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its EDS acquisition four years earlier. The write down amounted to a staggering 58% of what the firm had paid for
EDS.
What went wrong? Was it due to poor planning, a bad strategy, or poor execution? Probably each had a role.
Could financial models have helped to prevent this disaster? Yes and no. Models are attempts by their builders to
approximate reality. Once built, they represent high speed calculators. The reliability of their output is dependent on
the extent to which they accurately represent the underlying dynamics of the businesses that have been modeled and
the credibility of the assumptions that drive their cash flow projections. In the final analysis, models are an
important tool supplementing but not replacing executive judgment.
Mars Buys Wrigley in One Sweet Deal
Under considerable profit pressure from escalating commodity prices and eroding market share, Wrigley
Corporation, a U.S.-based leader in gum and confectionery products, faced increasing competition from Cadbury
Schweppes in the U.S. gum market. Wrigley had been losing market share to Cadbury since 2006. Mars
Corporation, a privately owned candy company with annual global sales of $22 billion, sensed an opportunity to
achieve sales, marketing, and distribution synergies by acquiring Wrigley Corporation.
On April 28, 2008, Mars announced that it had reached an agreement to merge with Wrigley Corporation for $23
billion in cash. Under the terms of the agreement, which were unanimously approved by the boards of the two firms,
shareholders of Wrigley would receive $80 in cash for each share of common stock outstanding, a 28 percent
premium to Wrigley's closing share price of $62.45 on the announcement date. The merged firms in 2008 would
have a 14.4 percent share of the global confectionary market, annual revenue of $27 billion, and 64,000 employees
worldwide. The merger of the two family-controlled firms represents a strategic blow to competitor Cadbury
Schweppes's efforts to continue as the market leader in the global confectionary market with its gum and chocolate
business. Prior to the announcement, Cadbury had a 10 percent worldwide market share.
As of the September 28, 2008 closing date, Wrigley became a separate stand-alone subsidiary of Mars, with $5.4
billion in sales. The deal is expected to help Wrigley augment its sales, marketing, and distribution capabilities. To
provide more focus to Mars's brands in an effort to stimulate growth, Mars would in time transfer its global
nonchocolate confectionery sugar brands to Wrigley. Bill Wrigley Jr., who controls 37 percent of the firm's
outstanding shares, remained the executive chairman of Wrigley. The Wrigley management team also remained in
place after closing.
The combined companies would have substantial brand recognition and product diversity in six growth
categories: chocolate, nonchocolate confectionary, gum, food, drinks, and pet care products. While there is little
product overlap between the two firms, there is considerable geographic overlap. Mars is located in 100 countries,
while Wrigley relies heavily on independent distributors in its growing international distribution network.
Furthermore, the two firms have extensive sales forces, often covering the same set of customers.
While mergers among competitors are not unusual, the deal's highly leveraged financial structure is atypical of
transactions of this type. Almost 90 percent of the purchase price would be financed through borrowed funds, with
the remainder financed largely by a third-party equity investor. Mars's upfront costs would consist of paying for
closing costs from its cash balances in excess of its operating needs. The debt financing for the transaction would
consist of $11 billion and $5.5 billion provided by J.P. Morgan Chase and Goldman Sachs, respectively. An
additional $4.4 billion in subordinated debt would come from Warren Buffet's investment company, Berkshire
Hathaway, a nontraditional source of high-yield financing. Historically, such financing would have been provided
by investment banks or hedge funds and subsequently repackaged into securities and sold to long-term investors,
such as pension funds, insurance companies, and foreign investors. However, the meltdown in the global credit
markets in 2008 forced investment banks and hedge funds to withdraw from the high-yield market in an effort to
strengthen their balance sheets. Berkshire Hathaway completed the financing of the purchase price by providing
$2.1 billion in equity financing for a 9.1 percent ownership stake in Wrigley.
Discussion Questions:
1. Why was market share in the confectionery business an important factor in Mars’ decision to acquire
Wrigley?
2. It what way did the acquisition of Wrigley’s represent a strategic blow to Cadbury?
3. How might the additional product and geographic diversity achieved by combining Mars and Wrigley
benefit the combined firms?
4. Speculate as to the potential sources of synergy associated with the deal. Based on this speculation what
additional information would you want to know in order to determine the potential value of this synergy?
5. Given the terms of the agreement, Wrigley shareholders would own what percent of the combined
companies? Explain your answer
Tribune Company Acquires the Times Mirror Corporation
in a Tale of Corporate Intrigue
Background: Oh, What Tangled Webs We Weave. .
.
CEO Mark Willes had reason to be optimistic about the future. Operating profits had grown at a double-digit rate,
and earnings per share had grown at a 55% annual rate between 1995 to 1999. Many shareholders appeared to be
satisfied. However, some were not. Although pleased with the improvement in profitability, they were concerned
about the long-term growth prospects of the firm. Reflecting this disenchantment, Times Mirror’s largest
shareholder, the Chandler family, was contemplating the sale of the company and along with it the crown jewel Los
Angeles Times. It had been assumed for years that the Chandler family trusts made a sale of Times Mirror out of the
question. The Chandler’s super voting stock (i.e., stock with multiple voting rights) allowed them to exert a
disproportionate influence on corporate decisions. The Chandler Trusts controlled more than two-thirds of voting
shares, although the family owned only about 28% of the total shares of the outstanding stock.
In May 1999 the Tribune Chairman John Madigan contacted Willes and made an offer for the company, but
Willes, with the help of his then-chief financial officer (CFO), Thomas Unterman, made it clear to Madigan that the
company was not for sale. What Willes did not realize was that Unterman soon would be serving in a dual role as
CFO and financial adviser to the Chandlers and that he would eventually step down from his position at Times
Mirror to work directly for the family. In his dual role, he worked without Willes’ knowledge to structure the deal
with the Tribune.
Following months of secret negotiations, the Chicago-based Tribune Company and the Times Mirror Corporation
announced a merger of the two companies in a cash and stock deal valued at approximately $7.2 billion, including
$5.7 billion in equity and $1.5 billion in assumed debt. The transaction, announced March 13, 2000, created a media
giant that has national reach and a major presence in 18 of the nation’s top 30 U.S. markets, including New York,
Los Angeles, and Chicago. The combined company has 22 television stations, four radio stations, and 11 daily
newspapers—including the Los Angeles Times, the nation’s largest metropolitan daily newspaper and flagship of the
Times Mirror chain.
Transaction Terms: Tribune Shareholders Get Choice of Cash or Stock
The Tribune agreed to buy 48% of the outstanding Times Mirror stock, about 28 million shares, through a tender
offer. After completion of the tender offer, each remaining Times Mirror share would be exchanged for 2.5 shares of
Tribune stock. Under the terms of the transaction, Times Mirror shareholders could elect to receive $95 in cash or
2.5 shares of Tribune common stock in exchange for each share of Times Mirror stock. Holders of 27.2 million
shares of Times Mirror stock elected to receive Tribune stock, whereas holders of 10.6 million elected to receive
cash. Because the amount of cash offered in the merger was limited and the cash election was oversubscribed, Times
Mirror shareholders electing to receive cash actually received a combination of cash and stock on a pro rata basis
(Table 1).
Table 1. Times Mirror Transaction Terms
As of June 12, 2000 Transaction Value
Times Mirror Shares Outstanding @ 3/13/00 59,700,000
No. of Times Mirror Shares Exchanged for 2.3
Shares of Tribune Stock 27,238,253 $2,587,634,0351
No. of Times Mirror Shares Exchanged for Cash 10,648,318 $1,011,536,9682
Times Mirror Shares Outstanding after Tender Offer 21,813,429
No. of New Tribune Shares Issued for Remaining
Times Mirror Shares 54,533,5735 $2,072,275,7743
Equity Value of Offer $5,671,446,777
Market Value of Times Mirror on
Merger Announcement Date $2,805,900,0004
Premium 102%
127,238,253 2.5 $38/share of Tribune stock.
2$41.70 in cash + 1.4025 shares of Tribune stock $38 per share for each Times Mirror share remaining
10,648,318.
3Equals 2.5 shares 21,813,429 $38 per Tribune share.
4Times Mirror share price on announcement date of $47 times 59,700,000.
5The total number of new Tribute shares issued equals 27,238,318 2.5 + 10,648,318 2.5 + 54,533, 573 or
137,537,013.
Newspaper Advertising Revenues Continue to Shrink
Most U.S. newspapers are mired in the mature or declining phase of their product life cycle. For the past half-
century, newspapers have watched their portion of the advertising market shrink because of increased competition
from radio and television. By the early 1990s, all major media began taking a significant hit in their advertising
revenue streams as businesses discovered that direct mail could target their message more precisely. Moreover,
consolidation among major retailers further reduced the size of advertising dollar pool. The same has happened with
numerous large supermarket chain mergers. Newspaper advertising revenues also have been threatened by
increasing competition from advertising and editorial content delivered on the internet. Finally, newspapers simply
have become less attractive places to advertise as readership continues to decline as a result of an aging population
and new generations that do not see newspapers as relevant.
Times Mirror: A Largely Traditional Business Model
As essentially a traditional newspaper, Times Mirror publishes five metropolitan and two suburban daily
newspapers, a variety of magazines, and professional information such as flight maps for commercial airline pilots.
The Los Angeles Times, a southern California institution founded in 1881, is Times Mirror’s largest holding and
operates some two dozen expensive foreign news bureaus—more than any other newspaper in the country. The Los
Angeles Times has more than 1200 Los Angeles Times reporters and editors around the world (CNNfn, March 13,
2000).
Tribune Company Profile: The Face of New Media?
Unlike the Times Mirror, Tribune has built its strategy around four business groups: broadcasting, publishing,
education, and interactive. The Tribune is also an equity investor in America Online and other leading internet
companies, underscoring the company’s commitment to new-media technologies. Applying leading edge new-media
technology has allowed the Tribune to transform they way it does business, and the technology commitment creates
the opportunity for future growth. The internet has been the greatest driver for change, and the Tribune’s interactive
business group continues to focus on capitalizing on emerging Web technologies. Throughout the company, new
technologies have been applied aggressively to create new products, improve existing products, and make operations
more efficient. The Tribune’s non-newspaper revenues accounted for more than half of its earnings by 2000.
Anticipated Synergy
Cost Savings: Opportunities Abound
Cost savings are expected because of the closing of selected foreign and domestic news bureaus, a reduction in the
cost of newsprint through greater volume purchases, the closing of the Times Mirror corporate headquarters, and
elimination of corporate staff. Such savings are expected to reach $200 million per year (Table 2).
Revenue: Great Potential . . . But Is It Achievable?
The combined companies will have a major presence in 18 of the nation’s top 30 U.S. advertising markets, including
New York, Los Angeles, and Chicago. The combined companies provide unprecedented opportunities for
advertisers to reach major market consumers in any media form—broadcast, newspapers, or interactive. In addition,
the combined companies will benefit consumers by giving them rich and diverse choices for obtaining the news,
information, and entertainment they want anytime, anywhere. These factors provide an increased ability to capture
national advertising in the most important U.S. population centers. The significantly greater breadth of the combined
firm’s geographic coverage is expected to boost advertising revenues from about 3% to 6% annually.
Integration Challenges: Cultural Warfare?
Based on the current, traditional culture found at the Los Angeles Times and other Times Mirror properties,
integration following the merger was likely to be slow and painful. Concerns among journalists about spreading
their talents thin across three or four media—print, television, online, and radio—in the course of a day’s work
raised the stress level. Although the Tribune has been able to make the transition to a largely multimedia company
more rapidly than the more traditional newspapers, it has been costly. For example, development losses in 1999
were $30–35 million at Chicagotribune.com and an estimated $45 million in 2000. The bleeding was expected to
continue for some time and to constitute a major distraction for the management of the new company.
Financial Analysis
The present values of the Tribune, Times Mirror, and the combined firms are $8.5 billion, $2.4 billion, and $16.5
billion, respectively; the estimated present value of synergy is $5.6 billion (Table 3). This assumes that pretax cost
savings are phased in as follows: $25 million in 2000, $100 million in 2001, and $200 million thereafter. The cost
savings are net of all expenses related to realizing such savings such as severance, lease buyouts, and legal fees.
Table 4 describes how the initial offer price could have been determined and the postmerger distribution of
ownership between Times Mirror and Tribune shareholders.
Table 2. Annual Merger-Related Cost Savings
Source of Value Annual Savings
Bureau Closings1 $73,000,000
Newsprint Savings2 $93,000,000
Other Office Closings (e.g., Corporate Office in Los Angeles)3 $34,000,000
Total Annual Savings $200,000,000
1Assumes Tribune will close overlapping bureaus in United States (9) and most of the Times Mirror’s foreign
bureaus (21 abroad).
2As a result of bulk purchasing and more favorable terms with different suppliers, 15% of the newsprint expense of
the combined companies is expected to be saved.
3Layoffs of 120 L.A. Times Mirror Corporate Office personnel at an average salary of $125,000 and benefits equal
to 30% of base salaries. Total payroll expenses equal $19,500,000 (i.e., $125,000 1.3 120). Lease, travel and
entertainment, and other support expenses added another $14.5 million.
Source: Moore, Kathryn, Tim Schnabel, and Mark Yemma, “A Media Marriage,” paper prepared for Chapman
University, EMBA 696, May 18, 2000, p. 9.
Table 3. Merger Evaluation
1997 1998 1999 2000 2001 2002 2003
2004 2005
Tribune ($ Millions)
Sales 2891.5 2980.9 3221.9 3261.5 3473.5 3699.3
3939.7 4195.8 4468.5
Operating Expenses 2232.5 2279.0 2451.0 2283.1 2431.4 2589.5
2757.8 2937.1 3128.0
EBIT 559.0 701.9 770.9 978.5 1042.0 1109.8
1181.9 1258.7 1340.6
EBIT(1 – t) 395.4 421.1 462.5 587.1 625.2 665.9 709.2
755.2 804.3
Depreciation 172.5 195.5 221.1 212.0 225.8 240.5
256.1 272.7 290.5
Gross Plant & Equipment 103.8 139.7 134.7 163.1 173.7 185.0
197.0 209.8 223.4
Change in Working Capital 147.7 49.0 1107.0 260.9 243.1 258.9
275.8 293.7 312.8
Free Cash Flow to Firm 511.8 427.9 -558.1 375.1 434.2 462.4
492.5 524.5 558.6
PV (2001–2005) @8.5 51.5
PV (Terminal Value) @8.5 11144.2
Total Present Value 11195.7
Less: Long-Term Debt 2694.2
Plus: Excess Cash Balances 0
Equity Value 8501.5
Shares Outstanding 237.4
Equity Value Per Share 35.81
Times Mirror
($Millions)
Sales 2728.2 2783.9 3029.2 3140.0 3297.0 3461.9 3634.9
3816.7 4007.5
Operating Expenses 2337.0 2380.5 2558.7 2449.2 2571.7 2700.2
2835.3 2977.0 3125.9
EBIT 391.2 403.4 470.5 690.8 725.3 761.6
799.7 839.7 881.7
EBIT(1 – t) 234.7 242.0 282.3 414.5 435.2 457.0
479.8 503.8 529.0
Depreciation 133.4 152.1 166.4 188.4 197.8 207.7
218.1 229.0 240.5
Gross Plant & Equipment 173.4 131.5 113.0 125.6 131.9 138.5
145.4 152.7 160.3
Change in Working Capital 199.2 551.1 -791.1 251.2 257.2 270.0
283.5 297.7 312.6
Free Cash Flow to Firm -4.5 -288.5 1126.8 226.1 244.0 256.2
269.0 282.4 296.6
PV (2001–2005) @ 9.5% 25.8
PV (Terminal Value) @ 9.5% 3937.2
Total Present Value 3963.0
Less: Long-Term Debt1 1562.2
Plus: Excess Cash Balances 0
Equity Value 2375.0
Shares Outstanding 59.7
Equity Value Per Share 39.8
Combined Firms ($Millions)
Sales 5619.7 5764.8 6251.1 6401.5 6770.5 7161.1 7574.7 8012.5
8476.1
Operating Expenses 4569.5 4659.5 5009.7 4732.3 5003.1 5289.7 5593.1
5914.1 6253.8
Synergy 25.0 100.0 200.0 200.0 200.0 200.0
EBIT 1050.2 1105.3 1241.4 1694.3 1867.4 2071.4 2181.6
2298.4 2422.2
EBIT(1 – t) 630.1 663.2 744.8 1016.6 1120.4 1242.8 1309.0 1379.0
1453.3
Depreciation 305.9 347.6 387.5 400.4 423.6 448.2 474.2 501.7
530.9
Gross Plant & Equipment 277.2 271.2 247.7 288.7 305.6 323.4 342.4
362.5 383.7
Change in Working Capital 151.5 600.1 315.9 512.1 500.3 529.0 559.3 591.4
625.4
Free Cash Flow to Firm 507.3 139.5 568.7 616.2 738.2 838.6 881.5
926.9 975.1
PV (2001–2005) @ 9.5% 88.1
PV (Terminal Value) @ 9.5% 22805.6
Total PV 22893.8
Less: Long-Term Debt 4256.4
Less: Acquisition-Related Debt 2193.7
Plus: Excess Cash Balances 0
Equity Value 16443.7
Shares Outstanding 374.9
Equity Value Per Share 43.9
1Book values for long-term debt may be used if the coupon rate on the debt approximates competitive market rates.
Table 4. Offer Price Determination
Tribune Times Mirror Combined Incl. Synergy Value of Synergy
Equity Valuations 8501.5 2375.0 16443.7
5567.3
Minimum Offer Price1 2805.9
Maximum Offer Price 8373.2
Actual Offer Price 5671.4
% Maximum Offer Price 67.7%
Purchase Price Premium 1.02
New Tribune Shares Issued 137.50
Ownership Distribution
TM Shareholders 0.37
Tribune Shareholders 0.63
1Market value of Times Mirror on the merger announcement date.
Epilogue
Only time will tell if actual returns to shareholders in the combined Tribune and Times Mirror company exceed the
expected financial returns provided in the valuation models in this case study. Times Mirror shareholders earned a
substantial 102% purchase price premium over the value of their shares on the day the merger was announced. Some
portion of those undoubtedly “cashed out” of their investment following receipt of the new Tribune shares.
However, for those former Times Mirror shareholders continuing to hold their Tribune stock and for Tribune
shareholders of record on the day the transaction closed, it is unclear if the transaction made good economic sense.
Discussion Questions:
1. In your judgment, did it make good strategic sense to combine the Tribune and Times Mirror?
corporations? Why? / Why not?
2. Using the Merger Evaluation table given in the case, determine the estimated equity values of Tribune,
Times Mirror and the combined firms. Why is long-term debt deducted from the total present value
estimates in order to obtain equity value?
3. Despite the merger having closed in mid-2000, the full effects of synergy are not expected until 2002.
Why? What factors could account for the delay?
4. The estimated equity value for the Times Mirror Corporation on the day the merger was announced was
about $2.8 billion. Moreover, as shown in the offer price evaluation table, the equity value estimated using
discounted cash flow analysis is given has $2.4 billion. Why is the minimum offer price shown as $2.8
billion rather than the lower $2.4 billion figure? How is the maximum offer price determined in the Offer
Price Evaluation Table? How much of the estimated synergy value generated by combining the two
businesses is being transferred to the Times Mirror shareholders? Why?
5. Does the Times Mirror-Tribune Corporation merger create value? If so, how much? What percentage of
this value goes to Times Mirror shareholders and what percentage to Tribune shareholders? Why?
Ford Acquires Volvo’s Passenger Car Operations
This case illustrates how the dynamically changing worldwide automotive market is spurring a move toward
consolidation among automotive manufacturers. The Volvo financials used in the valuation are for illustration
only— they include revenue and costs for all of the firm’s product lines. For purposes of exposition, we shall
assume that Ford’s acquisition strategy with respect to Volvo was to acquire all of Volvo’s operations and later to
divest all but the passenger car and possibly the truck operations. Note that synergy in this business case is
determined by valuing projected cash flows generated by combining the Ford and Volvo businesses rather than by
subtracting the standalone values for the Ford and Volvo passenger car operations from their combined value
including the effects of synergy. This was done because of the difficulty in obtaining sufficient data on the Ford
passenger car operations.
Background
By the late 1990s, excess global automotive production capacity totaled 20 million vehicles, and three-fourths of the
auto manufacturers worldwide were losing money. Consumers continued to demand more technological
innovations, while expecting to pay lower prices. Continuing mandates from regulators for new, cleaner engines and
more safety measures added to manufacturing costs. With the cost of designing a new car estimated at $1.5 billion to
$3 billion, companies were finding mergers and joint ventures an attractive means to distribute risk and maintain
market share in this highly competitive environment.
By acquiring Volvo, Ford hoped to expand its 10% worldwide market share with a broader line of near-luxury
Volvo sedans and station wagons as well as to strengthen its presence in Europe. Ford saw Volvo as a means of
improving its product weaknesses, expanding distribution channels, entering new markets, reducing development
and vehicle production costs, and capturing premiums from niche markets. Volvo Cars is now part of Ford’s Premier
Automotive Group, which also includes Aston Martin, Jaguar, and Lincoln. Between 1987 and 1998, Volvo posted
operating profits amounting to 3.7% of sales. Excluding the passenger car group, operating margins would have
been 5.3%. To stay competitive, Volvo would have to introduce a variety of new passenger cars over the next
decade. Volvo viewed the capital expenditures required to develop new cars as overwhelming for a company its
size.
Historical and Projected Data
The initial review of Volvo’s historical data suggests that cash flow is highly volatile. However, by removing
nonrecurring events, it is apparent that Volvo’s cash flow is steadily trending downward from its high in 1997. Table
9-10 displays a common-sized, normalized income statement, balance sheet, and cash-flow statement for Volvo,
including both the historical period from 1993 through 1999 and a forecast period from 2000 through 2004.
Although Volvo has managed to stabilize its cost of goods sold as a percentage of net sales, operating expenses as a
percentage of net revenue have escalated in recent years. Operating margins have been declining since 1996. To
regain market share in the passenger car market, Volvo would have to increase substantially its capital outlays. The
primary reason valuation cash flow turns negative by 2004 is the sharp increase in capital outlays during the forecast
period. Ford’s acquisition of Volvo will enable volume discounts from vendors, reduced development costs as a
result of platform sharing, access to wider distribution networks, and increased penetration in selected market niches
because of the Volvo brand name. Savings from synergies are phased in slowly over time, and they will not be fully
realized until 2004. There is no attempt to quantify the increased cash flow that might result from increased market
penetration.
<A>Table 9-10. Volvo Common-Size Normalized Income Statement, Balance Sheet, and Cash-Flow Statement (Percentage of Net Sales)<A>
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Income Statement
Net Sales 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Cost of Goods Sold .772 .738 .749 .777 .757 .757 .757 .757 .757 .757 .757 .757
Operation Expense .167 .101 .120 .077 .119 .133 .132 .131 .129 .128 .127 .126
Depreciation .034 .033 .033 .034 .029 .038 .038 .039 .040 .040 .041 .042
EBIT .027 .128 .098 .112 .088 .073 .073 .074 .074 .074 .075 .075
Interest on Debt .050 .023 .022 .021 .015 .023 .023 .022 .021 .021 .020 .020
Earnings Before Taxes .024 .017 .076 .091 .072 .049 .051 .052 .053 .054 .055 .056
Income Taxes .004 .018 .022 .012 .015 .014 .014 .015 .015 .015 .015 .016
Net Income .028 .087 .054 .079 .057 .035 .036 .037 .038 .039 .040 .040
Balance Sheet
Current Assets .632 .503 .444 .524 .497 .500 .500 .500 .500 .500 .500 .500
Current Liabilities .596 .400 .283 .298 .304 .350 .350 .350 .350 .350 .350 .350
Working Capital .036 .103 .161 .226 .192 .150 .150 .150 .150 .150 .150 .150
Total Assets 1.21 .889 .809 .905 .889 .906 .880 .858 .839 .822 .808 .795
Long-Term Debt .371 .211 .227 .236 .256 .234 .215 .196 .180 .165 .151 .307
Equity .244 .278 .299 .371 .329 .321 .316 .312 .309 .308 .307 .307
Selected Valuation Cash-Flow Items
EBIT (1 – t) .022 .150 .126 .126 .105 .093 .094 .094 .095 .095 .096 .096
Capital Expenditures .031 .027 .033 .053 .054 .061 .069 .078 .088 .099 .112 .126
Working Capital .025 .077 .068 .049 .000 .017 .020 .020 .020 .020 .020 .020
Free Cash Flow .047 .079 .053 .059 .088 .087 .044 .036 .027 .017 .005 (.008)
to the Firm (FCFF)
Determining the Initial Offer Price
Volvo’s estimated value on a standalone basis is $15 billion. The present value of anticipated synergy is $1.1 billion, suggesting that
the purchase price for Volvo should lie within a range of $15 million to about $16 billion. Although potential synergies appear to be
substantial, savings due to synergies will be phased in gradually between 2000 and 2004. The absence of other current bidders for the
entire company and Volvo’s urgent need to fund future capital expenditures in the passenger car business enabled Ford to set the
initial offer price at the lower end of the range. Thus, the initial offer price could be conservatively set at about $15.25 billion,
reflecting only about one-fourth of the total potential synergy resulting from combining the two businesses. Other valuation
methodologies tended to confirm this purchase price estimate. The market value of Volvo was $11.9 billion on January 29, 1999. To
gain a controlling interest, Ford had to pay a premium to the market value on January 29, 1999. Applying the 26% premium Ford paid
for Jaguar, the estimated purchase price including the premium is $15 billion, or $34 per share. This compares to $34.50 per share
estimated by dividing the initial offer price of $15.25 billion by Volvo’s total common shares outstanding of 442 million.
Determining the Appropriate Financing Structure
Ford had $23 billion in cash and marketable securities on hand at the end of 1998 (Naughton, 1999). This amount of cash is well in
excess of its normal cash operating requirements. The opportunity cost associated with this excess cash is equal to Ford’s cost of
capital, which is estimated to be 11.5%—about three times the prevailing interest on short-term marketable securities at that time. By
reinvesting some portion of these excess balances to acquire Volvo, Ford would be adding to shareholder value, because the expected
return, including the effects of synergy, exceeds the cost of capital. Moreover, by using this excess cash, Ford also is making itself less
attractive as a potential acquisition target. The acquisition is expected to increase Ford’s EPS. The loss of interest earnings on the
excess cash balances would be more than offset by the addition of Volvo’s pretax earnings.
Epilogue
Seven months after the megamerger between Chrysler and Daimler-Benz in 1998, Ford Motor Company announced that it was
acquiring only Volvo’s passenger-car operations. Ford acquired Volvo’s passenger car operations on March 29, 1999, for $6.45
billion. At $16,000 per production unit, Ford’s offer price was considered generous when compared with the $13,400 per vehicle that
Daimler-Benz AG paid for Chrysler Corporation in 1998. The sale of the passenger car business allows Volvo to concentrate fully on
its truck, bus, construction equipment, marine engine, and aerospace equipment businesses. (Note that the standalone value of Volvo
in the case was estimated to be $15 billion. This included Volvo’s trucking operations.)
Discussion Questions and Answers:
1. What is the purpose of the common-size financial statements developed for Volvo (see Table 8-8 in the textbook)? What
insights does this table provide about the historical trend in Volvo’s historical performance? Based on past performance,
how realistic do you think the projections are for 2000-2004?
2. Ford anticipates substantial synergies from acquiring Volvo. What are these potential synergies? As a consultant hired to
value Volvo, what additional information would you need to estimate the value of potential synergy from each of these areas?
3. How was the initial offer price determined according to this case study? Do you find the logic underlying the initial offer
price compelling? Explain your answer.
4. What was the composition of the purchase price? Why was this composition selected according to this case study?
