The Hostile bid for Red October Harvard Case Solution & Analysis

The Hostile bid for Red October

To: Yuri Yegorov, Chief Financial Officer for Red October

From: Senior Financial Analyst

Date: 15-11-2015

Subject: Analysis for Hostile bid for Red October

Question 1

Why does Koloss want to buy Red October?

            There are many reasons for which Koloss wants to buy Red October could be determined quantitatively however; the main reason for this was that Koloss believed that Red October was undervalued. Other reasons for acquiring Red October include:

  • The financial and the operating performance of the company was good standing at the end of the current year.
  • Koloss believed that Red October was ill equipped with regard to the financial resources in order to survive financially and strategically and that Menatep had the required resources to create significant synergies from this takeover.
  • The Wall Street Journal had stated that the interest of Menatep for Red October was due to the fact that as a holding company the linchpin would exist to buy out all the candy factories and control them (page 6).
  • Moreover, Menatep was interested to buy Red October because it wanted to diversify and penetrate into the higher margin confectionary products and move away from its low margin products (page 6). These all were the reasons due to which Koloss considered Red October as a suitable hostile bid.

Question 2

Is Red October undervalued, and how should Koloss decide what price to pay for Red October? What variables are of critical importance in determining Koloss’ price?(Hint: please use the cost of capital/discount rate given in the case; ie-23% for any calculations).

            The current share price for Red October’s shares is $ 5.5 per share. However, in order to determine that whether Red October is undervalued or not, the valuation for the company has been performed based upon the cash flow projections for the company provided in case exhibit 8a.

  • The valuation for the company has been performed based on a discounted cash flow method using the discount rate of 23%. The value for the company has been calculated to be $ 51.426 million. Based upon the current outstanding number of the shares of 6.356 million.
  • This shows that the company is currently undervalued as the current price per share is $ 5.5 per share whereas the price based upon the DCF method is $ 8.1 per share as shown in the appendix.
  • Koloss needs to consider a range of variables in determining the final offer price for Red October. The first variable is the synergies that would be created post acquisition of Red October. These have not been determined currently however; once these are quantified they can be incorporated in the DCF method to determine a suitable offer price.
  • The terminal value for Red October after the year 2001 could also be computed if it is foreseeable that Red October would be profitable after this period and then it could also be incorporated in the DCF analysis to determine the true worth of Red October Company.
  • The comparable bids of similar companies could also be considered by Koloss in order to find the most suitable price for Red October.
  • Lastly, independent projections could also be performed by Koloss for Red October and also incorporate terminal value for the company and the present value of the synergies to determine the true worth of the company for Menatep. ..................                                                                                                                                                                                                                                                  This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution. 

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