Mergers and Acquisitions

Financial analysis

WE will first analyze the financial situation of Macro Engineering. In the 2005-2008 period, the income growth has been, on average, stable, in the region of about 20%. However, in 2009 the growth was negative. This can be attributed to two reasons, first of all, the company has been hit by the global financial crisis and its effects on the macroeconomic outlook, secondly, the goods they produce are not that competitive (we will see data on the next slide).

As far as the profit is concerned, the company didn’t fare that well either and as a result its bargaining position is rather weak. gross profit margin, net profit margin and ROE are very low (except for 2005 where other income has skewed the figures). On average, the gross profit margin is about 16%, net profit margin about 2 o 3% and ROE has got a descending tendency, when the income is about 30 million per year and net profit only in 100s of thousands, the bargaining position of the target company is relatively weak. Another factor to be mentioned is the marked lowering of debt that shows the company was under certain financial pressure in the previous years.

In this table we can see that the cash flow situation is rather negative, the figures for account receivables are too great, the volatility is high and the figures are few times higher that the net profit. This can be explained that during this period the company did not manage their contract tightly enough. Since the figures for accounts receivables are huge, the company’s cash situation must have been under some pressure. We can see from the assets and liabilities statement that from 2005 to 2008, there was none or negligible cash available., the company relied solely on borrowing and business on credit, in 2009 they sold some assets, lowered debt, improved operations and as a result there was cash.  In the case of free cash flow we can see strong volatility , since the profits are low, change in the working capital has direct impact on the free cash flow, operations are not ideal the company therefore needs outside capital intervention to help it with further development and innovation.

Valuation

 We are going to value the company using 2 methods 1)comparable firm valuation method and 2)discounted cash flow method. Let’s start with the comparable firm valuation method

A comparable company must satisfy the follow 3 criteria 1)it must be a Canadian company 2)a company in the chemical industry and 3)must be listed on Toronto stock exchange

WE have found 5 companies that satisfy all 3 criteria, but for the calculations we only used 2 or 3 with the positive figures. Because the companies’ depreciation and amortizations are relatively big, the difference between EBITDA and profit are also relatively big and this leads to overvaluation. The price using this method is….