DuPont Corporation: Sale of Performance Coatings Case Solution
From PE firmâ€™s perspective, if PE acquires DPC, there will be an increase in EBITDA from 5.5 times to 6 times. The reason EBITDA will create the value by improving targetâ€™s operations such as; product expansion, cost reduction, and add-on acquisitions. PE firm will improve plans and gain control of the company. It will be pressured to put money in order to work and get results through an increase in numbers. Purchased price multiples will be 9 times in 2011. As PPMS is coincided with credit market. When the set two companies will merge, it will have more ability to finance the amount.
Total debt-to-EBITDA multiples decreased sharply, from 7.6Ã— in 2007, to 3.3Ã— in 2009,due to a large increase in equity contributions from sponsors.If current trends held, it appears that PE firms would have large amounts of debt financing available, for a potential purchase of DPC.
- Highlight any relevant industry characteristics, and/or market and macroeconomic trends.
PPG was a strong competitor of GPC. While acquiring any DPC, the PE firm has to compare the target company with their close competitors. Compared with DPC, PPG has a strong growth and higher achieved margin. DPCâ€™s lower margin was mostly the result of a higher cost. Based on the assessment, while acquiring DPC, it is expected that sales will grow by 1% or 2% and operating margin will improve by 50 basis points. According toÂ exhibit 12, in 2007 most of the strategic buyers were interested in acquiring DPC, as at that time economic conditions was not good, so most of the companies try to get advantage of synergy like ability, to get more loans at higher rate, good management, and reduction of cost.
The APV (adjusted present value) is not frequently used for DCF analysis, APA is used more in theoretical circles. However, APV considered a more attractive valuation yield. Both analyses give same answer, there are no changes accrued in capital structure.
The main feature of APV analysis is that it does not attempt to capture taxes and other financing effects on discounting rate. While DCF analysis calculates the cost of equity, cost of debt, in the way to capture the effects of taxes and financing.
Theoretically, the APV method brings the impact of growth as well as the tax on the cost of equity, systematic risk, and cost of capital. Therefore, it comes up to be as a more flexible technique for valuation as compared to DCF analysis.
In other words, we can say that WACC approach is not as useful as APV approach in leveraged buyouts due to the change in the capital structure.
Â The LBO analyzes “floor” valuation for the company, and it is also useful to determine the amount that strategic buyers are willing to pay for target company and still realize an adequate return on their investment.
While calculating the enterprise value of the DPC, it is expected that company revenue will grow by 5% in the next five years and operating margin will also improve by 12%. The enterprise value is $4,859.. Thus, enterprisesâ€™ value provides valuation that is more accurate because it includes debt in its value calculation…………….
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