经济学case study案例

1.杰西卡Gallinelli主要考虑在这种情况下：

一）正负两个通用电气和霍尼韦尔收购的影响。

B）的可能性，司法部和欧盟批准合并。

三）预期的市场反应，新闻和EC的调查和干预的预期效果。

1． Jessica Gallinelli’s main considerations in this case:

a) Positive and negative impact of the acquisitions on both GE and Honeywell. 

b) Possibility that DOJ and EC approve the merger.

c) The expected market reaction to the news and the expected result of theinvestigation and intervention of EC.

 

2.根据图表9，这是霍尼韦尔公司的财务数据的预测，现金流量折现和乘数估值方法的使用。以下显示的步骤，以获得精确的结果。

贴现现金流估值：

a）根据以往的表现和其他可比公司，霍尼韦尔公司的预期增长率2001〜2004年为6％，之后，它仍保持在5.27％

二）其他一些资产负债表和利润表项目都应该是销售，如COCS，SG＆A费用，现金，存货，折旧，利息，税收等方面的固定比例。根据这些财务数据，计算出2001年至2005年的自由现金流为2041，1880，1993，2113和2312。
2． According to exhibit 9, which is the forecast of the finance data of Honeywell, the discounted cash flow and multiplier valuation methods are used. The following show the steps to get the precise result.

The discounted cash flow valuation:

a) Based on previous performance and other comparable companies, the expected growth rate of Honeywell from 2001 to 2004 is 6%, and after that it remains at 5.27%

b) Some other balance sheet and income statement items are supposed to be a fixed proportion of sales, such as COCS, SG&A expense, cash, inventory, depreciation, interest, tax and so on. Based on these finance data, calculate the free cash flow from 2001 to 2005 is 2041, 1880, 1993, 2113 and 2312.

c) Use the CAMP model to find out the cost of equity, and calculate the cost of the debt. The weighted average cost of capital is 10.69%

d) Use the constant growth rate to get the terminal value in 2005. The formula is (CFn(1 + g)/(K - g))/(1 + K)^5=44917, where g is the constant growth rate in step a) 5.27% and K is the weighted average cost of capital in step c) 10.69%

e) Use the weighted average cost of capital to discount all the cash flow to get the estimated enterprise value:

2041/(1+10.69%)+1880/(1+K)^2+1993/(1+K)^3+2113/(1+K)^4+(2312+44917)/(1+K)^5=34677

 

The multiplier valuation:

According to the multipliers of comparable companies shown in exhibit 4, the enterprise value is estimated as a multiple of 2000 revenue, 2000 EBIT, 2000 EBITDA and so on. The stand-alone estimation of enterprise ranges from 25300 to 88520, while the with-synergies estimation ranges from 28026 to 73067.

 

Comprehensively considering the two methods, I would make an estimation of Honeywell enterprise value range from 30 to 40 billion dollars. With common shares of 801.4 million, the reasonable share value range from $37.43 to $49.91.

 

3． On October 20, 2000, the stock price of Honeywell and GE are $41.46 and $47.08, while on March 1, 2001 the stock price are 41.82 and 41.60. Gallinelli has a long position of 10 million shares in Honeywell and a short position of 10 million in GE. The change of the portfolio value is:

10,000,000*($41.82-$41.46) +10,000,000*($47.08-$41.60)=$5,840,000

 

4． The stock price of both Honeywell and GE fell right after the news. The reason is that the acquisition is beneficial to both Honeywell and GE, but the news from antitrust regulator may stop the acquisition. For GE, the acquisition can expand its market share in the aerospace industry, strengthen the competitiveness of GE in related fields, and since GE is experienced in merger & acquisition, probably it can solve the integration problem quite well. While for Honeywell, the acquisition can help to get rid of the troublesome and unsatisfactory stock price to rebuild investors’ confidence, have the aid of GE and Welch to quickly get rid of the plight of the operation and management.

However, the bad news bring a signal that the EC may prevent the acquisition, which harm the interest of the two companies, so the stock market react to the news with a fall in stock price.

 

5． Recall the 3 considerations in question 1. The acquisition is beneficial to both companies, for the reaction of stock price on Oct. 20, 2000 is a signal that showed the market hold this opinion. So the key issue is the possibility of DOJ and EC to prevent the acquisition.

For the protection of the interests of the any larger company in UN members, any companies operates in the EU member states, regardless of whether its headquarters located in the EU member states or not, if the acquisition or merger impact other companies in UN members, the companies should accept the EU's antitrust investigation, the U.S. Department of Justice also has a similar provision.

On European Commission’s perspective, if the acquisition is approved, the GE-Honeywell are too strong in the aircraft market, so that it has the ability to exclude competitors by signing an exclusive contract with the customer. GE's aircraft leasing company GECAS will use its aircraft purchasing power to ask aircraft manufacturers Boeing and Airbus to install equipment only produced by GE-Honeywell. As a result, GE-Honeywell may bind aircraft engines and avionics. GE has the ability to sell its aircraft Component to Boeing or Airbus competitors with a low price that its competitive can never charge. These competitors include Britain's Rolls Royce and France's Thales, which are both companies in UN members.

The European Union has always been devoted to antitrust work. Compared with the United States, the European Union considers more of the views from competitors, coupled with such a big acquisition with a wide range of impact. The review of the EU may be more stringent, the merger may have much trouble.

In addition, the impact of competitive should not be ignore, which also plays an important role in block the acquisition. If GE acquired Honeywell successfully, it is a bad news to their competitors. Especially UTC had spent a lot of human and financial resources but received no successful acquisition. UTC is certainly not willing to let GE finish acquisition smoothly. 

As discussed above, since the obstruction from UC and competitive, the acquisition may be very difficult. And if the acquisition fails, the stock price of Honeywell and GE would fall again. So for Jessica Gallinelli, I strongly recommend her to sell the long position of Honeywell, and hold a short position of both companies, because I think finally the EC would not approve the acquisition.