case 49
FIN3CSF Case Studies in Finance
Semester 2, 2014
Case Study 5: Valuing the Enterprise
Due date: 4.00 pm, Monday, October 20th, 2014
CASE 49: GEs Proposed Acquisition of Honeywell
On March 1, 2001, the antitrust regulatory authority of the European Commission (EC) announced that it had initiated a review of the proposed takeover of Honeywell International Inc. by General Electric Company (GE). You are required to look at this situation from the point of view of an arbitrageur Jessica Gallinelli, who already holds a long position in Honeywell and a short position in GE.
Case Study Questions
1. Jessica Gallinelli must make a decision. Should she hold or sell her positions in GE and Honeywell? Justify your answer by analysing the main considerations in her decision (3 marks)
2. Consider the information in Case 49, Exhibits 4 through 10. What is a reasonable share value range for Honeywell? Justify your choice by making reference to (1) recent market prices; (2) financial data for comparable firms; (3) financial data for comparable transactions: Aerospace Industry; (4) financial data for comparable transactions: “Jumbo” deals; (5) discounted cash flow; (6) multiples valuation (i.e. stand-alone valuation summary Honeywell international; and (7) with-synergies valuation summary Honeywell international. (6 marks)
3. What is the return on investment for Gallinelli’s arbitrage position to March 1, 2001, if she opened her position on October 20, 2000? Refer to the worksheet “Arb Returns and Spreads” in the workbook or spreadsheet “Case_49.xls” and the related procedure for calculating this in [B] Case 48, pp. 692-3. (4 marks)
4. How will the market react to the news from antitrust regulators? Justify your answer by making reference to (a) the probability that the takeover succeeds or (2) the takeover fails (do not answer as if the takeover had already concluded). Include as a justification for your answer the analysis in the “Case_49-probability for
Semester 2, 2014
Case Study 5: Valuing the Enterprise
Due date: 4.00 pm, Monday, October 20th, 2014
CASE 49: GEs Proposed Acquisition of Honeywell
On March 1, 2001, the antitrust regulatory authority of the European Commission (EC) announced that it had initiated a review of the proposed takeover of Honeywell International Inc. by General Electric Company (GE). You are required to look at this situation from the point of view of an arbitrageur Jessica Gallinelli, who already holds a long position in Honeywell and a short position in GE.
Case Study Questions
1. Jessica Gallinelli must make a decision. Should she hold or sell her positions in GE and Honeywell? Justify your answer by analysing the main considerations in her decision (3 marks)
2. Consider the information in Case 49, Exhibits 4 through 10. What is a reasonable share value range for Honeywell? Justify your choice by making reference to (1) recent market prices; (2) financial data for comparable firms; (3) financial data for comparable transactions: Aerospace Industry; (4) financial data for comparable transactions: “Jumbo” deals; (5) discounted cash flow; (6) multiples valuation (i.e. stand-alone valuation summary Honeywell international; and (7) with-synergies valuation summary Honeywell international. (6 marks)
3. What is the return on investment for Gallinelli’s arbitrage position to March 1, 2001, if she opened her position on October 20, 2000? Refer to the worksheet “Arb Returns and Spreads” in the workbook or spreadsheet “Case_49.xls” and the related procedure for calculating this in [B] Case 48, pp. 692-3. (4 marks)
4. How will the market react to the news from antitrust regulators? Justify your answer by making reference to (a) the probability that the takeover succeeds or (2) the takeover fails (do not answer as if the takeover had already concluded). Include as a justification for your answer the analysis in the “Case_49-probability for