FINA 6050 – Mergers, Acquisitions, and Corporate Restructuring Midterm Exam
Business case: Adecco SA’s acquisition of Olsten Corp.
- The case is included in the Harvard Business case package.
- Students must work independently on this case, no discussion with other student(s) in the class or any third person is allowed. The UML Students’ Code of Conduct will be strictly applied.
- Please provide your answers to the questions in a clear and concise manner. State/copy each question before providing your answer. For any calculation or estimation, state your input clearly and explain how you get the intermediate and final results. If you need to make assumptions, state them explicitly.
- Each student is requested to submit one case write-up that does not exceed ten double-spaced pages to the email address: Hieu_Phan@uml.edu. All write-up (including the appendix) should be consolidated into one WORD file (no excel file please). The file name should be in the following format: firstname_lastname_adecco_case.doc
- The submission deadline for the write-up is 11 am, Wednesday, November 8, 2017. Late submission will not be accepted.
- Good luck!
Questions for the case:
- (15 points) How has Adecco been able to outperform its rivals in the staffing industry? What is the strategic and economic rationale for its acquisition of Olsten?
- (15 points) Evaluate Olsten’s strategic and financial conditions as of mid-1999, in particular its funding needs and resources, and its performance with respect to the debt covenants.
- (40 points) Based on Adecco’s pro forma estimates of the staffing business of Olsten in Exhibit 13, what is your estimate of total enterprise value?
For this calculation, make the following assumptions:
- Evaluate the valuation from the perspective of Adecco US.
- Assume the acquisition was completed as of January 1, 2000.
- Evaluate enterprise value with the long-term target capital structure for Olsten i.e., 20% debt and 80% equity.
- The estimated EBIAT was arrived at without deducting amortization of goodwill.
- Assume that the Olsten’s rivals (i.e., Kelly and Manpower) had a debt beta of 0.2.
- A debt beta of 0.25. Market risk premium of 7.5%.
- In Exhibit 14, assume equity beta of Kelly to be 0.65 and equity beta of Manpower to be 1.05 (which are different from the equity betas of these two firms reported in Exhibit 14).
For the calculation of total enterprise value in Question 3, do not consider 1) any Olsten debt that might be assumed by Adecco, 2) any payments that Adecco might need to make to minority shareholders of some of its subsidiaries nor, 3) any special tax benefits enjoyed by Adecco SA through its ability to charge Adecco US royalties.
- (15 points) Let’s consider some additional factors in Olsten’s valuation:
- If Adecco were to assume $750 million of Olsten debt, how would this affect how much they would pay for the equity of Olsten’s staffing business?
- Some of the enterprise value calculated above in Question 3 is actually “owned by” minority shareholders in some of Olsten’s subsidiaries. How would this affect how much Adecco would pay for the equity of Olsten’s staffing business?
- Page 7 in the case describes a method whereby Adecco US could make royalty payments to Adecco SA. What is the valuation impact of this “tax market imperfection”? To simplify this analysis, assume that royalties are 1.5% of revenues and value the net tax savings from the perspective of the US firm (Adecco US).
- (15 points) As Adecco:
- How much would you bid for Olsten? Why?
- What forms of payment would you use (e.g., cash, stock, or a mix thereof) to acquire Olsten? Why?
- How would you convince the Olsten board to accept your offer?