It strived to achieve three goals. First of all, Adecco kept the high growth rate both organically as well as through acquisitions. Secondly, it meant to be the number one or two in market share in the biggest national markets and attain a 20% share of each market. Economies of scale and scope work in the staffing industry and are p ossible with consolidation. Thirdly, Adecco emphasized on its highvalue business segment s, which is IT and other specialized staffing. It operated a number of established sectors such as ccounting, finance, IT and engineering, characterized by higher margins.
It made strategic sense to acquire Olsten. Geographically, Olsten was a great complement to Adecco. Whereas Adecco was strong in the western US, Olsten had significant presence in the East. In addition, Olsten was present in Scandinavia, Latin America and Germa ny, where Adecco’s market share is small. The US market was highly desirable for Adecc o’s board, which made Olsten an appealing target for expanding IJS market share.
Culturally, t he management team also thought the cultures of the two companies were compatible. Based on Adecco’s pro forma estimates of the staffing business of Olsten in Exhibit 13, what is your estimate of the value of Olsten if the combined company immedi ately assumes its longterm target capital Structure (i. e. debt and 80% equity)? From the perspective of Adecco IJS, we should use the equity beta and debt b eta of those companies comparable to Adecco’s business. So for equity beta we take the a verage of those of Kelly and Manpower and get 0. 73 because they similarly operated exclusively in the staffing business. We also use the return of debt of 7% because Adecco itself faced a ngterm borrowing rate of 7%. . Suppose a consultant proposes that instead of assuming the longterm capi tal structure of debt and 80% equity, the acquisition should be financed with debt such that this coverage ratio achieves a value of 4 in 2000 and grows linearly to 7 at the end of the forecast horizon (nine years ahead). Note that the ratio “times interest ear ned” is the coverage ratio defined as EBIT/ (Interest Expense). Calculate the enterprise value under this financing assumption. Would you agree with the consultant’s recommend ation for the financing Of the acquisition?
Why or why not? Under the consultant’s assumption on capital structure the company will incr ease debt every year and the company will higher tax shield compared to fixed equity ratio. Would you agree with the consultant’s recommendation for the financing of t he acquisition? Why or why not? would agree. Because this capital structure is more flexible, and the tax shiel d benefit as a percentage of the earnings would stay constant after terminal year. So when t he earnings increase dramatically, the company can raise more and more debt to finance the grow th. 4.
Show how your estimated value from Question 2 changes if you consider th e following two aspects: Adecco assumes $750 million of Olsten debt Adecco US makes royalty payments to Adecco SA which might generate tax s avings for the worldwide firm. We make two adjustments to the valuation in Question 2. First, the longterm debt of Olsten would be eliminated, leading to a capital structure change, i. e. equity ratio . Second, we add back the tax savings due to royalty payments to free cash flow.
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Three Goals on Adecco Analysis. (2017, Jul 18). Retrieved from https://graduateway.com/adecco-writeup-43461/