Financial analysis and management of international groups: Schneider vs Square D

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Financial analysis and management of international groups: Schneider vs Square D

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Abstract

The electrical equipment industry, which generates revenues from construction and maintenance, is closely related to the economic conditions. This sector is characterized by the globalization of markets, the concentration of firms, the standardization of products and increasing costs of development & production. The Schneider Group, a French electrical manufacturer whose CEO is Didier Pineau-Valencienne has been restructured. It has conducted the following measures:
-Divest the loss-making businesses,
-Focus on the two segments: electrical building contracting and electrical equipment manufacturing,
-Geographical diversification through the acquisition of 15% stake in DAVY, an English engineering company, and a controlling interest in Federal Pioneer, a Canadian electrical equipment manufacturer.

Presentation of the case
1. Outlook of the industry
2. The Schneider Group
3. Square D
4. Positioning on the global markets
5. From a joint-venture to a 'friendly cash merger transaction'
Questions about the case study
1. Assumptions made by Lazard Freres for valuing Square D
2. Square D's cost of equity
3. Estimation of the value of Square D to Schneider based on Lazard's assumptions
4. Price offered for Square D by Mr. Pineau-Valencienne
5. Net income, Equity and ROE
6. Goodwill asset arising from the acquisition of Square D
7. Consequence of the future amortization of the goodwill asset for Mr. Pineau-Valencienne
Conclusion

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[...] They projected: - Sales growth = in 1991 and thereafter - EBIT = 15-16% of sales - Net working capital = 11-13% of sales - Capex = of sales - Depreciation expenses = of sales between 1991 and 1997 and thereafter - Using exhibit 6 the other data used for the valuation of Square D are: - Square D equity Beta = 0.95 - Prime rate = - Government 30-year treasuries rate = - US Federal income tax rate = 34% - State income rate = We take into account the following data because it will have an impact on the future consolidated financial statements Schneider group if the merger is made. [...]

[...] Assuming that Schneider was forced to pay the full value of Square the goodwill is: Goodwill = fair value book value of equity = 1,675 604 = $1,071 M The goodwill amortization would have a negative impact on Schneider's future earnings. Even if it is amortized in 40 years, the charge of the amortization would be $ 27 M i.e. FF 134 M with an exchange rate of 0.2 in February 1991. As a result, the deterioration of net income is about Consequence of the future amortization of the goodwill asset for Mr. [...]

[...] This average has been annualized and we found a yearly market yield of Assumption: Based on the information above, we decided to take into consideration a market yield of * Source: FININFO Using the Capital Assets Pricing Model, the Square D's cost of equity or discount rate is calculated thanks to the risk free rate rF ( 8.25 the equity beta β ( 0.95 ) and the market yield ( 19.4 k = rF + β x (rM rF) = + 0.95 x ( - 8.25 = Estimation of the value of Square D to Schneider, based on Lazard's assumptions The value of Square D to Schneider is the present value of the free cash flows, which are the sum of the operating cash flows, the investing cash flows and the savings. [...]

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