Adecco has been achieving significant profits through its global strategy of becoming the leading staffing service firm in the major global markets. The company has consistently pursued two strategies: first, achieving rapid growth through both organic means and acquisitions, and second, attaining a minimum market share of 20% in all major markets as there is a strong correlation between market share and profitability (EBIT margins) in the staffing industry. Additionally, Adecco has prioritized optimizing its business segment mix.
These consistent strategies have proved successful for Adecco, particularly its market-share leadership which has been the key driver for outperforming competitors. Adecco has recently acquired multiple personnel service businesses, such as TAD, Delphi Group plc, and Career Staff Ltd., in an effort to gain more market share. The acquisition of Olsten would further boost Adecco’s share in the US market from 6% to 10%, establishing it as the top company in terms of market share in this region.
The potential merger of Olsten’s staffing business with Adecco’s US subsidiary could result in significant synergies. Therefore, it is crucial for Adecco to acquire Olsten in order to maintain its global leadership. According to Adecco’s estimates in Exhibit 13, if the combined company immediately adopts its long-term target capital structure of 20% debt and 80% equity, what is your estimate of Olsten’s value?
Furthermore, a consultant suggests an alternative financing strategy for the acquisition. Instead of assuming the long-term capital structure, the acquisition should be funded with debt. This would result in a coverage ratio of 4 in 2000 and it would grow linearly to 7 at the end of the forecast horizon (nine years ahead).
Note that the ratio “times interest earned” refers to the coverage ratio, which is defined as EBIT divided by Interest Expense. It is used to calculate the enterprise value based on this financing assumption. Do you agree with the consultant’s recommendation for acquiring financing? Explain your reasoning. Additionally, demonstrate how the estimated value from Question 2 is affected by considering the following two aspects.
