FOREWARD
This reports aims at shedding light in the best strategy for Ahold to adopt in identify the best target company to take over its aims to expand its food retailing services.
In this report the best comparison that will lead to aid in best decision making is by use of ratios since the business are reporting in different currencies and since the use of exchange rate would be biased due to volatility of the exchange rates overtime and thus such results would be quite unreliable and might lead to wrong decision making which would adversely affect the predator company.
Executive summary
Acquisition is a financial term used to refer to the process by which a one business entity or company known as predator company takes over at hundred percent or nearly one hundred percent another business entity known as target company in which the target company becomes part of the parent company and its operation as an independent entity ceases at the point of acquisition. Most of the times a larger company takes over a small business entity and rarely small firms take over large firms and when this happens its referred to as reverse takeover.
The sole aim of acquisition is to increase benefits of the acquiring company but this occurs with some risks since the acquiring entity will assume all the responsibilities of the captured business entity both in managing assets and bearing all liabilities.
Acquisition may also aim at consolidating the scarce resources of production and thus having taken over another business the company will have available resources for surplus production at a lower cost and thus will be enjoying economies of scale. Acquisition may as well aim at eradicating a competitor from an industry an thus have a control of the market as the only player and thus enjoy benefits of a monopoly
Issues.
In this report in which we are evaluating the best alternative for Ahold to acquire one of the two possible target companies we will identify what kind of acquisition it will be, whether it’s a forward or a reverse takeover.
In the process of take over there requires sound evaluation financial positions of the target companies in-order to ensure that a proper decision is arrived with less or no risk. The key factors of financial weight to be considered in this report are the;
- profitability of the target companies, profitability of the companies will be obtained from the income statements and some relevant ratios
- cash flow of the target companies
- balance sheet items of the target company
- market share of the target companies
- legal and intellectual rights of the target companies
In this special case, the evaluation of the predator company which is the Ahold is the target company will also be carried out for comparison reasons.
The report utilises the available financial statement readily available which are for financial period ending twenty ten and twenty eleven.
Brief history of the companies.
Ahold is Netherlands based international retailer which ranks number twenty five in the world in this field of food retailing. The company is Aiming at spreading its operations in Europe before diversifying to other countries in the world as well as offering high quality retail products which are competitive both in quality and in price.
Morrison is the fourth food retail company in United Kingdom with a market share of above eleven million customers. The company short term plan is to capture a large market share of the united kingdom as well as increase its profitability by providing a wide range of consumer retail products at competitive prices.
Delhaize is a Belgium based international food Retail Company operating in eleven countries which are in three continents of the world. It’s long-term plan is to expand an become the most preferred food retailing company both in its parent country, in Europe and in the entire continents of the world.
An evaluation of the profitability of the three companies from their income statements of financial period ending twenty eleven gives the following crucial information regarding each.
The possibility of acquiring Delhaize would seem impossible due to its long term ambition of spreading to every corner of the world in its pursuit to be the leading food retailing company and for such as much as Ahold would be willing to capture this company it would experience a lot of injunctions further more this would be the best alternative for its prime idea since the company is operating in the same currency area, Euro currency area, since there would be less technical difficulties in conversion of the operations as well as valuation since there is debate on the value of exchange to use as it would be for the Morrison.
Recommendation on which the company should Ahold take cannot be subjectively stated at his point but will be objectively stated after computations on the profitability, leverage ratios and long-term ambitions of the companies and their subsequent comparison in-order on the same calibres in-order to arrive at an optimal capturing decision.
Valuation of the companies.
The companies’ face value will be determined from their market capitalisation multiplied with the average market value of each after which the capturing cost will be determined from the face value and an addition of the goodwill amount attached to each company of which the value of the Delhaize would be much higher due to the expansive area of operation and good will which is linearly positive to the face value of the company, and thus is cost is the prime factor to consider in takeover then Morrison would be the best company to capture.
The first comparison: Profitability position of the companies.
Income statement for Morrison.
Earnings per share which is the amount paid per share before dilution increased from 23.93 pound to 26.68 pound which is an increase by a margin of 11.49%.
Decrease in profit s of the companies is due to decreased sales during the year which was due to increased cost of sales which were the main contributor to the expenses of the company more so the macroeconomic shocks famously known as the euro crisis were the major cause of the decreased performance in terms of the company’s profitability .
Income statement for Delhaize group
A quick inference of the results of Delhaize shows poor performance in the financial period of year 2011.
Income statement of Ahold Company
A tabulation of the above information on the performance of the companies generating income is as shown below:
One thing to note in this analysis is that the Ahold and Delhaize are expressing their financial values in Euro with Morrison reporting their performance in pounds and thus percentages are the best for this comparison instead of monetary value due to fact that exchange rates are volatile and deciding on the best exchange rate to use would be quite debatable.
Second comparison: Financial positions of the companies.
It’s from the financial positions of the companies that we can identify the asset base of the company, current liabilities calculate the liquidity ratios, know the capitalization of the company and thus a predator company like the must take into consideration in order to weigh the available benefits of taking over the target as well as the available risks such as excessive liabilities it taking over from the target company more it will assess the productivity of the assets of the target company. The other aspect of balance sheet is the retained asset and the hedging reserve which shows the amount of liquid cash the company is holding in the reserve account for precautionary uses or for use in case of an adverse situation arise and would put the businesses going concern into jeopardy more so huge reserves shows the entity has enough funds to meet future expansion and such a company would be a good one for capturing.
Its from the balance sheet items that we calculate the most crucial ratios, the leverage ratios and the liquidity ratios, leverage ratios show the extent to which the company utilises non owner funds in its production activities which shows the extent to which the company uses borrowed funds and thus the level of financial obligation which may put the company going concern in a situation of uncertainty while the liquidity ratio shows the extent to which the company can turn its assets into cash with ease. From the financial position of the company the most crucial ratios under the two categories calculated are the;
- Debt ratio under the leverage ratio which shows high leverage if above 50% its computed as follows, (long term debt/capital employed)100%.
- Acid test ratio which is the extent to which the company can realise its cash from current assets excluding the stocks its computed as follows, ({current assets- stock}/current liabilities)100%.
Debt ratio =(1600/6997)100%= 22.87%
Acid test ratio=(563/2303)100%=1:0.2
Consolidated balance sheet for Ahold Company
Its debt ratio (1489/7366)100% =20.21%
Its acid test ratio is {(5193-1466)/4614}100% =1:0.8
The debt ratio for Delhaize group is =(2325/7741)100% =30.03%
Acid test ratio for Delhaize group = {(3167-1718)/2827}100% =1:0.5 thus the activities of Delhaize are 30.03% funded by non owner funds while its liquidity is 95% with exclusion of the value of its inventories.
Summarizing this information in a tabular form ,
Reflecting on the cash flows of these companies ,the only priority here is to consider how the cash base of the companies are structured with reference to the activities which define the cash flow which include the operating activities which are the the core business undertakings which generate the cash, investing activities which are all investing activities which include sale and purchase of the assets used within the activities of the business and finally the financing activities which include the undertaking which alter the capital structure of the company.
CONCLUSION.
The aims of Ahold would be possibly be two
- Go off shore to other continents and for this objective it should opt for Delhaize which has already gone off shore and thus would be less tedious for Ahold to engage in market navigation as it would have a market that is already established and captured by the targeted company.
- Dominate the Europe food retailing industry and thus it should first expand to the company not operating in the Euro zone which Morrison and thus have an upper hand of enjoying a wide coverage in Europe.
If the company want to take over a company with a wide cash base then it’s should opt for Delhaize since it has a wide cash base which require no conversion since both companies use the euro in financial reporting .
If Ahold is looking for a company with a huge asset to add to its assets base so as to facilitate generation of more cash under the operating activities then it should go for Delhaize group which has a lot of assets which are widely distributed in its eleven branches.
If a hold wish to hold a company that is currently having a lot of income from its sales revenue then it should take over Delhaize since its’ generating more revenues from its retailing activities. Most of the takeovers aim at taking absorbing companies with more liabilities so as to reduce their tax commitment and for such then the Ahold should take over the company with more obligations or that which is highly leveraged in this case being Delhaize.
If Ahold aims at taking over a company in which it will be easily absorbed into its system then in this case it should go for the Delhaize since this company is operating within its jurisdiction of the Euro currency area since there will be little legal processes to be involved and this will be working in coherence with aims of European union which is allow free mobility of capital from one region of the currency area to another more so Ahold will enjoy some form of monopoly powers with the European union economic block.
Since the competition of the companies is high when they are more, then competition is very will reduce since a few retailing companies will be against Ahold.
If Ahold is considering a strategy in which it will be paying less of its income to the shareholders then it will look for a company whose earnings per share is at minimum and for this case it’s better to go for the Delhaize. The final decision of takeover lies with the target company which may refuse to be absorbed by the parent company depending on the offer of the predator company!
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