Dow’s Bid for Rohm and Haas

Grand Metropolitan's P/E ratio is noticeably lower when compared to the other companies within its segmented segments. We found that these low P/E ratios combined with increased profits made Grand Metropolitan a potential target for corporate raiders, i.e. takeover risk.

UST dividend payment ability can be hampered given the following risk factors: anti-trust dispute is resolved in favor of competitors and UST is subject to further penalty, corporate restructuring or new entrants are encouraged to enter the moist smokeless market; management’s continued lackluster non-core investment performance further harms the company’s return over investment; Price value further prey market share of premium products while premium R&D is not catching up with the pace.

Our estimated cost of capital, 20.81%, is lower than Ricketts’ expected return, 30%-50%, thus the investment is worthy. However, it’s higher than other pessimistic members’ expected return, 10%-15%, making the decision more complex and requiring further valuation。

The purpose of this report is to evaluate the stock price of Wal-Mart Stores Inc. (which ticker symbol in NYSE is WMT) by fundamental analysis. According to this analysis, I recommend that Wal-Mart is worth to invest in the long term because of the potential growth of market shares and revenue. Besides, based on P/E method and Gordon model, WMT price is undervalued; therefore, if investors buy the stock, they will get benefit not only in capital gain but also in dividend cash inflow.

Profitability and liquidity ratios are impressive and continue to reflect the company’s ability to succeed and compete with archrival and industry powerhouse Home Depot. The stock market ratios have fluctuated throughout the period analyzed, largely due in part to world events beyond management’s scope of control and the American public’s uncertainty in the market as a whole. All in all Lowe’s is forecasted to continue its growth and upward trend in all indicative areas and remain a power in the retail hardware, special orders and home improvement market, trespassing on territory once clearly dominated by Home Depot, the worlds largest hardware retailer. Lowe’s is a favorite amongst institutional investors as their holdings make up 80.80% of common stock issued.

They derived this projection through estimating savings from increased operating efficiencies and by consolidation of duplicate functions. The present value of the synergies would range from $1.71 to $2.14 billion (Assuming the cash flows to be perpetuity using a discount rate of 8.3%). However, Vulcan’s leadership scoffed at Martin Marietta’s estimate of the merger synergies. Instead Vulcan CEO, Donald James was convinced the true value of synergies would not exceed $50 million per year. The present value of this synergy estimate would be $428 million (Assuming the cash flows to be perpetuity using a discount rate of 8.3%). This is summarized in table 2 below.

A) What is the possible meaning of the changes in stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement?

This represents a 7% increase in stock price. Further, the additional leverage and return of excess cash to shareholders will significantly increase ROE. If the market determines that an 80% debt capital structure is feasible for BBBY, then we will expect further capital gains as investors applaud shareholder friendly policies and re-examine EPS estimates. However, if top line growth and same store sales growth continue to trend downward, investors may become skeptical of BBBY management’s ability to continue generating over 30% EPS growth, and thus question the ability of the company to service its debt in the future.

An analysis of a repurchase of stock for $400 million cash, and recapitalization to 80% debt-to-total capital by borrowing $1.27 million reveals that BBBYs return on equity will be 113%, return on assets 61% and an after tax cost of debt of 28%. ROE is > ROA and ROA > after tax cost of debt. With the 80% debt-to-total capital structure ROE exceeds the other two capital structure scenarios of no debt and 40% debt-to-total capital. While all of this looks great there are other considerations. The household and personal products industries debt to total asset ratio is 34.69% while BBBY debt to total asset ratio is at 44% ($1,270,000/$2,865,023). Increasing to this capital structure would also reduce shareholders earnings per share.

A) What is the possible meaning of the changes in stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement?

Multiples approach is applied in the with-synergies valuation as well. Incorporating the effects of 80million cost savings for the merged firm (to be achieved by end of 2007 and assumed to incur in perpetuity then on) and 130 million integration costs (half of this accounted in each of first 2 years) in the estimated EBITA for Torrington. The with-synergies EBITDA is estimated to be $156.2 and then multiply average bearing industry EV/ EBITDA (7), enterprise value of $1103.16 million is evaluated, exceeding the value as a stand-alone entity by approximately $360 million. Sheet3: Multiples valuation method

Looking at Exhibit 11, which is a summary of comparable transactions by business segment, the offer for Interco once again fails to persuade. Looking at the average purchase price multiples of comparable transactions (refer to appendix B), it is apparent that the Rales proposal multiples are invariably lower than the industry averages. It would be in Interco's interests to divest and realize the higher earnings themselves, rather than allowing City Capital to take over at such a low offer.

Conversely, looking at the income statement for PMWL, operating income shows healthy gains of $45,862, which means the operating expenses are significantly lower in comparison to AWBL’s. However, PMWL’s cost of goods sold appear abnormally high, which makes an investor question whether this company is at it’s maturity phase in the product life cycle, and how much additional capital is necessary to bring this figure down to a number that leverages economies of scale and allows for profit maximization.

First, a large share repurchase will significantly increase shareholders’ percentage ownership of BKI. BKI has been under levered for decades. The company acquisitions of several small manufacturers made shareholders’ equity be diluted even more. In other words, shareholders, especially the main shareholders in Blaine’s board, are paying for BKI’s over-liquidity. This share repurchase will not only give the board more flexibility to allot dividends, but will lead to a stable development of BKI’s business in the long run.

1. The whole project will increase Dow shareholder’s wealth. As a public company, the first aim of the management team is to increase the shareholder wealth. The project proposed by the management team is definitely consistent with this goal. And bidding on the PBB is the first stage of the whole project. The exact increase in shareholders’ equity may be various at this point as it depends on lots of other factors ( we will discuss the risk of valuation thought the whole case.), but in general, the management team is confident in the future outlook.