1. How has Adecco been able to outperform its rivals in the staffing industry? 2. What is the strategic and economic rationale for its acquisition of Olsten? List and describe at least 3 elements. 3. Calculate the cost of equity Ke for Olsten using CAPM and the following assumptions: ? Beta = 0.82 ? Market Risk Premium = 7.20% 4. Calculate the Weighted Average Cost of Capital Adecco should use in valuing Olsten using the following assumptions ? Use Adecco target capital structure of 80% equity/20% debt ? Tax rate = 33% 5. Using the information in Exhibit 13 and the spreadsheet provided, calculate Olsten?s projected free cash flow for 2008. ? Use Gross PPE to estimate capital expenditures ? Calculate change in working capital. Exclude Other operating assets and Other non-interest liabilities from calculation. 6. Calculate the terminal value for Olsten in 2009 using a free cash flow in 2009 of $260 and a constant growth rate of 5%. 7. Calculate the enterprise value of Olsten using a PV of FCF of $961.

4/28/2015 ADECCO SA ACQUISTION OF OLSTEN CORP Case Study based on Chapter 9 Adecco's Acquisition of Olsten Case study explores the economics of staffing industry and rationale for acquisition Strategic Financial Determine value and offer price Situation: summer 1999 Companies had been in negotiations for 18 months Negotiations hindered by the fact that Olsten received offer from a competitor Vedior, Adecco's European rival is also in talks with Olsten. 1 4/28/2015 Staffing Industry First appeared in the mid 20th century Initial scope unskilled work in the industrial sector short-term replacements for absent workers - \"temp firms\" Industry evolution Placing more skilled workers in all sectors of the economy Longer assignments Added services Permanent placement Payroll Outplacement Staffing companies now seek to become long-term partners, serving as intermediaries between employees and employers Staffing Industry Recruiting 2 4/28/2015 Staffing Industry Global staffing industry grew 13% annually between 1987 and 1999 Factors responsible for this growth Economic expansion of the late 1980s and subsequent contraction Changes in the \"professional\" segment of labor market US by far the largest staffing market Compound annual growth rate of 17% between 1993 and 1998 Specialized services (IT, accounting, legal) had both highest growth rate and highest growth margins Staffing Industry 3 4/28/2015 Staffing Industry Staffing industry fragmented Top five companies globally accounted for 27% of the market Industry consolidation in progress, spurred by increasing globalization of client companies Move from local service providers to establishing national and global presence Consolidation provides significant economies of scale Staffing Industry 4 4/28/2015 Adecco Global leader in employment services Rapid growth since its creation in 1996 Acquisitions Organic Market leader in France, Canada, Switzerland, Australia, Spain Second in the U.S. and U.K. Global corporate strategy goal - market leadership Acquisition of Olsten would enable Adecco to increase its share of the US market from 6% to 10% - this would make it the number 1 staffing company in the country. Adecco Three-pronged strategy Sales growth Results in higher return to shareholders 5 4/28/2015 Adecco Three-pronged strategy 1. Sales growth Results in higher return to shareholders 2. Increase in market share Attain at least 20% market share of each market Be the #1 or #2 player in the 11 largest markets 3. Change the mix of business Adecco Historical estimates indicate a strong relationship between: Profitability and national market share Relationship between growth and returns 6 4/28/2015 Olsten $5 billion home health care and staffing firm Founded in 1950; went public in 1967 As of 1998, third largest staffing company in the world Global staffing revenues of $3.1 billion U.S. revenues of $2.4 billion Operates in 14 countries with 1500 offices Global market share of 3.9% Sizeable presence in IT staffing Olsten Largest provider of home health care U.S. and Canada - provided home care management Acquired Lifetime Corporation in 1993 Repurchased home health offices it had sold to Columbia/HCA in 1998 As of 1998, health services accounted for 27% of Olsten staffing revenues Expansion outside U.S. Company made series of acquisitions from 1994 to 1997 Increased presence in Europe and Latin America Total investment $150 million 7 4/28/2015 Olsten Home health care business faced increasing difficulties Medicare reimbursements reduced (1997) Industry-wide civil and criminal investigations for Medicare fraud Caused closure of many health companies Olsten paid $4.5 million to settle Medicare fraud investigation Pled guilty to other federal and state investigations Incurred charges of $61 million Olsten Olsten launched restructuring and recovery plan for its health care business in 1997 Efficiencies expected to materialize in 1998-99 Restructuring charges of $46 million in first quarter 1999 $22 million in compensation and severance costs $16 million for asset write-offs $8 million for integration costs Other challenges Purchase of European subsidiaries more expensive than anticipated Additional costs estimated between $165 and $270 million 8 4/28/2015 Olsten Debt increased $461 million in December 1997 $606 million in January 1999 $746 million in July 1999 62% increase Revolving credit line with 11 banks As of July 1999, Olsten had drawn $344 million of $400 million line Agreement scheduled to expire in 2001 Covenants Provide audited financial statements Restrictions from selling assets and issuing debt Financial covenants EBIT/interest ratio of at least 3 Debt/EBITDA of no more than 3.75 Olsten Dire need for cash Olsten was in violation of its debt covenants Actively looking for alliances or mergers by the end of 1998 9 4/28/2015 Staffing Industry Performance Olsten 10 4/28/2015 Olsten Covenant EBIT/interest ratio of at least 3 Debt/EBITDA of no more than 3.75 Adecco - Olsten Merger Adecco expressed interest in acquiring Olsten in 1998 Preliminary offer was for staffing business only - not home health care Olsten and Adecco agreed to spin off home health care unit to current Olsten shareholders as part of the acquisition Olsten initially looking for offer of $20 per share Adecco made offer of $11 per share while Olsten came down to $16 Vedior, a large Dutch staffing company, shows interest in Olsten 11 4/28/2015 Adecco Acquisition Strategy Five step method for valuing target businesses 1. Value target business as is 2. Value business with all synergies less any costs of integration 3. Add potential gains from cross-border financing strategy 4. Add potential gains from reduced tax liability 5. Determining suitable price to be paid Adecco's policy for financing growth Internal (organic) growth financed through cash generated from operations External growth financed through a mix of debt and equity Adecco Acquisition Strategy Adecco's plan to finance Olsten 30-40% through equity Remainder through debt at 7.14% Resulting capital structure for Adecco 80% equity/20% debt 12 4/28/2015 Free Cash Flow Free cash flow = EBIT(1-Tax rate) Operating cash flow after-tax + Depreciation (noncash expense) - Capital Expenditures - Working capital investments (omitting excess cash) Calculating Free Cash Flow Exhibit 13. Selected pro forma financial statement items for Olsten's staffing business as a stand-alone business, 1998-2009 (In USD millions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3,506 3,607 3,979 4,393 4,779 5,196 5,653 6,156 6,709 7,317 7,981 2,766 2,825 3,096 3,409 3,694 4,004 4,354 4,738 5,159 5,623 6,133 611 593 616 671 737 803 875 954 1,042 1,138 1,241 37 40 42 45 49 54 58 63 68 74 83 91 149 224 267 299 335 367 401 440 482 523 30 49 74 88 99 111 121 132 145 159 173 61 100 150 179 201 225 246 269 295 323 351 Revenues Cost of goods sold SG&A Depreciation expense Operating income Income taxes(a) EBIAT(b) Amortization of goodwill 13 15 15 16 16 16 15 15 14 14 14 SELECTED ASSETS Operating cash Accounts receivable Other current assets Other operating assets Gross PPE (capex) Net property plant and equipment 35 554 27 29 249 188 36 590 30 42 305 203 40 651 35 58 364 220 44 718 41 77 426 238 48 781 48 97 493 255 52 850 52 106 568 276 57 924 57 115 649 299 62 1,007 62 125 737 325 67 1,097 67 137 833 353 73 1,196 74 149 938 384 80 1,305 80 163 1,053 415 SELECTED LIABILITIES Total current liabilities Other non-interest liabilities 331 107 341 110 376 121 415 134 452 95 491 103 534 112 582 122 634 133 691 145 754 158 13 4/28/2015 Enterprise Value FMV of firm = PV of FCF before terminal date + TV Terminal Value Perpetual Growth Method Terminal value of a growing firm = FCFT+1 KW - g Must be discounted back to time 0. Assignment 1. 2. 3. (10 points) How has Adecco been able to outperform its rivals in the staffing industry? (10 points) What is the strategic and economic rationale for its acquisition of Olsten? List and describe at least 3 elements. (10 points) Calculate the cost of equity Ke for Olsten using CAPM and the following assumptions: Beta = 0.82 Market Risk Premium = 7.20% 4. (20 points) Calculate the Weighted Average Cost of Capital Adecco should use in valuing Olsten using the following assumptions Use Adecco target capital structure of 80% equity/20% debt Tax rate = 33% 5. (20 points) Using the information in Exhibit 13 and the spreadsheet provided, calculate Olsten's projected free cash flow for 2008. Use Gross PPE to estimate capital expenditures Calculate change in working capital excluding Other operating assets and Other non-interest liabilities. 6. 7. (15 points) Calculate the terminal value for Olsten in 2009 using a free cash flow in 2009 of $260 and a constant growth rate of 5%. (15 points) Calculate the enterprise value of Olsten using a PV of FCF of $961. 14