Key formulae:
Hamada Equation with taxes
l = u [1+ (1- tc) D/E]
Questions:
You have been asked by the CEO of Genzyme, Henri Termeer, to advise on Sanofi-Aventis’s $69 a share offer and threat of a hostile takeover. Termeer needs your help convincing key shareholders that Sanofi’s offer undervalues the company.
(1) Taking into account: a market rate of return of 7.5%; 25% corporate tax rate; Sanofi-Aventis’s Standard and Poor’s ‘AA’ Credit rating; 1.15 Beta and debt/equity ratio of 26%, estimate the WACC for the acquisition. Take special care to provide a clear and comprehensive rationale; (15%)
(2) Review management’s earnings projections in case Exhibit 17 and compare them to the market scenario provided in Exhibit 18. Are they appropriate? How would you recommend modifying them? (15%)
(3) Based on the market scenario information provided in Exhibit 18, forecast free cash flows, enterprise value and target share price. (20%)
(4) Perform sensitivity analysis and other risk analysis you consider appropriate on key variables and assumptions of this investment. Identify the effect on share price of deviations in key factors from those presented in the market scenario. Do you feel that these risks are acceptable? Under which conditions would you not proceed with this acquisition? (20%)
(5) Can you identify any real options embedded in this acquisition? What information would you need to value these options? (15%)
(6) Should Termeer recommend that the Board fight the hostile offer or back down in its resistance to Sanofi’s offer? Be sure to discuss strategic as well as financial factors. (15%)
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