...DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Hint Sheet: Congoleum Corporation Prof. Simon Gervais Fall 2011 – Term 2 This case illustrates a leveraged buyout and highlights some of its value-creating aspects. You are invited to combine the valuation principles and methods discussed in the course to evaluate a complex transaction from the perspectives of the various participants. Here are some guidelines for your valuation analysis. • Overview of the Valuation Process. Given the nature of the forecast data, it is useful for valuation purposes to treat the 1980-1984 period differently from the post-1984 period. In fact, the case writer hinted at the possibility of another reorganization at the end of 1984 in the note to Exhibit 14. Throughout, assume that time 0 is year 1979. • Make sure that you notice the changing debt ratios in 1980-1984. Which is the best valuation approach to deal with this? • Free Cash Flow. As usual, the following (unlevered) free-cash-flow formula should prove useful: EBIT = Operating Income − Corporate Expenses − Depreciation, UFCF = (1 − tc )EBIT + Depreciation − Change in NWC − Capital Expenditures. Note that there is a difference between UFCF defined above and what are referred to as “free cash flows” in Exhibit 13 (on line 14)? • Discount Rates. As we mentioned when discussing the Marriott case, the choice of discount rates is an important part of any valuation procedure. It is worthwhile to spend some...
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...„სააფთიაქო ნარკომანიის“ პრობლემა ნამდვილად არსებობს და მასთან ბრძოლის საჭიროებას არც არავინ უარყოფს. 1 სექტემბრამდე არსებული მდგომარეობით ნარკოტიკული და მათი შემცველი საშუალებები, ცალკეული ფსიქოტროპული და ძლიერმოქმედი ნივთიერებები მიეკუთვნებოდნენ (და დღესაც მიეკუთვნებიან) პირველი ჯგუფის მედიკამენტებს და ექვემდებარებიან სპეციალურ კონტროლს. მათი გამოწერა და გაცემა რეცეპტის სპეციალური ფორმით ხორციელდებოდა (და ხორციელდება). ჯანმრთელობის დაცვის სამინისტრო საჭიროებისამებრ ავსებს არსებულ ნუსხას ადგილობრივი ნარკოლოგიური სიტუაციის და სასამართლო-საგამოძიებო ორგანოების პრაქტიკის გათვალისწინებით. ძნელი სათქმელია რას შეცვლის ამ მიმართულებით მეორე ჯგუფის მედიკამენტების მხოლოდ რეცეპტით გასაცემ კატეგორიაში გადაყვანა. ვფიქრობ, ამ მიმართულებით უფრო მნიშვნელოვანია უკვე არსებული წესების მკაცრი დაცვა, მოსახლეობის სამედიცინო განათლება და მომხმარებელთა ფსიქო-სოციალური რეაბილიტაციაა. 2007 წლიდან საქართველოს ნარკობაზარზე იკლო ტრადიციულმა ნარკოტიკებმა (ჰეროინი, სუბოტექსი, იშვიათად - მეტადონი), რამაც ისინი ფართო მომხმარებლისთვის ფაქტობრივად მიუწვდომელი გახადა, 2008 წლის აგვისტოს ომის შემდეგ გორსა და გორის რაიონში საგრძნობლად მოიმატა ნარკოტიკების მომხმარებელთა რიცხვმა. დაიწყეს კუსტარულად დამზადებული ნარკოტიკის"- "ჯეფისა"და "ვინტის"გამოყენება, რომელთა ინგრედიენტები სააფთიაქო ქსელში ლეგალურად ხშირად ურეცეპტოდ იყიდებოდა. ამის გამო "წამალი"იმდენად იაფი იყო, რომ უამრავი ალკოჰოლიკისთვის ის უფრო ეკონომიური აღმოჩნდა, ვიდრე სპირტიანი სასმელი, შედეგად, მალე ნარკოტიკების მომხმარებელთა არმიას ალკოჰოლიკებიც შეემატნენ...
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...Executive Summary In valuing the target company Congoleum after an LBO by First Boston found the expected free cash flows generated by this firm from 1980 to 1984. These numbers were based on values provided in the case. From there, we employed the Adjusted Present Value method to discount these cash flows because we assumed that Congoleum was varying its Debt to Equity ratio during those years. We discounted these cash flows by the required return on assets that was in turn calculated through use of the Modigliani-Miller unlevering formula (to derive the Asset Beta) and the Capital Asset Pricing Model. The required return on Congoleum debt was calculated by the expected return of the average CCC-company’s debt and the expected return of debt under default. Then, the present value of financial side effects was taken into account by discounting the interest tax shield by the required return on debt. Finally, we calculated the terminal value of cash flows by assuming a constant 4.14% growth rate in perpetuity and a constant D/E ratio for the years after 1984. Thus, these cash flows were initially discounted under WACC-ME. From there, we factored in prior debt and cash that Congoleum had generated to calculate the total equity value of the firm after the LBO had taken place. Background Congoleum is a firm active in three product market segments: home furnishings, shipbuilding, automotive, and industrial distribution. In the summer of 1979, First Boston Corporation with the help...
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...proportion of operating income by segment in Exhibit 4 to aggregate Congoleum’s unlevered beta e. Calculate RU using the CAPM formula RU= RF + βU x MRP f. Alternatively, unlever Congeluem’s βE given in Exhibit 9 to get βE and Ru 2. Operating FCF Build discounted cash flow model with 5-year explicit forecast period from 1980-1984, as follows: a. Use projected Operating Income from Exhibit 15. b. From Exhibit 13, deduct corporate expenses and depreciation + amortization c. Less corporate taxes at 48% rate to get NOPLAT. d. Add back to NOPLAT the depreciation + amortization figures, less capital expenditure and changes in working capital. This gives the FCF to all capital 3. Calculate RD a. Due to the increased gearing of the Congoleum post LBO to >80%, the overall debt rate should effectively be higher than the bank senior financing of 14%. From Exhibit 10, such a debt rate corresponds to an S&P CCC rating. b. It is likely that the new senior and subordinated notes have lower interest rates because the “strips” issued to the insurance company investor includes preferred stock that pays additional (guaranteed) dividends. c. RD is the average of the CCC debt yields. 4. Calculate Tax Shield Benefit a. From Exhibit 16, find the present value of tax shield on the Total Interest Payments during the explicit forecast period. b. Apply tax rate of 48% and discount rate of RD 5. Debt Capacity post 1984 a. We assume that the firm maintains a target leverage post 1984...
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...1 ACQUISITIONS AND TAKEOVERS When analyzing investment decisions, we did not consider in any detail the largest investment decisions that most firms make, i.e., their acquisitions of other firms. Boeing’s largest investment of the last decade was not a new commercial aircraft but its acquisition of McDonnell Douglas in 1996. At the time of the acquisition, Boeing's managers were optimistic about the merger, claiming that it would create substantial value for the stockholders of both firms. What are the principles that govern acquisitions? Should they be judged differently from other investments? Firms are acquired for a number of reasons. In the 1960s and 1970s, firms such as Gulf and Western and ITT built themselves into conglomerates by acquiring firms in other lines of business. In the 1980s, corporate giants like Time, Beatrice and RJR Nabisco were acquired by other firms, their own management or wealthy raiders, who saw potential value in restructuring or breaking up these firms. In the 1990s, we saw a wave of consolidation in the media business as telecommunications firms acquired entertainment firms, and entertainment firms acquired cable businesses. Through time, firms have also acquired or merged with other firms to gain the benefits of synergy, in the form of either higher growth, as in the Disney acquisition of Capital Cities, or lower costs. Acquisitions seem to offer firms a short cut to their strategic objectives, but the process has its costs. In this chapter,...
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...Acquisition Valuation Aswath Damodaran Aswath Damodaran 1 Issues in Acquisition Valuation I Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including • When should you consider synergy? • Where does the method of payment enter the process. I I Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value? Aswath Damodaran 2 Steps involved in an Acquisition Valuation I I I I I Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the acquisition motive built in. Step 4: Decide on the mode of payment - cash or stock, and if cash, arrange for financing - debt or equity. Step 5: Choose the accounting method for the merger/acquisition purchase or pooling. Aswath Damodaran 3 Step 1: Motives behind acquisitions (1) Simplest rationale is undervaluation, i.e., that firms that are undervalued by financial markets, relative to true value, will be targeted for acquisition by those who recognize this anomaly. (2) A more controversial reason is diversification, with the intent of stabilizing earnings and reducing risk. (3) Synergy refers to the potential additional value from combining two firms, either from operational or financial sources. • • Operating Synergy can come from higher growth or lower costs Financial Synergy...
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...1 The Value of Synergy Aswath Damodaran Stern School of Business October 2005 2 The Value of Synergy Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper, we consider the various sources of synergy and categorize them into operating and financial synergies. We then examine how best to value synergy in any investment and how sensitive this value is to different assumptions. We also look at how this synergy value should be divided between the parties (or companies) involved in the investment. We conclude with an empirical examination of how much synergy is actually created in corporate mergers, and how much is paid. Synergy, we conclude, is so seldom delivered in acquisitions because it is incorrectly valued, inadequately planned for and much more difficult to create in practice than it is to compute on paper. 3 When Carly Fiorina argued for Hewlett-Packard’s acquisition of Compaq, she offered a number of of reasons the deal made sense. She noted that the combined company would be able to meet the demands of customers for “solutions capability on a truly global basis.” She also claimed that the firm would be able to lead with its products “from top to bottom, from low end to high end.” As her crowning argument, she claimed that the merger made sense because it would create “synergies that are compelling.” Synergy, the increase in value that is generated by combining two entities...
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