Book (Donald M. DePamphilis - Mergers, Acquisitions, and Other Restructuring Act
ID: 2637456 • Letter: B
Question
Book (Donald M. DePamphilis - Mergers, Acquisitions, and Other Restructuring Activities
Case 18-1: Nestle Buys Majority Ownership Stake in Chinese Candy Maker pp. 672674
1. What were Nestls motives ?or acquiring Hsu Fu Chi? What were the firms alternatives to acquisition, and why do you believe they may not have been pursued?
2. What alternatives did the majority shareholders in Hsu Fu Chi have for growing the firm? Speculate as to why they may have chosen to sell a controlling interest to Nestl?
3. Speculate as to why Nestl used cash rather than its stock to acquire its ownership interest in Hsu Fu Chi.
4. Why do you believe the independent and noninstitutional shareholders in Hsu Fu Chi, whose shares were listed on the Singapore stock exchange, were willing to sell to Nestl? What were their other options?
5. Nestl is assuming that it will be able to grow its share of the Chinese confectionary market by a combination of expanding its existing Chinese operations (so-called organic growth) and acquiring regional candy and food manufacturers. What obstacles do you believe Nestl could encounter in its efforts to expand in China?
6. Do you believe that multiples of revenue paid by other good companies is a good means of determining the true value of Hsu Fu Chi? Why? Why not?
7. Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings, compared with 28 for comparable firms. Why do you believe Hsu Fu Chis share price on the Singapore stock market sold at a 21% discount from the share price of other firms?
Explanation / Answer
1. Nestle's motive for acquiring Hsu Fu Chi was to become a top player in the high growth Chinese confectionary market through inorganic growth. The firm's alternative to acquisition is to establish its own startup in China. The option of startup was not pursued by Nestle as ususally inorganic growth through acquisitions provides a quick, easy and a more desirable route to scale up operations in a foreign country or region.
2. For growing the firm, the majority shareholders could have sold shares to independent shareholders to raise more capital required for future growth. They, however, sold stake to Nestle because (i) there were few independent shareholders to whom shares could have been sold (ii) there was very little incentive for the founding family to buy minority shareholders (iii) Nestle would have helped the Chinese company expand its operations in other countries beyond China.
3. Nestle used cash rather than stock to possibly insulate itself from the country risk premium and the risk of foreign exchange fluctuations.
4. Independent and noninstitutional shareholders in Hsu Fu Chi, whose shares were listed on the Singapore stock exchange, were willing to sell to Nestle as the deal helped unlock value for Hsu Fu Chi's independent shareholders.
5. Obstacles that Nestle could encounter are: (i) inorganic growth through cross border acquistions require patience. The acquisition can fail to deliver the desired results due to consolidation issues in cross border acquisitions. (ii) There can be a conflict of interest with Hsu Fu Chi looking to expand outside China and Nestle wanting to strengthen its presence in China.
6. Multiples of revenue paid by other companies is a good means of determining the value for Hsu Fu Chi. This is because such multiples are used for the purpose of relative valuation in Finance. It is also known as prcedent transaction analysis in Finance in which price paid for similar companies are used as a standard or benchmark.
7. Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings, compared with 28 for comparable firms, possibly because of the limited trading volume in the market for Hsu Fu Chi's shares.