Alfa Coller Harvard Case Solution & Analysis

Introduction:

            Alfa Corporation started its operations in the 1960s in the industry of resins manufacturing and production. These resins can be in the liquid and powder form that is used as an intermediary good for the production of final goods. Alfa holds the status as a one of the largest company of the World in resins business. It offers a variety and quality of the product to its customers. Alfa is a multinational company having offices, distribution networks and operations in many countries.

            Alfa Corporation provides highly technical support to its customers regarding the product. Due to high quality production, big size and technical support are the main pillars for the success of the company. Alpha follows the strategy of continuous improvement in production through research and development activities to compete in the industry.

            Alpha has a competitive advantage in the industry because no competitor offers such a range of products that is offered by Alpha. The barrier to entry is already high due to the huge investment required in the industry. The substitutes are available in the market at lower price and the quality is low as well therefore, the effect is moderate. The multinational chemical companies are the suppliers of Alpha as well as the customers of Alpha.

            Alpha Corporation is under consideration to acquire Coller. Alpha acquired many of the companies to become the market leader, the reason to acquiring Coller is to become one of the top three World leaders in its industry.

Analysis:

            In this analysis, it is required to first access the benefits that can inflow to Alpha through the acquisition of color and then the valuation consideration must be undertaken to have a suitable bid price and maximum value of the company.

Business model for acceptance of acquisition:

            Coller has an excellent market image; therefore the acquisition can prove to be an attractive for expansion and market share growth by acquisition high reputed medium size company in the same industry.

            Coller is an innovative firm as like Alfa, innovation can be further explored through the merger of the technical department of both the companies. The management of Coller is motivated and technical skills that can give more innovation to the combined group to grow successfully in the market.

            There are many synergy savings like the material cost along with the acquisition of the healthy, profitable company that is growing above the industry average. Coller can help Alpha to grow in the industry and it is expected that Alpha can become one of the three major global leaders in the industry.

Valuation analysis:

            The valuation is based upon the net inflow of economic benefits to Alpha from the acquisition of Coller. The net economic inflow can be accessed through free cash flow model of valuation that is one of the most appropriate models of valuation. In this model, the net cash inflow that is also an economic benefit is accessed over the life of the company i.e. perpetuity. The valuation model has many assumptions and calculations that are required to derive the value of the business those are discussed below in detail.

Valuation:

            The value of the business can be derived through many methods that are applied and used in the market.

Free cash flows valuation model:

            The free cash flows valuation model is one of the most appropriate and acceptable valuation models in the world of investment. In this valuation model, the required return of all the investors is considered and the future cash inflows are discounted at the required returns of the investors i.e. weighted average cost of capital (WACC).

            Weighted average cost of capital is the required return weightages of debt and equity and their respective returns. The cost of equity is derived through capital asset pricing model (CAPM), the risk free interest rate, market risk premium and beta equity. The beta equity consists of systematic risk that is said to be industry, risk and the other one is financial risk that can arise due to the debt financing. The beta asset and beta equity of the company with 100% equity finance have the same beta asset and beta equity due to 0% financial risk. The industry average beta assets are0.495 (Appendix 1). This beta asset is further used to calculate the beta equity through the incorporation of debt structures. The beta equity for Coller with 25% of debt structure is 0.61 (Appendix 2.1)............................

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