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发表于 2012-3-30 14:29
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Clothing Tree is a Milan-based holding company. The holding company comprises individual firms with unique brands that produce and sell products ranging from infant and children’s clothing, to fashion wear, to work uniforms, to undergarments. The firm’s founder and chairman, Romano Nocci, says that “since we assume that people will continue to wear clothes, we continue to believe that this is a good business for the long haul.”
However, in spite of his overall belief in the soundness of the clothing market, he realizes that tastes and fashions change, and believes that the firm should constantly be on the lookout for suitable candidates to add to the Clothing Tree empire. He also believes that it may make sense to restructure the firm by creating a new holding company, Family Tree, to own the Clothing Tree plus two new divisions—Food Tree and Drug Tree.
The Food Tree would be a holding company formed to acquire companies in all phases of the food business. The Drug Tree would be a holding company formed to acquire companies in all phases of the non-prescription pharmaceuticals market. Both of these product lines are necessary goods, so Nocci believes that they would fit well with the firm’s existing clothing businesses.
To help implement this acquisition strategy, Nocci has hired Zurich Investment Advisers. Armando Palocci, CFA has been assigned to be the lead advisor in this effort. When Palocci and his team met with Nocci and other key Tree managers, they discussed a wide-ranging set of subjects relating to the nascent acquisition plans. These discussions are summarized in the paragraphs below.
Palocci asks whether additions to the Tree empire will continue to maintain their identities. For example, if Food Tree were to purchase Parma Foods, would the company be operated as a subsidiary and maintain its identity, or would it be combined with other acquisitions and rebranded as Food Tree? Nocci indicates that this would likely depend upon the value of maintaining the brand versus the efficiencies that could be gained from combining acquisitions.
Does the Tree want to avoid firms that have takeover defenses in place? If so, which types of defenses? Nocci responds that he “would prefer to avoid firms that have pre-offer defenses, such as poison pills and pac-man defenses in place because these make the cost of an acquisition prohibitive. However, if a firm has shown a willingness to pay greenmail in the past, he would not be averse to testing the management again on this count.”Some of the acquisition targets will likely have business interests in the U.S. and Canada, as well as Europe. Palocci describes to Nocci how industry concentration is measured in the U.S., and what might cause an acquisition to be challenged on antitrust grounds. Nocci indicates that whether or not it makes sense to run the risk of an antitrust challenge will depend, in part, on the potential gains from the merger. Thus, they must be evaluated on a case by case basis.
Palocci and Nocci conclude their discussions with a review of acquisition target valuation methods, the evidence concerning the distribution of merger benefits, and strategies that the firm might employ if it were to purchase a firm with several divisions, some of which it does not wish to keep.If Food Tree is successful in purchasing a food company for which it maintains the firm’s existing identity and brands, the first such purchase would be classified as a: A)
| statutory, conglomerate merger. |
| B)
| subsidiary, conglomerate merger. |
| C)
| subsidiary, horizontal merger. |
|
The first food company, being in an entirely different business from clothing, would have to be considered a conglomerate merger. The fact that the firm intends to maintain the target’s identity after it is acquired indicates that it would be considered a subsidiary merger. (Study Session 9, LOS 32.a)
With regard to Nocci’s description of the types of takeover defenses he would prefer to avoid, he is: A)
| incorrect with respect to the poison pill defense, and incorrect with respect to the pac-man defense. |
| B)
| correct with respect to the poison pill defense, and correct with respect to the pac-man defense. |
| C)
| correct with respect to the poison pill defense, but incorrect with respect to the pac-man defense. |
|
Nocci is correct with respect to the poison pill defense. It is a pre-offer defense that can make an acquisition prohibitively expensive. The pac-man defense is a post-offer defense. It involves the acquisition target turning the table and attempting to acquire the firm that is making the offer. (Study Session 9, LOS 32.f)
With respect to antitrust challenges in the United States, Palocci should have told Nocci that the decision to challenge is based upon a: A)
| qualitative measure of industry concentration, but that the issue is not clear-cut. |
| B)
| quantitative measure of industry concentration, and that the issue is clear-cut once the change in the measure is known. |
| C)
| quantitative measure of industry concentration, but that the issue is not clear-cut. |
|
Palocci should have told him that the decision to challenge is based upon a quantitative measure of industry concentration, but that the issue is not necessarily clear-cut. (Study Session 9, LOS 32.g)
Food Tree is likely to have to evaluate potential acquisition targets that are temporarily experiencing financial distress or earnings problems that can be solved with an application of the Tree’s financial strength and management expertise. That said, the food industry, by and large, consists of firms that have relatively predictable revenue and cost patterns, and the level of investment risk is well-understood. All else being equal this set of circumstances would seem to argue for which of the following valuation approaches? | | C)
| Comparable transaction. |
|
If a firm is in financial distress or experiencing earnings problems, this will make it difficult to apply the comparable company or comparable transaction approaches. However, if the firm can be restored to health and future cash flows and risks are fairly predictable, this implies that discounted cash flow valuation may provide the best results. (Study Session 9, LOS 32.i)
Suppose that Drug Tree has identified three comparable companies relative to a target under evaluation. The valuation metric is price to sales (P/S). The three comparable companies have P/S ratios of 2.17, 1.98, and 2.09. The target has sales of €600m. What value of the P/S should be applied to the target, and what is the estimated value?
The appropriate value to apply to the target is the average, or P/S = 2.08. If sales = €600m then solving for P = 2.08 × €600m yields an estimated target value of €1248m. (Study Session 9, LOS 32.j)
Palocci advises that if the Food Tree purchases a firm that includes a division that does not fit the Tree’s strategic plan, the firm can sell the division via divestiture, equity carve-out, spin-off, or split-off. However, he tells Nocci that only the divestiture will provide Food Tree with cash after completion, because the others all involve the distribution of stock in the division. Palocci’s advice is: A)
| correct with respect to the alternatives, and correct with respect to the provision of cash. |
| B)
| incorrect with respect to the alternatives, and incorrect with respect to the provision of cash. |
| C)
| correct with respect to the alternatives, but incorrect with respect to the provision of cash. |
|
Palocci’s list of methods is correct for a going concern (liquidation is also an option if the firm is in financial distress, which is assumed not to be the case here). However, he is incorrect with respect to the provision of cash. An equity carve-out will also generate cash, via the public offering of shares in the division. A spin-off or split-off will not generate cash for Food Tree. (Study Session 9, LOS 32.n) |
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