Assignment
You team works for XYZ Company, which has a directional strategy focused on expanding the company through horizontal integration. Your team can determine the official name of the company and industry. The company does a great job keeping close watch on its cash position and consistently maintains a positive cash flow; is very solvent; controls its overhead expenses; has solid marketing and sales, production, and human resources performance metrics, and fosters a culture of strategic thinkers. Historically, your company has expanded through a combination of organic (new startups) and inorganic growth and feels it's time to consider acquisition opportunities.
The Board is looking to engage in a friendly acquisition of a company that will not only increase its market share, but allow it to penetrate new markets and increase the company's abilities to meet current and future consumer needs and expectations. Since management's attitude is to pursue a friendly acquisition as opposed to a hostile takeover, your team may consider looking at conglomerates that have experienced significant growth through inorganic growth (acquisitions) and may now be looking to refocus on their core business and are willing to consider divesting some of its businesses that are within your industry. There could be other companies that are under financial duress and receptive to acquisition offers. Your team is a part of the corporate mergers and acquisition (M&A) department and has been assigned the task of identifying two potential acquisition targets. Since your Board is committed to a strategy of horizontally integration, you will be looking for possible acquisitions from within your industry. You will be performing a preliminary analysis of the companies under consideration, and then ultimately recommend one of the companies move forward for a more in-depth valuation by M&A Department.
I NEED 2 potential acquisition targets for Exxon-Mobil.
Notes: The target acquisitions should be publicly traded and have the same fiscal year end, preferably December 31st. In addition, your team is encouraged to select a proper name for your company and the industry for which it is aligned.
To successfully complete your preliminary analysis of the target acquisitions, your team should follow this high level process flow:
1. Select Comparable Companies that Satisfy Inclusion Criteria
2. Conduct Quantitative Analyses of the Companies (financial)
Select Comparable Companies - EXXON-MOBILE
Describe the methodology used to select the target acquisitions. You may want to consider utilizing the North American Industry Classification System (NAICS) to identify companies within your industry. Of course, there are a variety of Internet sites that can assist you in locating firms within your chosen industry, such as Google Finance and Yahoo Finance.
Conduct Quantitative Analyses of the Companies (financial)
Present a comprehensive financial statement analysis of the target acquisitions. Prepare the common size statements and all the ratios and amounts for the measures given below for the most recent year for both of your companies and present in a clear tabular form. Then discuss each category given below.
Prepare common-size financial statements for both target acquisitions
Complete both a horizontal and vertical analysis for each target acquisition
Compare the common-size financial statements between the two companies using cross-sectional analysis
Calculate and interpret relevant profitability, solvency, liquidity, leverage, market value ratios for each company that will be useful in comparing the target acquisition
For each company, graphically trend the net income and cash flow from operations over the last five years. Based on a comparison of the income statement to the statement of cash flows, what accounts explain the greatest differences between net income (loss) and cash flow from operations. Comment on the quality of the earnings numbers.
Calculate and interpret the net present value (NPV) of the companies' annual free cash flow (FCF) for a 5 year period (nper) taking into account a constant growth rate (which will need to be calculated), and a discount rate that is equal to your companies weighted average cost of capital (WACC), which is 7%.
Any notable similarities and differences in financial reporting practices of the two acquisition targets that could potentially impact your analysis should be reported along with your team mitigation strategy. For example, perhaps the firms are using the same or different methods of accounting for property, plant, and equipment (PP&E), inventory, intangibles, etc.
The team will perform all numeric calculations using MicrosoftTM Excel. Excel can be used to graphically present data, and then copied and pasted into the Report of Findings (see below) or this can be directly in the Word document using the Microsoft charting feature.