The problem in the case deals with merger and acquisition. The buyer is Intercontinental Capital, Ltd.(ICL),and the target firm is Consolidated Supply S.S. (CSSA), a leading global supplier of medical products to hospitals and a subsidiary of AtlantisMed Systems, a major manufacturer of medical products and suppliers in the United States. The problem arises when ICL asked Deutsche Bank Securities to arrange the financing and propose a deal structure that would make ICL win against other four bidders. Hence, in this leveraged buyout, there are four main concerns needed to be considered, which are; 1. ICL required that bid prices would need to reflect at least 30 percent rate of return or …show more content…
Due to the rising earnings of ICL, free cash flow to firm of ICL will increase; thus, the value of them is increased. Furthermore, this LBO deal will increase debt level of ICL. Having debt has its own advantages and disadvantages as we all know, which are; Advantages of having debt | Disadvantages of having debt | 1. Higher tax shield benefit | 1. Higher probability of bankruptcy | 2. Reduce agency cost | 2. Higher amount of fixed interest expenses | 3. No dilution on control of the firm | 3. Shareholders may not be convinced that there is no probability that firm will not go bankrupt | 4. More debt = more cash to operation | |
With more factors to be considered rather than just IRR alone, we concluded that it depends on investors on how they perceived the future of the firm that whether the firm will be able to exploit the synergistic effect they have, or whether the firm will be able to pay back debt. Thus, the deal will be LESS attractive to equity investors. There will be some who back off, but we believed the deal is still attractive to majority of equity investors.
Question 7: How should Maria Ober reply to ICL? From the valuation, we see