in firms if they are not already.

       Boyd Gaming‘s insider management has extensive control over the operations of the firm

(―Boyd Gaming,‖ 2006). The organization supports the family‘s influence with family members

in top management positions. The firm can capitalize on the capability and willingness of the

family to operate the business in a manner that promotes above average returns and give Boyd a

sustainable competitive advantage in the marketplace.

Geographic Diversity

       Geographic diversity is a valuable competitive strength that contributes to Boyd

Gaming‘s success (―Boyd Gaming Corporation Annual/10K Report,‖ 2006). Boyd has

experienced hurricane damage to several Gulf Coast casinos in 2005, recent profit declines in the

Las Vegas market, and is predicting a loss in sales for a property located nearby a planned
                                                                             Boyd Gaming Corp. 64


American Indian casino. However, due to the geographic diversity of Boyd, setbacks in these

different locations are not detrimental to the organization as a whole. Other major gaming firms

are diverse in locations and market segments, but the extent of Boyd‘s geographic diversity is

rare. Few gaming competitors are able to benefit from this resource as significantly as Boyd

does. Ameristar operates in five markets with a single casino in each segment as well as two

casinos in Jackpot, Nevada (―Ameristar Casinos, Inc. Annual/10K Report,‖ 2006). Although

Ameristar is diverse geographically, it is not in prime locations such as Las Vegas. MGM Mirage

has limited geographic diversification primarily being located in one location, Las Vegas

(―MGM Mirage Annual/10K Report,‖ 2006). The majority of MGM Mirage‘s revenues are

derived from the Las Vegas properties exposing the company to risks associated with this

particular market. Harrah‘s is one of the few competitors in the gaming industry that also has a

geographic diversity advantage (―Harrah‘s Entertainment, Inc. Annual/10K Report,‖ 2006).

       A firm that is not geographically diversified can be at a cost disadvantage position in the

marketplace. Unpredictable events such as economic downturns, natural disasters, or local

terrorist activity can have a significant effect on operating revenues if no other locations exist to

offset the losses. Imitating this resource with acquisitions and mergers can be costly. Boyd is

organized to benefit from its geographic diversity by marketing the varied properties and

amenities to locals, tourists, and low to high-end gamblers in different market segments (―Boyd

Gaming Corporation Annual/10K Report,‖ 2006). Boyd has become a leader in every gaming

jurisdiction in which it is located, making the geographic diversity a sustainable competitive

advantage.
                                                                          Boyd Gaming Corp. 65


Mergers and Acquisitions

       In the last five years, Boyd has been involved in a number of mergers and acquisitions

that have created a valuable strength for the company. Expansion and growth are important to the

success of Boyd Gaming because they add value to the company by diversifying and satisfying

the demands of different customers groups. Each merger and acquisition implemented has

created a valuable competitive advantage over Boyd‘s competitors. In October of 2002, Boyd

acquired Harrah‘s Isle of Capri property in Tunica County, Mississippi with the intention to use

the property‘s theaters and hotels for entertainment operations only (―Boyd Gaming completes

purchase of Tunica property from Isle of Capri,‖ 2002). Boyd planned to keep the casino closed

permanently upon the $75 million acquisition as it is strategically located next to Boyd‘s Sam‘s

Town property. In 2003, Boyd entered into a joint venture with its competitor MGM Mirage to

open the Borgata in Atlantic City, New Jersey (Haines & Quick, 2005). The property has

allowed Boyd to gain market share over its rivals due to numerous opportunities for real estate

expansion and the great roadway infrastructure between New York and Pennsylvania to Atlantic

City. The Borgata is currently in its second phase of expansion which is the result of

overwhelming popularity and immense customer demand (―Master plan development,‖ 2007).

In 2004, Boyd Gaming acquired two more properties. First, Boyd bought the Barbary Coast

Casino and Hotel from Coast Casinos, Inc. through a merger in which Coast became a wholly

owned subsidiary of Boyd Gaming (―Boyd Gaming completes Coast Casinos merger,‖ 2004).

The merger created value by giving Boyd the opportunity to expand the Las Vegas locals market

while also acquiring a new strategic team to strengthen operations. However, in 2006, Boyd

entered an agreement with Harrah‘s Entertainment to trade the Barbary Coast Casino and Hotel

property for twenty-four adjacent acres on the Las Vegas Strip in a tax deferred exchange
                                                                           Boyd Gaming Corp. 66


(―Boyd Gaming announces agreement to sell Barbary coast to Harrah‘s Entertainment,‖ 2006).

The acquired land on the strip is strategically located next to Boyd‘s Echelon Place development

site, formerly the Stardust, and is considered quite valuable. The second acquisition of 2004 was

the $190 million transaction in which Boyd bought Harrah‘s Shreveport Riverboat property

(―Louisiana Gaming Board approves Boyd Gaming acquisition of Shreveport riverboat,‖ 2004).

Once the Louisiana Gaming Board announced approval of the acquisition, the ownership

transition period took one day. The property reopened as Sam‘s Town Shreveport. Boyd entered

the acquisition to gainfully integrate the company, and create a strategic stake in the Louisiana

market. The purchase of the Dania Jai Alai and forty-seven acres of related land located on

Dania Beach, Florida is Boyd‘s most recent acquisition which closed on March 1, 2007 (―Boyd

Gaming closes acquisition of Dania Jai Alai,‖ 2007). The property is one of four pari-mutual, or

betting pool, properties approved by Florida law to operate a total of 1,500 slot machines. As

sole management of the new property, Boyd will benefit from a percentage of the betting pool of

the top three competitors. With these financial benefits, Boyd plans to construct casinos set to

open in 2008.

       Evidence of competitors‘ dedication to expansion and growth over the past five years is

rare. Ameristar has made one acquisition and has instead focused on renovations of currently

owned properties (―Ameristar history,‖ 2007). MGM Mirage has been the seller in many

transactions. This company has sold both Laughlin, Nevada, properties to Marnell Corrao

Associates (Elman, 2006), and has sold three properties to Herbst Gaming, Inc. in its ―Primm

Acquisition‖ (―Sands enters into definitive agreement to purchase Primm Valley Resorts,‖ 2006).

Harrah‘s Entertainment has also sold many business units. In fact, Boyd Gaming has bought

several of the company‘s properties, as previously stated. Harrah‘s was the buyout target in a
                                                                           Boyd Gaming Corp. 67


recent transaction in which two private equity firms completely bought out the company

(―Video: Harrah‘s agrees to be acquired by Apollo and TPG,‖ 2006).

       Mergers and acquisitions are costly to imitate because they require a solid financial

foundation. Boyd‘s $75 million Sam‘s Town acquisition and the $190 million Shreveport

Riverboat acquisition are evidence of this. Boyd‘s competitors have not been able to imitate this

competitive advantage as they have collectively only carried out one acquisition in the past five

years. The mergers and acquisitions Boyd has successfully implemented are valuable. They have

given Boyd the ability to organizationally exploit expansion, growth and diversification as

customers‘ demands shift and new opportunities become available.

Strategic Financing

       Boyd Gaming utilizes the business expertise of its top management and board members

to build financial capabilities within the firm. The strong financial foundation is used to enhance

cash flows from operations which provide the means for Boyd to meet current and future

objectives of developing and expanding the organization. Strategic financing is a valuable core

competency that gives Boyd a sustainable competitive advantage in the marketplace.

       The most lucrative and consistent profit center is the cash based slot revenues, and Boyd

Gaming‘s properties have historically produced significant cash flows (―Boyd Gaming

Corporation Annual/10K Report,‖ 2006). The gaming industry is capital intensive and relies

heavily on these cash flows to support operations, pay debts, and fund capital expenditures. In

addition, excess cash is needed to pay dividends and assist future growth goals. Casino revenues

have doubled in the last 10 years and continue to grow (Bjorke, 2006). Boyd is capitalizing on

the increase in slot revenues to fund future expansion, but also depends on debt financing (―Boyd

Gaming Corporation Annual/10K Report,‖ 2006). The timing of the growth goals is precisely
                                                                           Boyd Gaming Corp. 68


planned by Boyd Gaming‘s management team to ensure that the financial foundation of the firm

stays strong without overextending to a financially dangerous level in which debts cannot be

paid. Balancing cash flows, paying off debt, and acquiring new debt takes careful financial

planning to ensure the business grows at a superior rate.

       Boyd Gaming‘s financial capabilities are illustrated in the debt to assets ratio as seen in

Figure 4. Analysis reveals that Boyd has the ability to expand operations and also maintain a

constant level of financial strength. At the end of 2006, this ratio improved by a few points

despite additional debt for new projects (―Boyd Gaming Corporation Annual/10K Report,‖

2006). Analysis also shows that the strategic group members matched Boyd by staying relatively

stable. However, they have not expanded their operations to the same extent as Boyd has in the

past several years (―Ameristar Casinos, Inc.: As reported annual balance sheet: Five years,‖

2005; ―Harrah‘s Entertainment, Inc.: As reported annual balance sheet: Five years,‖ 2005;

―MGM Mirage: As reported annual balance sheet: Five years,‖ 2005).

       The debt to equity ratio demonstrates how Boyd alleviates potential expansion problems

through the use of strategic financing. As illustrated in Figure 3, Boyd has been consistently

improving in this area, and in 2006, the ratio fell to 1.92 (―Boyd Gaming Corporation

Annual/10K Report,‖ 2006). This ratio indicates the level of credit risk, and despite the growth

pattern, Boyd has shown to be exceptional at improving its balance sheet. The capacity to remain

highly profitable enables Boyd to maintain a working relationship with a credit facility and

obtain financing with a revolving line of credit. The extent that Boyd has strategically handled

the finances of the firm is rare compared to the strategic group members as shown by Boyd

Gaming‘s obtaining additional debt while improving the debt to equity ratio.
                                                                            Boyd Gaming Corp. 69


       The financial capabilities of Boyd Gaming are costly to imitate. Substantial amounts of

capital are needed to enter the gaming industry, and it could be years before a positive cash flow

is realized. This requires expertise in managing the financial aspects of a business. Without

expertise, many businesses fail in a relatively short period of time. If a firm does achieve the

level of a viable competitor in the industry, a skilled team to plan each step of aggressive

expansion while also handling the finances strategically is necessary for the company to succeed.

       Boyd Gaming has set up an organizational structure that supports and exploits the

financial knowledge that is found within the firm. Boyd takes risks by strategically expanding

the firm when opportunities for growth are discovered. An example is Echelon Place being built

on the Las Vegas strip. The construction of this building will increase the long term debt of

Boyd, but this project is expected to significantly increase cash flows and enable Boyd to reduce

its debt after it opens in 2010. The timing of the Echelon and other expansion efforts are

carefully planned to ensure that Boyd will continue to be a leader in the gaming industry.

Strategic financing allows Boyd to efficiently move into new markets domestically and, in the

future, globally. These objectives will be accomplished by taking advantage of the financial core

competency to analyze and strengthen the strategic growth of the firm in an attempt to increase

value for the stakeholders and continue to move forward with new projects.

Management and Board Members

       The management and board members of Boyd Gaming are a core competency. The

experience the members have acquired as well as the types of boards some members are on give

Boyd a competitive advantage. The members of the executive team are valuable to the firm

because of previous experience in other senior management positions, management positions

specifically in the gaming industry, and practicing law (―Boyd Gaming Corp.: Key employee
                                                                          Boyd Gaming Corp. 70


biographies,‖ 2007). Executives have over 100 collective years of experience in the gaming

industry. For example, Perry Whitt, a director at Boyd Gaming, has close to 60 years of

experience in gaming while Keith E. Smith, the president and chief operating officer has over 20

years of experience. The management team at Boyd also has over 50 years of experience

practicing law. Co-founder and current chairman of the board, as well as, chief executive officer

William S. Boyd practiced law for 15 years before starting the business with his father, Sam

Boyd. Director Thomas Giradi has practiced law for 40 years. This combined knowledge gives

the executives the experience necessary to make value adding decisions.

       The top executives‘ and board members‘ positions on additional boards, such as banks

and special event committees, make this core competency rare. Three Boyd board members are

on the board of BankWest Nevada, and one member is on the board of Las Vegas Events (―Boyd

Gaming Corp.: Key employee biographies,‖ 2007). Boyd employees that are on a bank‘s board

have additional knowledge regarding financial activities. Being a member on the board of

directors of a bank also gives Boyd insight into how to successfully manage the finances of the

company. As a member of a special event committee, the Boyd employee will have information

regarding upcoming events, attractions, and entertainment. This capability is rare because the

executive teams and boards of directors of the strategic group do not possess such valuable

information (―Management team,‖ 2007a; ―Management team,‖ 2007b; ―Officers and directors,‖

2007). Fewer members of competitors‘ boards are on the boards of banks or other financial

institutes and gaining the level of experience that Boyd has can take decades.

       The experience and knowledge obtained by Boyd‘s management and board members is

costly to imitate. In order to hire someone with plenty of experience in the gaming industry a

company must be willing to compensate the employee well. Experience and knowledge acquired
                                                                           Boyd Gaming Corp. 71


by an employee create more opportunities in the job market. Any firm willing to better

compensate managers and directors has a better chance of recruiting an employee. For example,

William Boyd earns almost $4 million in annual salary plus bonuses and other payments

(―Company details: Executives,‖ 2007). Robert Boughner, a Subsidiary Officer earns close to

$1.5 million. Boyd‘s management team and board members carry many years of experience in

the gaming industry and sit on many influential boards. Strategic group members without this

resource lack the competitive advantage of Boyd‘s executive team.

       The management and board members are organizationally exploited by Boyd making this

core competency non-substitutable. The knowledge and expertise of the individuals in this group

are used to make value adding decisions in areas such as geographic diversification, strategic

financing, and mergers and acquisitions. The team has a unique collection of information that

helps the organization make the best decisions in situations that arise in each of these given

areas. Without the specific knowledge and experience of the team, Boyd would not be an

industry leader. Organization policies and procedures also support this competency. Support is

apparent by the compensation packages offered to its executives. As previously stated, in order

to attract and retain such valuable executives, a company must offer above average compensation

packages, and Boyd rewards its executives well.
                                                                         Boyd Gaming Corp. 72


                                    Strengths and Weaknesses

                                            Table 13

                           Boyd Gaming‘s Strengths and Weaknesses

                   Strengths                                       Weaknesses

      Executive Board and Management                    Vulnerability to State Regulations
                                                            (Licensing and Permits)
              Strategic Financing                          Lack of Short-term Solvency

            Mergers and Acquisitions                             Significant Debt

             Geographic Diversity

               Family Operations


Strengths

       Boyd Gaming‘s executive board and management team are a strength for the company

due to their expertise and knowledge. The executive board and management not only influence

the company‘s day-to-day operations but also highly influence the company‘s strategic activities

for business growth. Boyd‘s strategic financing is also a strength for the company. The

management team has been able to coordinated cash flows and debt financing so that the growth

goals of the company can be met in the future. Within the past five years Boyd has made

significant choices regarding mergers and acquisitions. The choices have not only enhanced the

value of the corporation as a whole but have also created market potential advantages for the

company. This value creating and growth strength is essential in the competitive gaming market.

       Another important strength for Boyd is the fact that the company is geographically

diverse. Setbacks in a particular geographic segment will not damage Boyd because the company

is located in many different geographic segments. However, setbacks in geographic segments
                                                                            Boyd Gaming Corp. 73


will hinder companies who are only located in fewer locations. Furthermore, geographic

diversification gives Boyd a wider variety of target customers, enhancing the profit potential.

Finally, Boyd is a family operated business which is rare in the gaming industry. Not only does

this strength decrease the potential for buyouts, it also demonstrates that the company is able to

operate efficiently because of the stability within their management team.

Weaknesses

       Even successful businesses and industry leaders have weaknesses. Some of the

weaknesses Boyd faces are vulnerability to state regulations (licensing and permits), the inability

to finance, and significant debt. Because Boyd operates in several different states, they are

obligated to run each business unit under that states‘ particular laws and regulations. If a

particular state decides to change the laws and regulations of the gaming industry, Boyd is forced

to change its operation strategies to coincide with the new rules and regulations of the state.

Boyd Gaming‘s liquidity ratios demonstrate that the company lacks short-term solvency, as seen

in figures 1 and 2. The company‘s current cash flow and revenue is used to pay off operating

expenses and both long- and short-term debt. This takes away from the company‘s ability to

finance future and current projects; therefore, they are forced to rely on creditors to help them

financially. The lack of short-term solvency is a weakness that has the potential to hurt Boyd‘s

growth and diversity (―Boyd Gaming Annual/10K Report 2006,‖ 2007).

       Boyd also has a significant amount of debt which may hinder the ability to grow. This

weakness has consequences such as the inability to satisfy current obligations, increased

susceptibility to economic and industry conditions, and a requirement to set aside current cash

inflow to make payments on debts (―Boyd Gaming Annual/10K Report 2006,‖ 2007). Setting

aside cash flows will reduce the company‘s ability to fund general corporate business activities.
                                                                           Boyd Gaming Corp. 74


                                         SWOT Analysis

                                             Table 14

                                          SWOT Matrix

                                            Strengths (S)                  Weaknesses (W)
                                  1. Management & Board             1. Vulnerability to State
                                     Members                           Regulations
                                  2. Strategic Financing            2. Lack of Short-term Solvency
                                  3. Mergers & Acquisitions         3. Significant Debt
                                  4. Geographic Diversity
                                  5. Family Operated
        Opportunities (O)                   SO Strategies                      WO Strategies
1.   Disposable Income            1. Create value through           1.   Increase funding for
2.   Emerging Global and             continued M&A. (S3,O3)              PAC/lobbyists to gain access
     Domestic Markets             2. Exploit expansion                   to new markets. (W1,O2)
3.   Mergers & Acquisitions          opportunities in both the      2.   Develop and market
4.   Exchange Rates                  global and domestic markets.        entertainment packages for
5.   Jenny Chun v. The State of      (S3,O2)                             Baby Boomers to increase
     New York                     3. Increase marketing budget           revenues and decrease debt.
                                     to attract foreign tourists.        (W2,O1)
                                     (S2,O4)                        3.   Utilize a state‘s right to open
                                                                         up new gaming markets.
                                                                         (W1,O5).
          Threats (T)                      ST Strategies                       WT Strategies
1. September 11, 2001             1. Formulate plan to expand      1.    Increase funding to
2. Emerging Global & Limited         variety of amenities to add         PAC/Lobbyists to
   Domestic Markets                  value for the customer.             ease/reduce gaming
3. Cutthroat Competition             (S1,T4)                             regulations. (W1,T5).
4. Substitute Products            2. Utilize M&A to neutralize     2.    Improve solvency to increase
5. National Coalition Against        threat of increasing global         ability for market share
   Legalized Gambling                competition and limited             growth. (W2,T2)
                                     domestic markets. (S3,T2)     3.    Conserve environmental
                                  3. Establish team and formulate        resources to control costs
                                     strategy to continuously            and reduce long-term debt.
                                     identify and react to actions       (W3,T3)
                                     by competitors. (S5,T3).
                                  4. Expand geographic diversity
                                     to protect firm from profit
                                     losses due to tourism
                                     declines. (S4,T1)
                                                                            Boyd Gaming Corp. 75


SO Strategies

       The top management team formed four proposed strategies when matching Boyd‘s

strengths and opportunities. The first strategy proposed is to match the opportunity for mergers

and acquisitions with Boyd‘s strength in mergers and acquisitions. Boyd can imitate their

strengths from the transactions they‘ve implemented so far to create value in new mergers and

acquisition opportunities; S3, O3. Another strategy proposed is for Boyd to use their mergers and

acquisitions strength to exploit expansion opportunities in emerging global and domestic

markets; S3, O2. Boyd has successfully carried out several mergers and acquisitions over the

past five years. If the company continues using this technique, Boyd will be able to efficiently

move into new markets domestically and abroad.

       The large number of potential foreign tourists is a great opportunity for Boyd to increase

its customer base. By increasing our marketing budget, we can create valuable marketing

strategies that target the foreign tourist market. This will help increase the amount of visiting

customers, and in return, will boost sales and revenues for Boyd Gaming; S2, O4.

ST Strategies

       Any current or potential threats against Boyd can be neutralized or eliminated using

internal strengths. In a highly competitive environment, Boyd‘s executive board members are

able to strategically act and react against aggressive attacks from competitors. The collective

knowledge, expertise in the gaming industry, and extensive education of Boyd‘s board members

allow the company to minimize the threat of substitute products; S1, T4. They are able to use

this strength by collaborating to efficiently develop continuous innovation within their company

for the products they offer. These plans will help to add value to their customers.
                                                                           Boyd Gaming Corp. 76


        Boyd‘s strength in mergers and acquisitions will also help to alleviate threats of emerging

global markets and limited domestic markets; S3, T2. The growth and stability resulting from

mergers and acquisitions will help Boyd firmly block threats of rivals moving into emerging

markets. Having the stability of a family operated business protects Boyd against competitors‘

actions and gives Boyd the leverage to aggressively compete in the industry‘s cutthroat

competitive environment; S5, T3.

        The final strategy proposed is for Boyd to use their strength in being geographically

diverse to protect against the threats of terrorist attacks like September 11, 2001; S4, T1. Being

geographically diverse creates strength for Boyd and enables the company to maintain stability

in uncertain conditions. Because Boyd has so many strategically located business units across the

United States, the company‘s operations were not hindered by the decline in tourism resulting

from the attacks. The collective success of each business unit, combined with highly diversified

entertainment and products, help give Boyd a competitive advantage to sustain customers‘

interests.

WO Strategies

        Boyd Gaming Corporation has the ability to turn weaknesses into strengths by exploiting

opportunities in the external environment. Three different strategies have been developed to help

the company benefit from the opportunities. First, Boyd can increase funding to political action

committees and lobbyists to gain access to new markets; W1,O2. Increased funding will put

Boyd and the gaming industry in a more favorable position when decisions are being made

regarding the legalization of gaming in certain states. In addition to increasing funding, Boyd can

utilize a state‘s right to allow gaming, as decided in Jenny Chun v. The State of New York (1992),

to create new gaming markets; W1,O5. States are likely to reserve their right to decide unless a
                                                                          Boyd Gaming Corp. 77


major event occurs that damages the relationships between members of the gaming industry and

individual states.

       Another strategy developed to exploit opportunities and lessen the impact of weaknesses

is to develop and market to Baby Boomers in order to increase revenues; W2,O1. The buying

power of American Baby Boomers has increased because their disposable income has increased.

Boyd can take advantage of this by developing entertainment that is directly marketed to this

generation. Increased marketing to Baby Boomers should increase their visit frequency at Boyd

facilities and in turn increase revenue.

WT Strategies

       Although some weaknesses can be converted into strengths, other weaknesses are

amplified by threats in the external environment. When threats are exaggerated, Boyd must make

decisions to avoid potential damage to the company. Three potential problems have been

identified and strategies have been developed to avoid them. First, if the National Coalition

Against Legalized Gambling (NCALG) influences law makers‘ decisions to prohibit casino

gaming in a particular state, Boyd loses the chance to expand its geographic diversity; W1,T5.

To avoid the negative effects of the NCALG on Boyd‘s opportunity to expand, the company can

increase funding to political actions committees and lobbyists. Increased funding can, again, put

Boyd and the gaming industry in a more favorable position.

       Another problem may occur if Boyd‘s short-term solvency continues to deteriorate as

global markets continue to emerge and domestic markets continue to be limited; W2,T2. If Boyd

cannot obtain financing for new projects due to a lack of solvency, it faces losing market share to

its competitors globally and domestically. Boyd can improve its short-term solvency to avoid this

complication. Finally, problems caused by the company‘s significant debt are increased by
                                                                          Boyd Gaming Corp. 78


cutthroat competition; W3,T3. Because competition is so intense, Boyd must promote the

company by differentiating its products to attract and retain customers. Extensive advertising,

renovations, new developments and acquisitions increase the debt of a company. Managing

operating costs by conserving energy, for example, is essential to maintain optimum cash flows

to help reduce these debts. Boyd can manage operating costs by conserving environmental

resources. If Boyd can avoid the effects of weaknesses amplified by threats in the external

environment, it will continue to be an industry leader.

Recommended Strategies

   1. Conserve environmental resources to control costs and reduce long-term debt; W3,T3

   2. Develop and market entertainment packages for Baby Boomers to increase revenues and

       decrease debt; W2,O1.

   3. Exploit expansion opportunities in both the global and domestic markets; S3,O2.
                                                                           Boyd Gaming Corp. 79


                                    Recommended Strategies

Strategy 1: Conserve environmental resources to control costs and reduce long-term debt.

       Strategy Overview. Boyd Gaming reported $2.1 billion of long-term debt in the 2006

year-end financial report (―Boyd Gaming Corporation Annual/10K Report,‖ 2006), and the

development of Echelon Place in Las Vegas will significantly increase this debt due to the cost

of $4.4 billion (Stutz, 2007). However, when the Echelon opens in late 2010, its revenues will

help offset a portion of the additional debt. Boyd is focused on growth, but management should

explore ways to reduce expenses. Every business can improve the bottom line by reducing

expenses in every area (Kennedy, 2007). The external environment analysis revealed that

predictions through the year 2030 call for energy consumption and prices to continue to increase

worldwide (Energy Information Administration, 2007). In the U.S., commercial buildings

consume 36% of the total energy used and 65% of the total electricity used (Smith, 2006).

       To entice commercial building developers to conserve energy and water, Nevada passed

legislation that allows a 50% property tax abatement for 10 years on buildings with

environmentally friendly, or green, design features that are certified by the U.S. Green Building

Council (USGBC) (Zitt, 2006). Boyd will implement a green building design in the development

of the Echelon Place to take advantage of the tax abatement. The current trend in commercial

development design includes advanced air and water systems, skylights and windows used for

natural light, and solar panels that produce energy. Each green design feature gives the developer

credits and after a specific amount of credits are used in a building, the USGBC issues a green

building certification. These green features result in long term savings in energy, water,

insurance premiums, operations, and maintenance (Zitt, 2006). Green buildings have also been

proven to reduce costs associated with human resource as a result of fewer sick days, decreased
                                                                         Boyd Gaming Corp. 80


employee turnover, and increased productivity. Marketing advantages also exist that Boyd can

use to enhance its public image because of current environmental concerns. The company will

gain a competitive edge over non-green hotels and casinos.

Short-Term Goals: April to October 2007

      Boyd Gaming will join the national USGBC required to obtain certification (―USGBC:

       Member benefits,‖ 2007). Membership will give Boyd access to workshops and expos

       designed to gain information and play an active role in building public awareness of the

       green design.

      Boyd will also become a member of the USGBC Las Vegas Regional Chapter. This

       membership includes advertising with the company logo and newsletters that explain to

       employees the benefits of working in a healthy building.

      The Echelon green design will be registered with the USGBC. This organization will

       monitor the construction progress and certify the property upon completion.

      Boyd will designate two employees to focus on the green design and construction of the

       Echelon project full-time. They will be trained and tested to achieve the Leadership in

       Energy and Environmental Design (LEED) professional accreditation which gives them

       the knowledge and skills to monitor the progress of the Echelon during the three year

       building phase. The job responsibility includes acting as a liaison between the USGBC

       inspectors, the design team, the construction firm, and Boyd management.

Mid-Term Goals: November 2007 to 2010

      After six months, the LEED employees will evaluate existing Boyd properties to

       determine ways to decrease operational costs through green design elements. These

       existing properties may not qualify for certification from the USGBC and obtain the
                                                                            Boyd Gaming Corp. 81


         property tax abatement, but incorporating energy saving features will aid in controlling

         costs.

        At the end of 2010, the Echelon Place will achieve the green design certification from the

         USGBC. The property will open and the green modifications in the design will result in a

         30% reduction in energy consumption and a 50% reduction in water usage, significantly

         reducing operational costs (Zitt, 2006).

Long-Term Goals: 2010 and Beyond

        Echelon‘s renewable energy features will have cost benefits for the property for at least

         20 to 30 years (Zitt, 2006) and will be used to reduce Boyd‘s long term debt.

Budget

        Green Design Cost Premium - $3 per square feet

                  10.5 million square feet x $3.00                    $31.5 Million

        Membership Fees – 3 Years

                  USGBC – National                                      10,500

                  USGBC – Las Vegas Regional Chapter                    30,000

        LEED Training & Certification                                     500

        Echelon Place Building Design Registration USGBC                  450

        LEED Employee Salaries – 3 Years                             600,000

                  Total Implementation Costs                     $32.1 Million

         Performance Measures. After the Echelon Place is completed and the property is

certified by the USGBC, the 50% property tax abatement program established by Nevada can be

utilized for 10 years. However, the USGBC will not certify the casino area of 140,000 square

feet because patrons are allowed to smoke on the gaming floor and natural lighting cannot be
                                                                            Boyd Gaming Corp. 82


used due to a lack of windows (Benston, 2007). The property tax abatement is only reduced by

$56,000 after deducting the casino area from the total square footage of the property. The

estimated annual property tax for the Echelon Place is $8.4 million and after the casino area

exclusion, the total property tax savings equals $4.1 million per year.

       The casino area will not be figured into the property tax savings, but is still able to

provide operational savings with the rest of the development. Yearly cost benefits are estimated

to be $.32 per square foot for energy and water combined with a savings of $.43 per square foot

for operations and maintenance (Zitt, 2006). The total yearly cost savings of $.75 per square foot

equates to a savings of $7.9 million for the Echelon Place which has a total of 10.5 million

square feet. Additional savings in insurance costs and employee productivity are unique to each

firm and difficult to estimate upfront.

       Summary of Yearly Cost Savings:

      Property Taxes                         $4.1 million

      Energy and Water                        3.3 million

      `Operations and Maintenance             4.5 million

       Total Yearly Savings                   $12 Million

       The total implementation costs of $32.1 million will be recaptured in approximately 2.7

years. Afterwards, the $12 million saved each year as a result of building the Echelon Place with

a design using renewable energy resources will be designated to reducing the significant long-

term debt of Boyd Gaming.
                                                                             Boyd Gaming Corp. 83


Strategy 2: Develop Marketing Strategy Targeting Baby Boomers to Increase Revenues

       Strategy Overview. Boyd Gaming‘s liquidity ratios confirm that the company lacks short

term solvency. Current cash flows and revenue are used to pay operating expenses and debts.

This process causes the company to be unable to self-finance projects forcing Boyd to depend on

creditors for assistance. If the liquidity ratios do not improve, Boyd will lose a significant

amount of market share in global and domestic markets to competing firms

       Cutthroat competition in the gaming industry requires companies to develop, advertise,

and differentiate their firms extensively. Each of these activities increases a company‘s debt, but

given the opportunities in the external environment, Boyd can develop a strategy that helps the

company maintain its market share.

       An increase in disposable income has accounted for much of the gaming industry‘s

success over the last few years. The United States has seen an 18% increase in disposable

income since 2002 (―Average Disposable Income,‖2007). Considering the popularity of the

gaming industry among Baby Boomers, and taking into consideration that this customer group

typically generates the highest travel volume in the United States, an opportunity to increase

revenue and cash flow is presented (―Domestic research: Travel market segments,‖2004). Baby

Boomers also represent a large target market for Boyd because this group accounted for 78

million of the population in 2005 (―Small Business Trends,‖2007).

       Due to the increased popularity of the internet among Baby Boomers as well as an

increase in disposable income, the recommendation is to develop a Boyd Gaming virtual online

casino. The virtual online casino will allow Boyd‘s customers to practice, compete, and

familiarize themselves with each of Boyd‘s locations. Various games will be available for
                                                                           Boyd Gaming Corp. 84


members so they can learn how to play, improve technique, or practice competing individually or

with other members using the site.

       This virtual world will mirror reality. Cartoon figures will represent real people and will

participate in normal activities found at Boyd‘s casinos. This business frontier will allow

members to feel more comfortable with Boyd‘s casinos causing customers to favor them over

competing companies‘ casinos. Customers must download the software from the website and

become a member in order to participate, but after doing so, they can choose a name and create a

character to represent themselves or even someone of their imagination. Adjustments can be

made regarding height, weight, hair color, and even apparel to satisfy this alter ego.

       Although no fees are required to enter or compete, winnings for these games include

vouchers for hotel stays, entertainment, and chances to compete at highly popular gaming

tournaments held at various Boyd locations. As the popularity of Boyd‘s online casinos and

rewards given to each member increases, the desire to actually be in one of the locations will also

increase. This should cause customers to visit Boyd‘s facilities more frequently. As Boyd begins

to retain more customers, the company will experience increases in revenue.

Short-Term Goals: By year-end 2008

      Developing a management team to control the database, website, and measurement

       process.

      Establishing a mailing list of Boyd‘s existing Baby Boomer customers using database

       resources within the company.

      Beginning design process of Boyd Gaming‘s virtual online casino.

      Preparing three mail outs targeting Boyd‘s Baby Boomer customer base.

Mid-Term Goals: By year-end 2009
                                                                           Boyd Gaming Corp. 85


      Send annual mail outs to initiate customer awareness.

      Mid 2009, launch website www.boydbetting.com.

      Implement annual measurement procedures.

Long-Term Goals: 2010 and Beyond

      Improve frequency of baby boomer stays.

      Expand target market to include more customer groups and strategic development

   Budget. The budget for the virtual online casino will be approximately $1.25 million

annually. Costs include the initial design of the website combined with actual implementation for

a one time fee of $100,000. The remaining expenses will be consistent annually until a new or

improved budget is developed. These expenditures include website maintenance for $50,000,

management team compensation for $300,000, direct mail programs sent out three times a year,

also for $300,000, prize packages and promotions for the winning members at $100,000, and an

advertising media budget of $500,000. The primary form of advertising for this strategy will be

in-flight publications to promote the virtual reality casino website. The cost of this marketing

strategy is minimal in comparison to other strategies that would also provide significant amounts

of revenue.

       The budget is calculated below:

      Design and implement website (one time fee)           $100,000

      Website Maintenance                                      50,000

      Compensation of management team                         300,000

      Direct mail program                                     300,000

      Prize packages and promotions                           100,000

      Advertising media budget                                500,000
                                                                           Boyd Gaming Corp. 86


       Total cost of www.boydbetting.com                  $1.35 million

   Performance Measure. To measure the effectiveness of the virtual online casino, the website

management team will implement annual measurement procedures. These records will indicate

the number of Boyd Gaming‘s customers who have used, continue to use, and find success with

the website. Each Member will have a profile with the management team showing activity online

as well as in the casinos throughout the different locations. The profile will include the time and

money spent by a customer, his or her winnings, and preferences. The goal is to increase website

usage and the frequency of visits to Boyd locations which should, in return, boost revenues for

the company.

      2010: Increase Baby Boomer website usage to 10%

      2011: Increase frequency of Baby Boomer stay by 10%

      2015: Increase Baby Boomer website usage to 30%

       As the Baby Boomer customer base increases through website usage and more frequent

visits to Boyd‘s casinos, the company should expand to other demographics. A separate

performance measurement database is necessary for each new customer group that is developed.
                                                                           Boyd Gaming Corp. 87


Strategy 3: Exploit Expansion Opportunities in Both the Global and Domestic Markets

       Current Locations. Boyd Gaming currently operates 18 properties in 7 different states

throughout the United States, including 4 properties that are currently under construction (―Boyd

Gaming Corporation Annual/10K Report,‖ 2006). The Bluechip Casino Hotel located in

Indiana, and the Borgata Casino Hotel and Spa located in Atlantic City, New Jersey, are both

undergoing expansion. The Echelon Place, located on the Las Vegas strip, and Dania Jai Alai in

Florida, are properties under construction that are being built from the ground up. Over the past

few years, Boyd has been working to increase geographically by adding locations across the

United States. The company has completed several mergers and acquisition transactions, and is

still setting goals for further expansion across the United States. Increasing geographically will

strengthen operations and create value for Boyd‘s customers.

                                             Figure 16

                                        Current Locations




       Source: ―Company Overview,‖ 2007
                                                                           Boyd Gaming Corp. 88


       Strategy Overview. Several states in the U.S. are currently under litigation for gambling

approval, including Texas (Humphrey, 2007b). Because Texas is the second largest state in the

U.S., a great opportunity for Boyd to acquire the state‘s huge gambling market exists. All the

states that touch the Texas state line and that have legalized gambling operate very popular

racetracks since the implementation of slot machines. Mr. Jacques Triplett, General Manager of

the Corpus Christi Greyhound Racetrack (personal communication, April 19, 2007) stated that

the parking lots of racetracks located in states that touch Texas‘s border and allow slot machine

gambling, are filled with cars with Texas license plates. Out of 600 parked cars, 400 cars belong

to Texas residents.

       The recommendation is that Boyd increase brand awareness in the Texas market by

acquiring pari-mutuel wagering facilities (racetracks) in Corpus Christi, Texas and Houston,

Texas. The properties include the Corpus Christi Greyhound Racetrack and the Houston Gulf

Greyhound Park. Once these tracks have been purchased by Boyd, the company will set budget

goals and use the revenues generated to implement video lottery terminals. Adding the video

lottery terminals should help increase the popularity of the racetracks while casino-style

gambling legislation is under litigation. Boyd will also set aside revenues from the racetracks to

contribute to political action committees and lobbyists to positively influence gambling

legislation for Texas. When the gambling legislation is passed in Texas, Boyd will convert the

racetracks into racinos by replacing the video lottery terminals with actual slot machines. Boyd‘s

long-term goal will be to build a racino in Austin, Texas. Concentrating expansion in Texas

creates a great opportunity for Boyd to prepare the company for further growth and expansion.

Establishing a valuable interest in the new Texas market will increase the customer base by

attracting the large number of Texas gamblers which will also increase revenue.
                                                                            Boyd Gaming Corp. 89


                                           Figure 17

                                  Expansion Locations in Texas




Source: ―Racetracks,‖ 2007

Short-Term Goals: By year-end 2007

      Acquire licenses to operate racetracks and video lottery terminals

      Purchase Corpus Christi Greyhound Racetrack

          o Install 1,000 – 1,500 video lottery terminals in 2008

      Contribute revenues to lobbyist and political action committees to positively influence

       the gambling legislation

Mid-Term Goals: By year-end 2009

      Purchase Houston Gulf Greyhound Park

          o Acquire a larger market and assist in building a name for Boyd
                                                                           Boyd Gaming Corp. 90


           o Install 1,000 – 1,500 video lottery terminals in 2010

      Start preparing for potential passage of gaming legislation

           o Acquire gambling license to operate slot machines

           o Set budget for implementing slot machines and conversion to racinos

Long-Term Goals: 2011 and Beyond

       Convert racetracks into racinos

           o    Install 1,000-1,500 slot machines

       Build a racino in Austin

   Budget. The licensing fee required by Texas to operate racetracks is about $125,000 per year,

which comes to a total of $750,000 over a six year period from 2007 to 2011(Jacques Triplett,

personal communication, April 19, 2007). The acquisition price to buy the Corpus Christi

Greyhound Racetrack is $25 million, and the cost of buying the Houston Gulf Greyhound Park

will total to $90 million (―All about Gulf Greyhound Park,‖ 2007). The cost of implementing

1,000 – 1,500 video lottery terminals and 1,000 – 1,500 slot machines will be between $25

million and $30 million for each set (―Racinos,‖ 2006). This amount will include the cost of

expanding the pari-mutuel wagering facilities to include the terminals and machines, rewiring,

converting from VLT‘s to slot machines, and updating the facilities to accommodate the new

environments. Revenues from the Corpus Christi Greyhound Racetrack and the Houston Gulf

Greyhound Park will be contributed to implementing the video lottery terminals and slot

machines. The contribution to lobbyists will be a total of $100,000 per year to equal a total of

$600,000 over the six-year budget period (Jacques Triplett, personal communication, April 19,

2007). The cost of building a racino in Austin, Texas will be between $150 million and $250

million, which will be supported by revenues brought in from the newly acquired pari-mutuel
                                                                           Boyd Gaming Corp. 91


wagering facilities in Texas and from the strength of sharing cash flows throughout Boyd‘s

business units (Dixon, 2006). The cost to build the racino includes total expenses from start to

finish since Boyd will be building the park from ground up.

   This is the budget for the six-year period from 2007 to 2011:

      Obtaining a License                                                   $125,000/year

       Buyout Corpus Christi Greyhound Park                                     25 million

       Contribution to Lobbyist                                              600 thousand

       Purchasing Houston Gulf Greyhound Park                                   90 million

      Implementing VLT‘s                                                     25-30 million

       Purchasing of Slot Machines                                           25-30 million

       Building racino in Austin                                          150-250 million

       Total cost of expansion                                           $300-430 million

       Performance Measure. Boyd will measure the success of expansion by the profitability of

the business ventures in Texas and the revenues generated by these parks. Generating revenue is

a sign of success in itself but is not sufficient enough to determine whether expanding into Texas

was a beneficial strategic decision. Measuring Return on Investment will help Boyd determine

the overall effectiveness of management to generate profits with the company‘s assets. If Boyd

sets a Return on Investment goal of 30% per year from the date of acquisition, it will take

between 3 and 4 years to recover the total costs of expanding into Texas. Total revenues

generated from the Texas market of $120 million per year will be expected. This is calculated at

an average admission fee of $3 per person but does not include revenues produced from the

betting pools. It is expected that revenues will increase yearly as more customers are attracted to

betting on the races. Boyd will greatly benefit from the Texas gamblers, and will also be able to
                                                                          Boyd Gaming Corp. 92


measure this expansion strategy by the 10 million additional fans the Texas racetracks will

acquire.

       If all of these goals are met and carried out successfully, Boyd should be able to recover

the costs associated with the Texas expansion by the year 2015. Once Boyd has met this goal, the

company can start contributing revenues to other long-term debts or expand to other states that

begin to allow casino-style gambling.
                                                                      Boyd Gaming Corp. 93


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