Business 35200 - Corporation Finance Professor Amit Seru

Adecco Questions for Write-Up and Class Discussion

1. How has Adecco managed to outperform its rivals in the staffing industry? What is the rationale for acquiring Olsten?
For the next several questions assume the acquisition would be completed as of January 1, 2000. Assume that Kelly and Manpower have a debt beta of 0.2 and that their corporate tax rate is the same as Adeccos. You can calculate the market risk premium from the numbers in the Ameritrade case.

2. Based on Adeccos pro forma estimates of the staffing business of Olsten in Exhibit 13, what is your estimate of the value of Olsten if the combined company immediately assumes its long-term target capital structure (i.e. 20% debt and 80% equity)? For this question, observe the following guidelines.
You can use WACC method Do not consider any Olsten debt that might be assumed by Adecco. Do not consider any payments that Adecco might need to make to minority shareholders. Do the valuation from the perspective of Adecco US. Do not consider any special tax benefits enjoyed by Adecco SA through its ability to charge Adecco US royalties.

3. Suppose a consultant proposes that instead of assuming the long-term capital structure of 20% debt and 80% equity, the acquisition should be financed with debt such that this coverage ratio achieves a value of 4 in 2000 and grows linearly to 7 at the end of the forecast horizon (nine years ahead). Note that the ratio times interest earned is the coverage ratio defined as EBIT/(Interest Expense). Calculate the enterprise value under this financing assumption. Would you agree with the consultant's recommendation for the financing of the acquisition? Why or why not?
Note that you may have to use a different valuation method from the one you used in Question 2. Make sure to account for the value of the interest tax shield beyond the forecast horizon.

4. Show how your estimated value from Question 2 changes if you consider the following two aspects:
Adecco assumes $750 million of Olsten debt Adecco US makes royalty payments to Adecco SA, which might generate tax savings for the worldwide firm. To get started, ask yourself how much savings for the worldwide firm is generated per $1 of royalties transferred from Adecco US to the Swiss parent.