M&A: acquisition plan Pirelli-Goodyear

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The acquisition process concerning a hypothetical acquisition of Pirelli made by Goodyear.

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M&A: acquisition plan Pirelli-Goodyear

  1. 1. ACQUISITION PLANWARSAW SCHOOL OF ECONOMICSMergers & AcquistionPh. D. Mariusz-Jan RadloMarcella Malpangotto 56100Francesco Micaletti 56103Henning Hoyer 56080Laura Corallo 56058and1
  2. 2. AGENDA – Acquisition Process1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan2Mergers & Acquisition
  3. 3. AGENDA – Acquisition Process3Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  4. 4. Goodyear – At a glance• Goodyear is one of the worlds leading tire companies(N. 1 in North America and Latin America)• It designs, develops, manufactures and sells tyres - for motorvehicles, industrial vehicles and motorcycles.• It operates 53 manufacturing plants in 22 countries• The Common stock is traded on the NASDAQ Global Select Market• 73,000 employees (2011)Mergers & Acquisition 4USD in millions 2010 2011 Δ %Sales 18,832 22,767 + 21%Operating Income 917 1,368 + 49%Net Income -216 343 /Total Assets 15,630 17,629 + 13%
  5. 5. BusinessesWhat they do?Development, manufacture, distribution and sale oftires and related products and services worldwide.• Automobiles, trucks,buses, aviation,motorcycles.ORIGINALEQUIPMENT• Automobiles, trucks,buses, motorcycles,others.REPLACEMENTPrimary production of tyreswhich are assembled andbranded by an organizationdown the supply chain:automotive manufacturesTechnical assistance and repaircentres for automobiles,garages, fast fitters, tyrewholesalers, retail shops
  6. 6. (In millions of tires)Replacement Units 2010North American Tire 50.8International 82.2Total 133OE Units 2010North American Tire 15.9International 31.9Total 47.8Worldwide tire units 180.8Businesses
  7. 7. AGENDA – Acquisition Process7Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  8. 8. External Analysis: Porters Five ForcesMergers & Acquisition 8IndustryRivalryPotential Entrants(Threat of Mobility)Buyers(Buyer Power)Substitutes(Threat ofSubstitutes)Suppliers(Supplier Power)
  9. 9. Porters Five ForcesMergers & Acquisition 9INDUSTRY COMPETITORS: Intensity of Rivarly• Concentrated industry:the first 7 firm >65% of the market share• Increasing competition at low-costfrom Asian companies.• High market growth (When industries aregrowing revenue quickly, they are less likelyto compete, because the total industry sizeis also growing• High levels of product differentiation (lower levels of price competition)Medium/Low rivalry, but the scenario could change in the futureCOMPANIES MARKET SHARE1 Michelin 17.1%2 Bridgestone 16.9%3 Goodyear 14.9%4 Continental 5.9%5 Pirelli 4.5%6 Sumitomo 3.2%7 Yokohama 2.9%IndustryRivalryPotentialEntrants(Threat ofMobility)Buyers(Buyer Power)Substitutes(Threat ofSubstitutes)Suppliers(SupplierPower)
  10. 10. Porters Five ForcesMergers & Acquisition 10SUPPLIERS: Bargaining Power of SuppliersNatural rubber, synthetic rubber (Butadiene) and petroleumbased raw materials represent the main raw material fortyres.Even if…• A low concentration of suppliers• Critical production inputs are similar… Natural rubber, butadieneand petroleumprices are volatile,because they depends onmany other factorsIndustryRivalryPotentialEntrants(Threat ofMobility)Buyers(Buyer Power)Substitutes(Threat ofSubstitutes)Suppliers(SupplierPower)
  11. 11. Porters Five ForcesMergers & Acquisition 11POTENTIAL ENTRANTS: Threats of new entrants• High capital requirements• High sunk costs limit competition• Strong brand names are important• Industry requires economies of scale• Advanced technologies are required No threats from potential entrantsIndustryRivalryPotentialEntrants(Threat ofMobility)Buyers(Buyer Power)Substitutes(Threat ofSubstitutes)Suppliers(SupplierPower)
  12. 12. Porters Five ForcesMergers & Acquisition 12ORIGINAL EQUIPMENT (“OE”):Automotive manufactures• highly concentrated market (About 10global automakers account for over77% of the production worldwide).• Low switching cost for buyers• Sales depend on automotive markettrendsHigh bargaining powerREPLACEMENTTechnical assistance centres forautomobiles, garages, fast fitters, tyrewholesalers, retail shops.It requires a high service level in terms ofshort delivery times• Not concentrated buyers• Low switching cost for buyers• Small size buyersLow bargaining powerBUYERS: Bargaining Power of BuyersIndustryRivalryPotentialEntrants(Threat ofMobility)Buyers(Buyer Power)Substitutes(Threat ofSubstitutes)Suppliers(SupplierPower)
  13. 13. Porters Five ForcesMergers & Acquisition 13SUBSTITUTES: Threat of substitutes• The only threat can be caused by the increasing of publictransport that reduces use of cars• High switching costs: customers cannot easily switch toother products or services of similar price and still receivethe same benefits• Limited number of substitutes: customers cannot easilyfind other products or services that fulfil their needs No threats from susbtitutesIndustryRivalryPotentialEntrants(Threat ofMobility)Buyers(Buyer Power)Substitutes(Threat ofSubstitutes)Suppliers(SupplierPower)
  14. 14. AGENDA – Acquisition Process14Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  15. 15. SWOT Analysis - GoodyearMergers & Acquisition 15+ -INTERNALStrengths* Innovation* Loyal customers* Strong management team* Strong financial position* Brand Identity* M&A competencesWeaknesses* Bad communication* Over leveraged financial position* Poor supply chain* Weaker position in Non-US marketsrelative to competitors* 19th largest air polluter in the U.S.EXTERNALOpportunities* Increasing growth rate of European Market* Higher operating margin from Premiumsector* Emerging marketsThreats* Increasing Competition from AsianCompanies* Exchange rate fluctuations* Volatile prices of raw materials
  16. 16. ObjectiviesSought Synergies from AcquisitionMergers & Acquisition 161. INCREASING MARKET SHARE Getting a leading position2. GEOGRAPHICAL DIVERSIFICATION Higher penetration of European MarketNew sales opportunities3. SALES GROWTH Improving product-mix  PremiumSegmentCross selling4. COST REDUCTION Economies of scale: reaching themaximum safe production capacitySharing the distribution network:divestment of the overlapping facilitiesIncreasing of purchasing powerSharing technological know-how
  17. 17. Type of AcquisitionMergers & Acquisition 17HORIZONTAL ACQUISITIONallowingDOMAIN EXPANSIONSegmentexpansion:Premium SegmentGeographicalexpansion:European Market
  18. 18. AGENDA – Acquisition Process18Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  19. 19. Search/Screening PlanScreening criteria1. Industry: same industry2. Market segment: High-quality tires, premium sector3. Market share: getting the leadership in the tire industry(at least 3% market share)4. Geographic location: Outside America, mostly Europe5. Degree of leverage: Relatively low (D/E < 80%)Mergers & Acquisition 19
  20. 20. Which potential targets?x Michelinx BridegestonContinentalPirelliSumitomoYokohamaWhy not?• It would be very difficult forGoodyear to buy a companyof such dimensions• The acquisition of one ofthose two companies is likelyto trigger the antitrustissues.
  21. 21. Which target is the most suitable?Mergers & Acquisition 21COMPANY1MARKETSHARE2MARKETSEGMENT3GEOGRAPHICLOCATION4MARKETDEBT/EQUITYContinental 5.9%High-quality andstandard-qualitytiresEurope (Germany)Asia98.03%Pirelli 4.5%High-qualitytiresEurope (Italy, Spain)Latin America57.69%Sumitomo 3.7% High-quality tiresAsia (Japan)North America114.03%Yokohama 2.9%Standard-qualitytiresJapanNorth America116.32%
  22. 22. Combined market shareMergers & Acquisition 22COMPANIES MARKET SHARE1 Goodyear + Pirelli 14.9% + 4.5% = 19.4%2 Michelin 17.1%3 Bridgestone 16.9%4 Continental 5.9%
  23. 23. AGENDA – Acquisition Process23Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  24. 24. Pirelli – At a glance• Pirelli Tyre is the fifth largest global tyre maker by revenues:5.6 billion € (2011)• It is leader in the high-end segments with high technologicalcontent.• It designs, develops, manufactures and markets tyres - formotor vehicles, industrial vehicles and motorcycles.• It operates 22 plants in more than 160 countries.• It is listed on the Milan Stock Exchange• 34,259 employees (2011)Mergers & Acquisition 24
  25. 25. BusinessMergers & Acquisition 251. A growing focus on the Premium Segment2. A strong presence inthe Replacement channel3. A balanced distribution of revenuesamongst Mature Markets and RapidDevelopment Economies% of 2011 Revenues
  26. 26. AGENDA – Acquisition Process26Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  27. 27. Shareholders structure (2012)Mergers & Acquisition 27CAMFIN totally owns 26.2% of ordinary share capitalCEO: M. T. ProveraChairman: M. T. Provera• Main Shareholder:M. T. Provera• Chairman:M. T. Provera
  28. 28. Negotiation Structure - RequestsPIRELLI:- Keep managerial indipendence due to overlap ofManagement and Shareholders- Keep brand integrity- Shared-based Payment due to the will of main shareholderto carry on with the businessMergers & Acquisition 28GOODYEAR:- Friendly Acquisition due to overlap of Management andShareholders- Shared-based Payment due to high leverage- Balanced Integration to let Pirelli focusing on thePremium Segment, while Goodyear on the Standard one Compatibility of both parts needs
  29. 29. Alternativesx Merger: too much integration and loss of Pirelli’s brand identityx Alliances: it doesn’t allow exploitation of synergies in a proper way,because of the lack of complete controlMergers & Acquisition 29Acquisition is the best alternative allowing in the same time:- Balanced Integration- the possibility to keep separated the brands identities- the possibility to share technological know-how- the possibility to exploit synergies
  30. 30. DEAL STRUCTUREMergers & Acquisition 30Acquisition vehicle Holding Company: the target is a foreing firmsand earn-outs could be involvedPost closing organization Holding company: to preserve Pirelli’s culture andimplement earn-outsForm of payment Combination of cash and stocksTax structure To avoid a high taxation resulting from a holdingcompany, they could:- use more stock than cash- start the Holding in Switzerland:- Holding tax system: 8%- No tax on capital income for SwissClosing the possible gap onpriceEarn-outs
  31. 31. AGENDA – Acquisition Process31Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  32. 32. Pirelli: DCF AssumptionsVariable Value SourceTwo-stageGrowthModelShort-term 6% Analyst estimateLong-term 2.5%Long-term growth rate of economyEBIT Margin 14%Higher than historical and industry average becausenew Pirelli’s strategy concentrates mainly on thepremium segment that has higher marginGross Capex (%on sales) 6%• Historical average• 4% for the year 2017 in order to guarantee themaintenance capex in the long periodD&A (%on sales) 4% Industry averageNon-cash Working Capital(%on sales)14.8% Analyst estimateTax rate 31.5%Weighted average of the marginal tax rate of thecountries where Pirelli sells its products, with weightsequal to the percentage of sales in each countryMergers & Acquisition 32
  33. 33. Pirelli: WACCVariable Value Sourceβ 1.42 BloombergRisk-free rate 4.5% Italian BTP 10 YRSEquity risk premium 6% Analyst estimateCost of equity Ke 13.02% CAPM: Ke = 4.5%+1.42*6%Cost of debt Kd 5.6% Analyst estimateD/(D+E) 42% Book value of debtMarket value of equityE/(D+E) 58%WACC 9.16% WACC= 42%*5.6%*(1-0.315)+58%*13.02%Mergers & Acquisition 33
  34. 34. Pirelli & C: DCF ValuationMergers & Acquisition 34= 8,356,060,000 €*All values are in Million EurosEnterprise ValueOf Pirelli
  35. 35. Goodyear: AssumptionsMergers & Acquisition 35Variable Value SourceTwo-stageGrowthModelShort-term 4% Analyst estimateLong-term 2.5% Long-term growth rate of economyEBIT Margin 5%• Historical average• Goodyear’s EBIT margin is much lower thanPirelli’s because its strategy is mainly focused onthe standard segmentGross Capex (%on sales) 4.6%• Historical average• 4% for the year 2017 in order to guarantee themaintenance capex in the long periodD&A (%on sales) 4% Industry averageNon-cash Working Capital(%on sales)6.7% Analyst estimateTax rate 35% US corporate marginal tax rate
  36. 36. Goodyear: WACCMergers & Acquisition 36Variable Value Sourceβ 2.66 BloombergRisk-free rate 4.5% US treasury notesEquity risk premium 5% Analyst estimateCost of equity Ke 17.8% CAPM: Ke = 4.5%+2.66*5%Cost of debt Kd 6.7% Analyst estimateD/(D+E) 65% Book value of debtMarket value of equityE/(D+E) 35%WACC 9.06% WACC= 65%*6.7%*(1-0.35)+35%*17.8%
  37. 37. Goodyear: DCF ValuationMergers & Acquisition 37= 11,954,220,000 $*All values are in Million DollarsEnterprise ValueOf Goodyear= 9,085,207,200 €
  38. 38. Potential synergiesGrowth in Revenues: the growth rate isexpected to switch from 4.5% to 5.5% in 2015Cost Reduction: the EBIT margin is expected togradually increase from 7.3% to 9% by 2017X Integration costs: 210 M € equally split in thefirst two yearsMergers & Acquisition 38
  39. 39. Combined Company: DCFMergers & Acquisition 39*All values are in Million Euros**All values of Goodyear have been converted in Euro using USD/EUR=0.76Enterprise Valueof combined-company = 23,622,690,000 €
  40. 40. Value of Synergies• Combined-company’s EV = 23,622,690,000 €• Pirelli’s EV+ Goodyear EV = 17,441,267,200 €Synergies =6,181,422,800 €Mergers & Acquisition 40
  41. 41. Pirelli & C: Comparable Companies MethodMergers & Acquisition 41*All values are in Million Euros
  42. 42. Weighted average valueMergers & Acquisition 42Valuation method Weight Enterprise ValueDCF 60% 8,356,061,000EV/EBIT 25% 5,374,478,000EV/EBITDA 10% 5,132,531,000EV/Sales 5% 4,994,836,000Average 100% 7,120,251,000
  43. 43. Price Range and Offer PriceMergers & Acquisition 43Minimum PriceStand-Alone price fromWeighted Average Value7,120,251,000 €Offer PriceStand-Alone price fromWeighted Average Value+50% Synergies10,210,926,400 €Maximum PriceStand-Alone price fromWeighted Average Value+Synergies13,301,673,800 €
  44. 44. Financial PlanGoodyear Pirelli Combined CompanyCash 2,107 557 2,664Book Value of Debt 3,953 1,772 5,725Book Value of Equity 773 2,191.60 2,965Book Debt to EquityRatio511.4% 80.85% 193.1%Mergers & Acquisition 44*All values are in Million Euros• Even without considering any further borrowing,the combined-company has a high Book D/E ratio• Pirelli’s shareholders would like to retaintheir interest in the tyre business• Goodyear’s P/E (9.8811) > Pirelli’s P/E (8.6507)which may increase value of the combined firm (Source: Bloomberg)Deal paidmainly bySTOCK
  45. 45. AGENDA – Acquisition Process45Mergers & Acquisition1. Step : Business Plana. Goodyear Introductionb. Industrial Analysis: Porters Five Forcesc. SWOT Analysis2. Step: Acqusition Plana. Search/Screening Planb. Pirelli Introductionc. Negotionation Strategyd. Financing Plane. Integration Plan
  46. 46. INTEGRATION PLANMergers & Acquisition 46COST EFFICIENCYCOMBINEDDEVELOPMENTCO-LEARNINGTURNAROUNDPLATFORMIncreasing revenuesthrough newmarkets/products,exploiting the acquiredas platform for growthLEARNINGDomain Domain DomainReinforcement Expansion ExplorationVALUE CRATION SOURCESHOW TO CREATEVALUE?MAXINTEGRATION‘STAND-ALONE’OPTIMIZATION
  47. 47. INTEGRATION PLANMergers & Acquisition 47INTEGRATION DEPTH:How many functions or divisionmust be integrated?“ARRANGMENT”long-distancecooperation, sharing ofbest practises, results-based managementINTEGRATION PACE:How fast must be decisions andimplementations?MEDIUMINTEGRATION SENSIBILITY:How many overlapskeeping/cutting?Which consensus level requested?MEDIUMEasier way to face COMMINCATION and CULTURAL problems
  48. 48. 48Thank you for paying attention!Any questions?

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