Read the article below and answer the following questions: address the folowing with a minimum of 500 words

1. List and describe the components used to calculate synergy value.

2. critically evaluate which components is most underestimated. Explain your answer.

3. Using the attached spreadsheet "Excel-Based M&A valuation and structuring Model", open the worksheet labeled BP APP B2 and study the Net Sales Growth Rate for 2002-2005. Next, open the worksheet labeled BP APP B1 and study teh 2006-2010 Net Sales Growth Forecasts. Lastly, reference "Are you paying Too Much for That Acquisition to identify the basis or rationale for justifying the 2006-2010 forecasts.

(Spread sheet BP APP B1)

Step 1: Acquirer 5-Year Forecast and Standalone Valuation

Forecast Assumptions 2006 - 2010

2006

2007

2008

2009

2010

Net Sales Growth Rate

4.0%

4.0%

4.0%

4.0%

4.0%

Cost of Sales (Variable) / Sales %

52.5%

51.5%

51.0%

50.5%

50.5%

Depreciation & Amortization / Gross Fixed Assets %

8.3%

8.3%

8.3%

8.3%

8.3%

Selling Expenses / Sales (%)

14.5%

14.5%

14.5%

14.5%

14.5%

G&A Expenses / Sales (%)

19.0%

18.5%

18.0%

17.2%

16.4%

Interest on Cash & Marketable Securities

5.0%

5.0%

5.0%

5.0%

5.0%

Interest Rate on New Debt (%)

8.3%

8.3%

8.3%

8.3%

8.3%

Marginal Tax Rate

18.0%

22.0%

25.0%

30.0%

37.0%

Other Current Operations Assets / Sales (%)

35.0%

35.0%

35.0%

35.0%

35.0%

Other Assets / Sales (%)

35.0%

30.0%

25.0%

20.0%

20.0%

Gross Fixed Assets / Sales (%)

25.0%

25.0%

25.0%

25.0%

25.0%

Minimum Cash Balance / Sales (%)

4.5%

4.5%

4.5%

4.5%

4.5%

Current Liabilities / Sales (%)

30.0%

30.0%

28.0%

26.0%

25.0%

Common Shares Outstanding (Mil)

426.0

426.0

426.0

426.0

426.0

Cost of Capital: 2006 - 2010 (%)

11.81%

1)

Cost of Capital: Terminal Period (%)

10.31%

1)

Sustainable Cash Flow Growth Rate (%)

4.00%

Market Value of Long-Term Debt

$1,171

million

Historical Financials

Projected Financials

2002

2003

2004

2005

2006

2007

2008

2009

2010

Income Statement ($mil)

1)

Net Sales

4,779

4,698

4,596

4,670

4,857

5,051

5,253

5,463

5,682

Less:

Variable Cost of Sales

2,315

2,286

2,333

2,415

2,449

2,496

2,570

2,646

2,751

Depreciation

100

103

81

75

101

105

109

113

118

Total Cost of Sales

2,415

2,389

2,414

2,490

2,550

2,601

2,679

2,759

2,869

Gross Profit

2,364

2,310

2,182

2,180

2,307

2,450

2,574

2,704

2,812

Less:

Sales Expense

761

786

685

681

704

732

762

792

824

G&A Expense

780

863

868

908

923

934

946

940

932

Amortization of Intangibles

32

41

52

52

52

52

52

52

52

Other expense (income), net

1

5

(5)

(19)

(16)

(16)

(16)

(16)

(16)

Total Sales and G&A Expense

1,574

1,695

1,599

1,622

1,663

1,703

1,743

1,768

1,792

Operating Profits (EBIT)

790

615

583

558

644

747

831

936

1,021

Plus: Interest Income

-

-

-

23

40

47

74

96

Less: Interest Expense

90

111

132

153

127

128

121

96

96

Net Profits Before Taxes

700

504

451

405

540

659

757

915

1,021

Less: Taxes

201

131

62

55

97

145

189

274

378

Net Profits After Taxes

500

373

390

350

443

514

567

640

643

Balance Sheet (as of 12/31/2005)

Current Assets

Cash

695

213

247

232

219

227

236

246

256

Other Operating Assets

1,767

1,845

1,605

1,519

1,700

1,768

1,839

1,912

1,989

Total Current Assets

2,462

2,058

1,852

1,752

1,918

1,995

2,075

2,158

2,244

Investments

245

582

711

1,235

1,674

Gross Fixed Assets

939

1,159

1,147

1,121

1,214

1,263

1,313

1,366

1,420

Less: Accum. Depr. & Amort.

337

422

422

473

574

679

788

901

1,019

Net Fixed Assets

602

737

725

648

640

584

526

465

402

Other Assets

852

1,819

2,097

1,914

1,914

1,913

1,913

1,913

1,913

Total Assets

3,915

4,613

4,674

4,313

4,718

5,075

5,224

5,771

6,233

Current Liabilities

1,173

1,317

1,565

1,502

1,457

1,515

1,471

1,420

1,420

Long-Term Debt

Existing Debt

664

984

983

1,242

1,242

1,021

640

589

400

New Debt

-

-

-

-

-

-

-

-

-

Other Liabilities

144

141

163

166

172

179

186

194

201

Total Liabilities

1,982

2,442

2,711

2,910

2,872

2,715

2,297

2,203

2,022

Common Stock

728

2,041

1,923

1,836

1,836

1,836

1,836

1,836

1,836

Retained Earnings

1,205

130

40

(433)

10

524

1,091

1,731

2,375

Shareholders' Equity

1,933

2,171

1,963

1,403

1,846

2,360

2,927

3,568

4,211

Total Liabilities & Shareholders' Equity

3,915

4,613

4,674

4,314

4,718

5,075

5,224

5,771

6,233

Addendum: Check

(0)

1

0

(0)

-

-

-

-

-

Shares Outstanding (millions)

291.6

390.8

421.6

426.0

426.0

426.0

426.0

426.0

426.0

Effective Tax Rate

28.6%

26.0%

13.7%

13.6%

18.0%

22.0%

25.0%

30.0%

37.0%

Earnings per Share

$ 1.71

$ 0.95

$ 0.92

$ 0.82

$ 1.04

$ 1.21

$ 1.33

$ 1.50

$ 1.51

Long-Term Debt/Equity

37%

48%

53%

93%

70%

46%

24%

18%

11%

Addendum: Working Capital

1,288

741

287

249

461

480

604

738

824

Free Cash Flow

EBIT (1-t)

564

455

503

482

528

583

623

655

643

Plus: Depreciation and Amortization

132

144

133

127

153

157

161

165

170

Less: Gross Capital Expenditures

201

221

(12)

(26)

93

49

51

53

55

Less: Change in Working Capital

(200)

(548)

(454)

(37)

212

18

124

133

86

Free Cash Flow

695

926

1,102

672

375

672

609

635

672

PV: 2006 - 2010

$ 2,100

PV: Terminal Value

$ 6,342

Notes:

Total PV (Market Value of the Firm)

$ 8,442

1) The historical financial statements have been adjusted for the discontinued operations.

Less: Market Value of Long-Term Debt

$ 1,171

2) For the long-term, the Acquirer believes its weighted average cost of funds is the appropriate measure

Plus: Excess Cash (Investments)

$ 245

to discount cash flows.

Equity Value

$ 7,517

Equity Value per Share

$ 17.64

	Step 1 Continued: Acquirer Historical Data and Ratios
Historical Ratios			Historical Financial Ratios
			2002	2003	2004	2005		Average	Minimum	Maximum
Net Sales Growth Rate		1)		-1.7%	-2.2%	1.6%		-0.8%	-2.2%	1.6%
Cost of Sales (Variable) / Sales %		2)	50.5%	50.8%	52.5%	53.3%		51.8%	50.5%	53.3%
Depreciation & Amortization / Gross Fixed Assets %		3)	10.7%	8.9%	7.1%	6.7%		8.3%	6.7%	10.7%
Selling Expenses / Sales (%)		4)	15.9%	16.7%	14.9%	14.6%		15.5%	14.6%	16.7%
G&A Expenses / Sales (%)		5)	16.3%	18.4%	18.9%	19.4%		18.3%	16.3%	19.4%
Interest on Cash & Marketable Securities		6)	3.0%	3.5%	4.0%	5.0%		3.9%	3.0%	5.0%
Interest Rate on Debt (%)		7)	6.0%	5.6%	5.5%	6.7%		6.0%	5.5%	6.7%
Tax Rate		8)	28.6%	26.0%	13.7%	13.6%		20.5%	13.6%	28.6%
Other Assets / Sales (%)		9)	17.8%	38.7%	45.6%	41.0%		35.8%	17.8%	45.6%
Gross Fixed Assets / Sales (%)		10)	19.6%	24.7%	25.0%	24.0%		23.3%	19.6%	25.0%
Cash Balance / Sales (%)		11)	14.5%	4.5%	5.4%	5.0%		7.4%	4.5%	14.5%
Other Current (Operations) Assets / Sales (%)		12)	37.0%	39.3%	34.9%	32.5%		35.9%	32.5%	39.3%
Current Liabilities / Sales (%)		13)	24.6%	28.0%	34.1%	32.2%		29.7%	24.6%	34.1%
Debt / Equity			34.4%	45.3%	50.1%	88.5%		54.6%	34.4%	88.5%
Notes:
1)	The Acquirer's business plan refocuses the company to capitalize on its core strengths. The firm's traditional markets are mature.
	Annual average market growth of 2% is expected over the next five years. The Acquirer's initiatives are expected to provide an additional 2% by
	gaining market share in the U.S. and expanding into new markets.
2)	Bringing down the Cost of Sales to 50.5% over the next four years will be achieved through the following actions:
	- the reduction of excess manufacturing capacity,
	- the termination of a variety of licensing and other contractual arrangements that did not deliver adequate profitability,
	- the elimination of product lines that did not meet required levels of profitability, and
	- the improvement of supply chain performance and economics.
3)	Depreciation as percent of Gross Fixed Assets has been estimated at the average ratio over the historical period.
4)	The elimination of underperforming product lines will allow the company to spend sales dollars more effectively.
5)	Although G&A expense shows an increase in 2004 and 2005, this percentage is expected to decrease over the next
	few years to 16.5% as a result of major efficiency initiatives, including
	- the elimination of approximately 350 positions at the US-based headquarters and in certain other subsidiaries.
	- the closing of certain international offices, and
	- an increase in efficiency in supply chain communication.
6)	A blended rate, combining non-interest bearing deposits and marketable securities, is used in the forecast.
7)	The interest on Current Debt is calculated based on the existing interest rates on the debt.
	The interest rate on future debt will be estimated at the interest rate on Moody's A rated debt as of December 2000.
8)	The tax rate shown is the tax on income after exclusion of non-recurring charges. The actual tax rate was 24.5% for 2000,								5,
	36.3% for 2004 and 28.6% for 2003. As of December 31, 2005, the Acquirer had US Net Operating loss carry-forwards totalling $1.1 billion.
	Utilization of these carry-forwards is subject to annual limitations. As a result of the loss carry-forwards, the income tax rate for
	2006-2008 is estimated at 18%, 22% and 25%.The tax rate is estimated to increase to 30% in 2009 and 37% in 2010.
9)	Other Assets include $515 million in deferred income taxes. Without this amount the ratio of Other Assets / Sales would have
	been 29%. As losses are used, the percentage of Other Assets will be reduced over the next three years.
10)	Elimination of excess capacity will be balanced by increased investment in new equipment. Gross Fixed Assets are
	expected to grow in line with sales during the forecast period.
11)	To ensure sufficient liquidity a minimum cash balance of 4.5% is included in the forecast.
12)	Working capital has been reduced to below desirable levels over the last few years putting a strain on the funding of current operations.
	To ensure sufficient Current Assets to fund operations a minimum level of 35% for Other Current Operating Assets is included in the forecast.
13)	Current Liabilities as a % of Sales are above average in 2005 as a result of severance pay and other charges resulting from the
	provisions for elimination of redundant positions (see item 5). This percentage is expected to be reduced gradually over the forecast period.