Kennecott Carborundum Acquisition
Autor: stephomework • November 8, 2015 • Coursework • 348 Words (2 Pages) • 612 Views
- Analyze the economic rationale of the Carborundum acquisition
To add value to the corporation through the Carbonrudum acquisition, the deal has to
Create synergy when merging the 2 companies | Improve the financial leverage |
Bring additional tax benefits | Improve the revenue |
Bring additional competitive edges – patents and unique technologies to the company | Diversify business risk |
Increase firm assets | Increase the revenue |
Actually, under a conservative approach, it is justifiable to price Carborundum’s share as $85 and $70, at the 10.5% interest rate, the expected WACC in 1977. When the offer at $66 per share was accepted, Kennecott gets $4 per share.
Besides, the acquisition also diversified the business risks of Kennecott, as the average annual growth of Carborumdum at about 12.02%.
Also, Kennecott enjoyed tax-loss carry forwards and tax shield through raising $100 million debt to increase the financial leverage.
- Evaluate the methodology used to determine the value of Carborundum to Kennecott in Exh 7
We believe Kenncott uses Adjusted Present Value (APV) methodology to determine the value of Carborundum with constant debt Level. Using the WACC for a corporation of Kennecott’s standing (10.5%), the forecasted free cash flows generated by the business and interest tax shields from 1978 to 1987 were calculated and discounted. Using the same calculation with data in Exhibit 7 we achieve similar Implied Stock Price range of $70-85 per share; the terminal values were estimated to be 6 times and 10 times of Net Income in the final year.
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