You team works for XYZ Company, which has a directional strategy focused on expanding the company through horizontal integration. Your team can determine the official name of the company and industry. The company does a great job keeping close watch on its cash position and consistently maintains a positive cash flow; is very solvent; controls its overhead expenses; has solid marketing and sales, production, and human resources performance metrics, and fosters a culture of strategic thinkers. Historically, your company has expanded through a combination of organic (new startups) and inorganic growth and feels it’s time to consider acquisition opportunities.
The Board is looking to engage in a friendly acquisition of a company that will not only increase its market share, but allow it to penetrate new markets and increase the company’s abilities to meet current and future consumer needs and expectations. Since management’s attitude is to pursue a friendly acquisition as opposed to a hostile takeover, your team may consider looking at conglomerates that have experienced significant growth through inorganic growth (acquisitions) and may now be looking to refocus on their core business and are willing to consider divesting some of its businesses that are within your industry. There could be other companies that are under financial duress and receptive to acquisition offers. Your team is a part of the corporate mergers and acquisition (M&A) department and has been assigned the task of identifying two potential acquisition targets. Since your Board is committed to a strategy of horizontally integration, you will be looking for possible acquisitions from within your industry. You will be performing a preliminary analysis of the companies under consideration, and then ultimately recommend one of the companies move forward for a more in-depth valuation by M&A Department.
Notes: The target acquisitions should be publicly traded and have the same fiscal year end, preferably December 31st. In addition, your team is encouraged to select a proper name for your company and the industry for which it is aligned.
To successfully complete your preliminary analysis of the target acquisitions, your team should follow this high level process flow:
1. Select Comparable Companies that Satisfy Inclusion Criteria –
Use these – Da Vita and Fresenius (dialysis)
2. Conduct Qualitative Research on the Companies
3. Conduct Quantitative Analyses of the Companies (financial)
4. Prepare Report of Findings with Recommendation
Conduct Qualitative Research on the Companies
Provide relevant background information on the each company, current forces affecting its operations, and its expectations for future years. The management discussion and analysis (MD&A) section of the company’s annual report will be a useful source for this type of information. In addition to the companies’ annual report, the teams may look at pulling current articles about the companies from the databases available through the University Library. There are a number of credible sources where this type of information can be obtained through the Internet.
The teams will be expected to qualitatively analyze the content within the companies’ most recent independent audit of its financials and records. In performing this analysis, the teams should focus on the audit findings and options.
Conduct Quantitative Analyses of the Companies (financial)
1. Present a comprehensive financial statement analysis of the target acquisitions. Prepare the common size statements and all the ratios and amounts for the measures given below for the most recent year for both of your companies and present in a clear tabular form. Then discuss each category given below.
o Prepare common-size financial statements for both target acquisitions
o Complete both a horizontal and vertical analysis for each target acquisition
o Compare the common-size financial statements between the two companies using cross-sectional analysis
o Calculate and interpret relevant profitability, solvency, liquidity, leverage, market value ratios for each company that will be useful in comparing the target acquisition
2. For each company, graphically trend the net income and cash flow from operations over the last five years. Based on a comparison of the income statement to the statement of cash flows, what accounts explain the greatest differences between net income (loss) and cash flow from operations. Comment on the quality of the earnings numbers.
3. Calculate and interpret the net present value (NPV) of the companies’ annual free cash flow (FCF) for a 5 year period (nper) taking into account a constant growth rate (which will need to be calculated), and a discount rate that is equal to your companies weighted average cost of capital (WACC), which is 7%.http://www.investopedia.com/articles/fundamental-analysis/11/present-value-free-cash-flow.asp (Links to an external site.)
4. Any notable similarities and differences in financial reporting practices of the two acquisition targets that could potentially impact your analysis should be reported along with your team mitigation strategy. For example, perhaps the firms are using the same or different methods of accounting for property, plant, and equipment (PP&E), inventory, intangibles, etc.
The team will perform all numeric calculations using Microsoft™ Excel. Excel can be used to graphically present data, and then copied and pasted into the Report of Findings (see below) or this can be directly in the Word document using the Microsoft™ charting feature.
Report of Findings with Recommendation (160 points)
The team will prepare a Report of Findings that addresses, at a minimum, the following content: background information on the project (not the target acquisitions) as assigned to your team by the M&A Department of your company; describe the methodologies and assumptions used in the selection of the target acquisitions as well as the qualitative and quantitative analyses of company data; present your results with accurate interpretations; conclusions; and finally recommend on which company should be forward to the M&A Department for more in-depth valuation analysis (due diligence). The recommendation needs to be well-supported, properly vetted, and logically presented.
The team will be expected to comply with the APA (6th edition) form and style standards when in-text citing sources and listing these sources in the list of references; however, all other APA standards are suspended for purposes of completing this deliverable. It is expected that the team will use sound judgment and professional creativity in the design, layout, and presentation of the content within the report. Any graphs used to present financial data can be created in Microsoft™ Excel, and then copied and pasted into the report OR the graphs can simply be created directly in the Word document using the Microsoft™ charting feature.
There are no prescribed page limits associated with the report. Keep in mind, the team will be expected to provide a great deal of specificity in terms of how the numeric calculations were performed, the underlying assumptions, and in the interpretation of results. The content throughout the report must be substantive, thorough, and comprehensive; explicitly address the requirement components (described in prior sections); reflective analysis, syntheses, and evaluation of relevant qualitative and quantitative data; and demonstrate the overall quality consistent with that expected of an industry professional.