askivy_assessment_center_case_study

CONS
companies means that they can combine licences and infrastructures, so they have
savings.
• (Diversification): In this case it doesn’t apply because they are selling the same
products in the same market
• (Increasing market share): yes. You can calculate combined market share of
25%+18% = 43%, which is still no.2 but closer to the no 1 firm.
• (Improve management of the target firm): probably not, as the target seems to be more
efficient with higher margins. But there is an argument to say that the target will benefit
from Vodafone’s expertise
• (The price paid may be too expensive and there may be a bidding war for the target):
you don’t have much info about the price or a bidding war, so you can just say it is a
question mark.
• (Lack of synergies, or unpredictable synergies): doesn’t apply, synergies seem quite
predicable in this case
• (Lack of diversification): that is a negative as it is basically increasing exposure to
Turkey. But on the other hand, you can say that it improves diversification of Vodafone
Plc as a whole, because at the moment they are very focused on Europe.
• (The target performance is uncertain and volatile): this is a negative because Turkey
just came out of recession. Looking at past financials, we can see that the business is
about to turn around in 2011
• (Poorly performing target due to bad products or reputation): Doesn’t apply, not much
info and they seem to be doing for 2011.
• (The acquiring company does not have sufficient financial power to acquire the target).
Here, you need to calculate Vodafone’s net debt to EBITDA ratio.
o EBITDA = 33.1% * 44.5bn (page 6, the margin is mentioned in the text and
multiply by revenue to get EBITDA) = 14.73bn.
o Net debt = Long term borrowings + short term borrowings – cash = 28,632 +
11,163 – 4,423 = 35,372m or 35.3bn.
o Therefore net debt / EBITDA = 2.4 times.
o Assuming as a rule of thumb that 4.0 times is the maximum net debt to
EBITDA ratio for a company (memorise this number), that means the company
can borrow at least (4.0 * 14.73) – 35.372 = 23.5bn.
o A rule of thumb for acquisition prices is multiplying EBITDA by 8 to 10 times
(also memorise those numbers). Assuming 10 times Avea EBITDA: 358 * 10 =
3,580 turkish lira, which is equivalent to 3,580*.44 = GBP1,575m, or £1.6bn.
o We can see that Vodafone could borrow up to 23.5bn, but Avea would only
cost 1.6bn, therefore it can easily acquire the company.
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