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Nike strategy and acquisition EMBA 2014


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Published in: Business, Economy & Finance

Nike strategy and acquisition EMBA 2014

  1. 1. NIKE Inc Cost Of CapitalDebasis ChakrabortyEMBA 20144/21/2013 1IBS EMBA 2014 Debasis Chakraborty
  2. 2. AgendaExecutive SummaryBackgroundProblemSWOT AnalysisGeneral Capital ReviewCost Of DebtCost Of EquityInvestment AppraisalWACCRecommendation and Conclusion4/21/2013 2IBS EMBA 2014 Debasis Chakraborty
  3. 3. Executive SummaryNike is one the world leading brand in shoes was facing a tremendouschallenge during the period 1997-2001, as its revenue and market share hasbeen declined with a alarming figure. Nike has opportunity to regain in themarket to offer new product line and cost reduction.And on the other hand North Point Fund, world leading Mutual FundManagement firm ,who is doing extremely well in the market, is considering tobuy NIKE share. KIM ford , the Portfolio Manager at “North Point Fund” is responsible toproduce the Financial decision to her executive board, whether BUY out NIKEshare is profitable Option or NOT.4/21/2013 3IBS EMBA 2014 Debasis Chakraborty
  4. 4. BackgroundYear Financial Factors Statistics1997-2000 Net Income, Market Share1997-2000 Revenue and Earning GrowthMillion Dollar Question to Investor Investment is worthwhile ? Should North Point Corp invest ?4/21/2013 4IBS EMBA 2014 Debasis Chakraborty
  5. 5. Background Of Nike And North-PointNike North-PointAthletic Shoe Manufacture Mutual Fund Management FirmRevenue is $9 billion from 1997 Invested on fortune 500Net Income fallen from $800 Million to $580MillionTOP holding share on GM, EM, McDonald , 3Mand other large capMarket Share fall 48% (1997) to 42% (200) The stock Market is declined last 18 monthManagement concern about Top line growthand Operating performanceFund performed extremely wellLong term revenue is targeted 8-10% In 2000 Fund Fund’s earned return is 20% VsS&P 500 falls 10%Earning growth is targeted 15% At end of June 2001, fund’s year to date Returnsstood at 6.4% verses 7.3% for S&P 500Adverse effect of strong dollar had negativeeffected in revenue4/21/2013 5IBS EMBA 2014 Debasis Chakraborty
  6. 6. Problem and Future DirectionProblemSales GrowthNet ProfitMarket ShareLehman Brothers recommended to Invest +UBS Warburg / CSFB recommended NOT Invest -Fundamental (DCF) value is higher than market value of Nike’s share ?With the CASH Flow forecast Provided , the Main task is to estimate WACC ?Future DirectionTo be : Mid-price footwearExpense4/21/2013 6IBS EMBA 2014 Debasis Chakraborty
  7. 7. AnalysisKIM Ford, portfolio Manager of North Point Large Cap has computed theCASH FLOW and her assistant Joanna Cohen is responsible to Calculatethe COC (Cost Of Capital )Considering the fact, IfDiscount Rate 12% == Stock Price is overvaluedDiscount Rate 11.17% == Stock Price is undervaluedCost Of Capital is very important for Cohen to calculate“Cost Of Capital (COC) is Important To Capital Investor to take adecision regarding to invest the capital with similar Risk Project “4/21/2013 7IBS EMBA 2014 Debasis Chakraborty
  8. 8. Data Analysis : Net Margin4/21/2013IBS EMBA 2014 DebasisChakraborty8Year SL No Net Margin1996 1 8.71997 2 8.51998 3 4.21999 4 5.12000 5 6.42001 6 6.20 5 10123456Net MarginSL No05100 2 4 6 8Net MarginNet MarginNet Margin = Net Profit / Sales
  9. 9. SWOT AnalysisStrengthNo 1 Sports band in the world.Global/ International band .Strong at R&D and Innovation.Strong at Marketing and Campaigning .Manufactured high quality of goods with low cost.WeaknessMost of the profit comes from shoeRetail sector is very Price sensitiveNo information of Partnership Model and current partnership detailsQuestionable to Factory heath and safety and working condition4/21/2013 9IBS EMBA 2014 DebasisChakraborty
  10. 10. SWOT AnalysisOpportunitiesOwners does not believe that it is Fashion band, but customer have differentopinionTo develop Sunglass , Sports wear and JewelryIncrease Market Share in Asia (India & China) to reduce cost/priceReduce the pollution from the Shoes FactoryRe-use the manufacturing WasteThreatsNike is exposed to International nature of TradeCompetition in the market for Sports shoes and GarmentDecline Market share in the USConsumers looking for better dealExperience many adverse publishing feedbacks due to widespread advertising4/21/2013 10IBS EMBA 2014 Debasis Chakraborty
  11. 11. General ReviewPerfect Capital Market AssumptionThe dividend (Gordon Growth Model)Limitation Of WACC4/21/2013 11IBS EMBA 2014 Debasis Chakraborty
  12. 12. The Capital Review & AssumptionAssumes that investor are well versifiedIt is one time Period mode for most investorProject Stretch over a number of YearAssumes the stock Maker is a Perfect CapitalEstimation of future Beta use historical dataCAPM does not correctly explain the Risk4/21/2013 12IBS EMBA 2014 Debasis Chakraborty
  13. 13. The Golden Growth ModelThe Accounting ratios that’s has calculated are assumed to beconstant over time and this is quite illogical in realityThe model uses accounting data can be manipulated to suitManagement ObjectiveThe Model can be useful If the Company has no DEBT, which isnot practical in most of the cases4/21/2013 13IBS EMBA 2014 Debasis ChakrabortyEarlier Capitalization ModeKe = EPS/PAssumption EPS will be constant over the time
  14. 14. Limitation Of WACCThe proportion of debt and equity remain unchangedThe operating risk of the firm is unchangedThe Finance is not project specificThe WACC reflects the marginal Cost of the new capitalThe WACC also reflects the Company’s long term future Capitalstructure and capital Cost4/21/2013 14IBS EMBA 2014 Debasis Chakraborty“WACC is the minimum return required by a capital provider“Set by the Investor and Market (NOT by the Manager)It estimation of WACC will be our Objective
  15. 15. Cost Of DebtJoanna Cohen has not been calculated the Cost Of Debt ProperlyCOD = IE (Interest Expected ) / Average Balance Of Debt (BOD)= 4.3 %Considering the factCoupon 6.75% paid semi-annuallyIssued ( 15107/1996)Maturity ( 15107/2021)PV ( Current Price ) = $ 95.60IRR = 3.587 ( Semi Annually ) ; = 7.16 Annually; Kd= 7.37 %After TAX Cost Of Debt = 7.37 % (1-38%) = 4.44 %4/21/2013 15IBS EMBA 2014 Debasis Chakraborty
  16. 16. Cost Of EquityJoanna Cohen has used CAPM to estimate Cost Of EquityCOE = 5.74 + (5.9%)*80 = 10.5 %Considering the factShe has calculated Risk free rate from 20 Year T bandCohen uses Average Beta from 1996 to June 2001 = 0.80Cohen uses a Geometric mean to market Risk Premier = 5.9%CommentsRisk Free RateT-band with 20 year maturity 5.74 is the longest rate availableMarket Risk Premium5.9% market risk premium are negatively serial correlatedWeighted Capital Component To calculate weight of Debt and Equity, she should use Market values,but she has used Book Values4/21/2013 16IBS EMBA 2014 Debasis Chakraborty
  17. 17. Capital Asset Pricing Model (CAPM)4/21/2013 17IBS EMBA 2014 DebasisChakraborty
  18. 18. Dividend Discounted Model (DDM/DGM)D0= 0.48g= 5.5%Ke= D0(1+g)/(p+g)=0.48*(1+5.5%) / (42.09)=6.71%<Kd = 7.3%Assumption : Dividend over last 3 year at flat rate 0.49 %4/21/2013 18IBS EMBA 2014 Debasis Chakraborty
  19. 19. Earning Capitalization Model (ECM)Ke= EPS/P= 2.32/42.09= 5.51%<Kd = <20 year , Rf= 5.74%Assumption : EPS will be constant for average4/21/2013 19IBS EMBA 2014 Debasis Chakraborty
  20. 20. WACC: Value of Equity and Valueof DebtWE ( Value Of Equity ) = Number of Shares * Shares Price= 42.09 * 271.5= $ 11427.49Where as in Cohen Model = $3494.5WD ( Value Of Debt) D= Current LT + Note s Payable + LT Debt ( Discounted) = 5.4 + 855.30 + 416.72= $1277.424/21/2013 20IBS EMBA 2014 DebasisChakraborty“Single Cost of Capital Vs Multiple Cost Capital : It should be Single asEstimated WACC is the value of Cash flow for the entire firm, provided by the Kimi “Risk is same across the Nike
  21. 21. DCF Valuation : WACCWACC) = 9.27 % [ Please find the calculation in excel]COST OF EQUITY = 9.27 %Equity Per Share = $58.13Current share price = $42.09 is undervaluedCurrent growth rate (6-7%) is much lower than Market ( 8%to 10%)4/21/2013 21IBS EMBA 2014 Debasis Chakraborty
  22. 22. ConclusionFrom the Earlier WACC, Valuation and Growth Opportunity analysis“North Point should Invest On Nike and BUY Nike Share “4/21/2013 22IBS EMBA 2014 Debasis Chakraborty