1) Prepare for the Schneider management a SWOT analysis of the proposed Square D acquisition, i.e., what are the strategic advantages and disadvantages of the transaction.
Assumptions: FF = 5.08USD
Advantages:
Good strategic and operational fit
French Franc strong relative to the USD
Disadvantages:
Disapproval of SQD management (Hostile Bid)
SQD HQ located in DE, USA (higher regulatory requirements for hostile takeover)
Overpriced deal environment (French firms overpaying)
Schneider SWOT Analysis
Strengths
- Strong brand reputation supported by strong R&D (4% of revenue), QA
- Customer goodwill
- Strategy Refocused on Electrical Distribution, Electrical Power Industry
- Subsidiary Modicon leads NA market in industrial control category
- Strong profit, revenue increase from 1987-1990 (185% profit increase with 70% revenue increase)
Weaknesses
- Current overall North American Market position
- Size of NA operations compared to competitors
Opportunities
- SQD acquisition, albeit fighting against SQD management
- SQD operations are a good strategic fit with SG
Threats
- Powerful competition in NA market
- loss of access to NA market due to competition
2a) Evaluate the financial health of both companies including a decomposition of ROE for the
years of data available.
SQD is less levered than SG. While SG is the larger company in terms of sales and Market Cap., SQD is the more profitable.
| ROE breakdown | ||||||||||||
| Net Inc. | * | Sales | * | Assets | ||||||||
| ROE | = | Sales | Assets | Shareholder's Equity | ||||||||
| Units: Millions FF,USD | ||||||||||||
| SG | ||||||||||||
| Net Inc. (FF) | Net Inc. (USD) | Sales (FF) | Sales (USD) | NPP | Assets (FF) | Assets (USD) | Aturn | SH Equity | SH Equity (USD) | Fleverage | ROE | |
| 1987 | 324 | 1724 | 29294 | 155844 | 1.1% | 49719 | 264505 | 59% | 2754 | 14651 | 18.1 | 12% |
| 1988 | 560 | 3394 | 40493 | 245388 | 1.4% | 63991 | 387785 | 63% | 4192 | 25404 | 15.3 | 13% |
| 1989 | 877 | 5069 | 45127 | 260834 | 1.9% | 45946 | 265568 | 98% | 6741 | 38963 | 6.8 | 13% |
| 1990 | 924 | 4703 | 49884 | 253910 | 1.9% | 49578 | 252352 | 101% | 7505 | 38200 | 6.6 | 12% |
| SQG | ||||||||||||
| Net Inc. (FF) | Net Inc. (USD) | Sales (FF) | Sales (USD) | NPP | Assets (FF) | Assets (USD) | Aturn | SH Equity | SH Equity (USD) | Fleverage | ROE | |
| 1987 | 110 | 1484 | 7.4% | 1193 | 124% | 680 | 1.8 | 16% | ||||
| 1988 | 119 | 1657 | 7.2% | 1336 | 124% | 636 | 2.1 | 19% | ||||
| 1989 | 102 | 1631 | 6.2% | 1382 | 118% | 556 | 2.5 | 18% | ||||
| 1990 | 115 | 1653 | 6.9% | 1460 | 113% | 604 | 2.4 | 19% | ||||
b) Determine a range of possible values for Square D based on observed premiums,
comparables, Gordon model (DDM) and discounted cash flows. Clearly indicate all your
assumptions.
c) Discuss the structure of the deal, financing issues and exchange rate issues related to the
deal.
_________________________________________________________________
Errata:
Typos in Schneider case:
p.6 first line: recording annual sales of 50 billion (not million)
p. 14 Groupe Schneider balance sheets
‘Current liabilities and current portion of long-term debt’ should be ‘Short-term debt and
current portion of long-term debt’
1988 Current total assets 50,831 (not 50, 381)
1988 Total liabilities 57,755 (not 57, 775)
1990 Total current liabilities 25,548 (not 22,548)
p. 15 Groupe Schneider Statement of income
1990 Minority interest -441 (not -141)
p.16 Square D balance sheets
‘Current liabilities and current portion of long-term debt’ should be ‘Short-term debt and
current portion of long-term debt’
p.20 item 9 replace ‘annual gross cash flow margin represents 16% of the sales figure’ by
EBITDA
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