Hg Capital and the Visma Transaction (A) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Hg Capital and the Visma Transaction Harvard Case Studies

Problem Background

The case reveals the importance of acquisition for a particular entity and shows the related estimated results in order to take over the company through the proposed analysis. Over here, Hg Capital wanted to acquire Visma as it knew that its operations were not expanded in Europe and believed that the acquisition could fill the proportion in the European markets.

Hg Capital was aware the technological companies were very successful during those days and Visma was one of the leading software houses in Norway which was founded after the merger of three companies which are Multi soft, Spec Tec and Dovre.

The company also conducted the historical performance of Visma and analyzed the future benefit from the projected results, as well as the company has been performing well in the software industry in Europe and U.K.

Although the estimated value to acquire was between 2 to 3 NOK billion, as well as Hg Capital generated high revenues and an expected 13.4% revenue for Visma. However, the threat was very clear to Hg Capital as it had not established its operations in Europe.

Hg Capital believed that the investment could be valuable to expand the business into the European markets, as well as acquisition would increase the revenues up to 30%per year of margin. Its initial analysis revealed that Visma could be an attractive business for Hg Capital in order to improve its performance.

However, the investment would require high leverage buyout ratio in order to acquire Visma and the post-acquire activity could made the company as an independent entity. Humphries is the current CEO of Hg Capital and his performance in the company is reason of the highest level of growth in the entire history of the company.

In other case, Sage was bidding to acquire Visma, and its final offer analyzed the period of two to three weeks from the day of bidding which put pressure on Humphries. Therefore, in order to outbid the offer of Sage, Hg was preparing to counter bid the offer and tried to value the company by offering more as compared to the counter party.

Thus, the issue was created by another bid and hence, it had to made quick decision about the investment opportunity of Visma. Finally, the company was engaged to project the future results of Visma and tried to overcome the threat of counter bid by Sage.

Company Valuation

The analysis shows the expected value of the company acquired by Hg Capital, which indicates that the results might be beneficial for the company as well as it analyzed the expected performance in order to know the future value of Visma.

Projected Income Statement

The results from the past performance determine the projected value of EBITDA and Net income for the company. In 2005, the company increased its sales to 14% as compared to the past years. The sales volume should be allocated in the future values and it can grow at the same rate over the period of five years.

The net value of EBITDA was not good as compared to the historical data, therefore the expected value can be analyzed by the current EBITDA ratio as given in the case. This value could affect the overall value of the company. Moreover, it shows that the comparable can be related to finalize the net value of Visma.

The marginal tax rate was 30% in the previous years and it is expected to be the same in the future, where the net income can be calculated by deducting the EBIT from Tax value. However, the overall result shows that the performance will vary according to the changing values in EBITDA and the volume of sales.

Total Weighted Average Cost of Capital

As the case analyzed the historical performance of different companies, it also gave the comparable and risk free rates in order to identify the current market average rate in a particular country.

The performance of Visma was quite similar to other companies; the current beta value is 0.42 as given in the exhibit. The total tax rate as analyzed in the projected income statement will be 30%.

The equity margin for Hg Capital was 50% and the debt value was similar as the ratio of equity. However, in order to invest in the Europe market, the current policies of the acquisition required at least 70% debt to equity ratio. It was difficult for Hg Capital to increase the debt level quickly because the current bid of Sage could acquire the company instead of the counter bid proposal.

The evaluation from the results shows that the average market debt level was 66% as compared to equity side. Therefore, Hg Capital should predict at least this level of debt in order to acquire Visma and to allow different level of debt offerings.

From the results it can be seen that the expected risk free rate of Visma will be 4% which is collected from the government bond history rates. The value of market risk premium is predicted to be 9%, which can fluctuate over the period of time and the total value of equity can be determined by these two ratios.

The total cost of debt is assumed to be 13% because as mentioned in the case, the total value of debt should be 66% of the overall capital. WACC has been calculated from these weighted values of debt and equity, and it is projected to be 11% of the overall capital.

Cash Flows

Under the projection of cash flows, Hg Capital might calculate the free cash flow values of Visma in order to evaluate the present value of the company and try to determine the total firm’s value in order to acquire.

It is noted that the net present value will be $5,729 in the end of the seventh projected year. It also shows that the company will grow its cash flow activities in the future. The average capital expenditure rate is calculated by collecting all the previous values in the past and determine through the average method.

However, the valuation under EBITDA shows that the company will perform better in the future and it will be an attractive offer for Hg Capital to expand its operations. Under the case of EBIT, the total value of the company might be greater than the value under EBITDA.

The overall assessment shows that acquiring Visma can be an opportunity for Hg Capital to increase the size of operations in Europe as well as the volume of sales. The advantage of the acquisition will be to hold competitive products and services in the field of software technology and to compete against the market giants in U.K as well as Europe.....

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