case analysis
HARVARD EXTENSION SCHOOL
Mergers and Acquisitions MGMT E-2720
Spring 2014
Midterm Case – Sterling Household Products Company
Contents
a.How much business risk is associated with Sterling’s proposed acquisition of the germicidal, sanitation, and antiseptic products unit of Montagne Medical? 3
What is the cost of equity capital appropriate for evaluating the free cash flow associated with this investment? 4
What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow? 4
b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022? 4
What is the terminal value of the final 10 years of the acquisition, as of 2022? 5
What is the net present value (NPV) to Sterling of this base investment? 5
What are the amounts and timing of the follow-up expansion investment opportunity’s free cash flow from 2013 through 2022? 5
What is the terminal value of the final 10 years of the follow-up acquisition, as of 2022? 5
What is the net present value of this follow-up investment and the combined base and expansion investments? 6
c. Is acquisition of Montagne Medical’s germicidal, sanitation, and antiseptic products unit value-additive to Sterling? 6
d.What are the strategic issues associated with the proposed acquisition? 6
What uncertainties or trends do you see which could make the acquisition more or less attractive on both a financial and a strategic basis? 13
a. How much business risk is associated with Sterling’s proposed acquisition of the germicidal, sanitation, and antiseptic products unit of Montagne Medical?
Business risk – Beta – associated with Sterling’s proposed acquisition is 0.99. The Business risk is obtained from industry average. Unleveraged Beta represents the non-diversifiable risk, the risk that affects all firms within the industry. The risk of a company increases with a higher Debt/Equity ratio. Therefore Beta is
Mergers and Acquisitions MGMT E-2720
Spring 2014
Midterm Case – Sterling Household Products Company
Contents
a.How much business risk is associated with Sterling’s proposed acquisition of the germicidal, sanitation, and antiseptic products unit of Montagne Medical? 3
What is the cost of equity capital appropriate for evaluating the free cash flow associated with this investment? 4
What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow? 4
b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022? 4
What is the terminal value of the final 10 years of the acquisition, as of 2022? 5
What is the net present value (NPV) to Sterling of this base investment? 5
What are the amounts and timing of the follow-up expansion investment opportunity’s free cash flow from 2013 through 2022? 5
What is the terminal value of the final 10 years of the follow-up acquisition, as of 2022? 5
What is the net present value of this follow-up investment and the combined base and expansion investments? 6
c. Is acquisition of Montagne Medical’s germicidal, sanitation, and antiseptic products unit value-additive to Sterling? 6
d.What are the strategic issues associated with the proposed acquisition? 6
What uncertainties or trends do you see which could make the acquisition more or less attractive on both a financial and a strategic basis? 13
a. How much business risk is associated with Sterling’s proposed acquisition of the germicidal, sanitation, and antiseptic products unit of Montagne Medical?
Business risk – Beta – associated with Sterling’s proposed acquisition is 0.99. The Business risk is obtained from industry average. Unleveraged Beta represents the non-diversifiable risk, the risk that affects all firms within the industry. The risk of a company increases with a higher Debt/Equity ratio. Therefore Beta is