Session 10 Simulation Questions

SIMULATION GAME REPORT
CHETAN DUDDAGI
2015PGP091

Financial Aspects of Mergers and Acquisitions
A Brief Report on Simulation: M&A in Wine Country
1. State the name of the company assigned to you
Star Shine
2. State the reservation prices submitted by you. Explain the basis for choosing these
reservation prices.
Starshine Belvino
Reservation Price $ 51 $ 38
Starshine reservation price calculations:
Confidential instructions for Starshine:

 New trade-promotion plans for the Private Selection line will boost domestic
revenue by $30 to $35 million per year
 An international wine and spirits distributor that is expected to increase
international sales by $20 to $25 million per year
 Savings in the marketing function of $5 to $8 million.
 Reduction in SG&A costs by approximately $500,000 per year.
Based on the above information, following modifications were done in the assumptions:
 Increase in Domestic Revenues ($M) = $ 38 ( Synergies after merger were expected

to add another 3 million domestic revenues)
 Increase in International Revenues ($M) = $ 23 (Mid value of the expected increase
in International sales has been considered)
 Reduction in Marketing Costs ($M/year) = $ 7 (Mid value of the expected reduction
in marketing costs have been considered)
 Reduction in Other SG&A ($M/year) = $ 0.5 (Given value)
StarShine capital structure, Debt/Equity = 235/414.1 = 0.567
D/V = 235/ (235+414.1) = 0.362 = 36.2%
Target D/V = 27% (Default value in simulation)
Since target D/V is different from current D/V, we use APV approach for valuation.
Modifications in Terminal value parameters:
Method used – Perpetuity method (Assuming that the growth rate remains stable
over the coming years)
 Terminal Value Perpetuity Growth Rate = 3% (Assuming industry growth rate

based on analysts calculations)
 Current levered equity beta = 1.32
o Value was obtained from the average of levered equity beta of
comparable companies
 Estimated Unlevered Equity Beta = 0.98
o Value was calculated based on company debt ($ 235mn) and equity
values ($ 414.1mn), current levered equity beta (1.32).
Based on all the above modifications, APV approach provided a value of $ 50.10. Hence, on
rounding off the value, $ 51 was chosen as the reservation price.
Belvino reservation price calculation:
Confidential instructions about Belvino:

 Reduction in Bel Vino's 190-person sales force by 35 positions, yielding an
immediate savings of $4.5 to $6 million per year
 Increase Bel Vino's domestic revenue by $25 to $50 million per year by selling Bel
Vino wines through Starshine's more robust U.S. distribution network and through
application of its superior marketing capabilities
 Cultural difference between Belvino and Starshine
 Starshine’s management is reluctant to merge with Belvino, since the former would
have to cut down its marketing costs if it accepts a merger offer from the latter
Based on the above information, following modifications were done in the assumptions:
 It was clear that merger with Belvino would mean that Starshine has to change its
strategy completely and reduce its marketing costs. Hence, the reservation price was
intended to be quoted less in order to compensate for the cultural difference.
 Also, since management was also reluctant to merge with Belvino and the stock
price of Belvino was on the downfall, it was assumed that the merger with Belvino
would be considered only if the deal occurred at a price very close to the current
stock price of Belvino ($ 36)
 Increase in Domestic Revenues ($M) = $ 25 ( Lower bound of the expected range has
been considered, as it will reduce Belvino’s reservation price)
 Reduction in Other SG&A ($M/year) = $ 4.5 (Lower bound of the expected range has
been considered, as it will reduce Belvino’s reservation price)
Belvino capital structure, Debt/Equity = 301/382 = 0.787
D/V = 301/ (301+382) = 0.44 = 44%
Target D/V = 35% (Default value in simulation)
Since target D/V is different from current D/V, we use APV approach for valuation.
Modifications in Terminal value parameters:
Method used – Perpetuity method (Assuming that the growth rate remains stable
over the coming years)
 Terminal Value Perpetuity Growth Rate = 3% (Assuming industry growth rate

based on analysts calculations)
 Current levered equity beta = 1.32
 Value was obtained from the average of levered equity beta of comparable
companies
 Estimated Unlevered Equity Beta = 0.95
o Value was calculated based on company debt ($ 301mn) and equity
values ($ 382mn), current levered equity beta (1.32).
Based on all the above modifications, APV approach provided a value of $ 37.47. Hence, on
rounding off the value, $ 37 was chosen as the reservation price.
3. State and justify the choice of comparable companies (Hint. Refer the foreground reading).
Belvino and Starshine:
Comparable companies for Belvino and Starshine: Belvino, Starshine and Bellini
Reasons for selecting Belvino, Starshine and Bellini:

 All are mid-size companies with comparable revenues
o Belvino - $ 370mn, Starshine - $ 525mn, Bellini - $ 500mn
 All these companies into exclusive winery business
Reasons for NOT SELECTING other companies:
 International Beverage Corporation (IB)

o Mismatch in product portfolio. Companies selected are exclusively into
winery business. Whereas, IB has broad portfolio across wine, imported
beer, and soft drinks
o Incomparable revenues. IB annual net sales are just over $3 billion
 Power Beverage
o Mismatch in product portfolio. Companies selected are exclusively into
winery business. Whereas, Power Beverage is an international brewer,
bottler, and marketer of beer and soft drinks
o Incomparable revenues. over $6 billion in annual revenues
 Blanc Vin Winery
o The company’s sales are only $25 million, which is less than 1/10th of the
sales of the companies selected
 Le Dutrec Enterprises
o LDE is a quite diversified company
o Over $20 billion in annual revenues
o Products are vastly different compared to Belvino and Starshine. Of its
revenues, 20% come from an upscale Paris department store chain, 30%
from fashion clothing and expensive leather luggage, and another 30% from
cosmetics and perfumes
4a. How many offers / counter-offers were made by you? Did you withdraw any bid? Provide
all the details and give your explanations/justifications.
Offers made to Belvino:
First offer: $ 37
Second offer: $ 37.5

The two offers made were through the chat discussions. Belvino didn’t agree with value in
both the cases claiming that the offer was much below their expectation. The reason for
offering the two prices was that the calculated reservation price was $ 38 and the stock
price of Belvino at that instant was $ 36. So I chose the offer values which lied between the
stock price and the reservation price.
Belvino was facing sluggish performance, conflict in the senior management ranks. Also,
the confidential information provided informed that Starshine management was reluctant
for a merger owing to the culture difference. This led to the reduction in synergy benefits
and hence resulted in the lower reservation price.
4b. How many offers / counter-offers were made for your company? Provide the details, and
justify your response. Did a counterparty withdraw a bid made for you? What was the
eventual outcome of the game?
IB was the only company which made offers for acquisition. Again, the discussion on the
offer prices were made through the chat option available in the simulation game. IB
initiated the discussion asking me to quote my offer price.
First offer: $ 65
IB response: Did not agree. He said he was getting a better deal with Belvino. Price offered
by IB $ 55
My response: Second offer $ 63
IB response: Did not agree again. Second offer - $ 58
My response: Third offer - $ 62
IB response: Did not agree. Tried to negotiate for $ 59
My response: Told $ 60 would be the final offer price.
Deal made.
The reason was negotiating the price from $ 65 to $ 60 is that the calculated reservation
price for Starshine was around $ 51 and the eventual deal price was higher than this. Also,
synergies in terms of distribution networks (IB was well known in the industry as a
preferred partner for distributors because of its ability to quickly and efficiently restock
wholesalers with product), and access to distribution channels abroad implied that the
deal would benefit Starshine
Outcome:
Stock price Starshine: Increased by 4.57% to $ 60.
Stock price of Belvino: Decreased by 23.31% to $34
Stock price of IB: Increased by 3.57% to $67

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SIMULATION GAME REPORT

Starshine reservation price calculations:

Confidential instructions for Starshine:

 Increase in Domestic Revenues ($M) = $ 38 ( Synergies after merger were expected

StarShine capital structure, Debt/Equity = 235/414.1 = 0.567

D/V = 235/ (235+414.1) = 0.362 = 36.2%

Target D/V = 27% (Default value in simulation)

Modifications in Terminal value parameters:

 Terminal Value Perpetuity Growth Rate = 3% (Assuming industry growth rate

Belvino reservation price calculation:

Confidential instructions about Belvino:

Belvino capital structure, Debt/Equity = 301/382 = 0.787

D/V = 301/ (301+382) = 0.44 = 44%

Target D/V = 35% (Default value in simulation)

Modifications in Terminal value parameters:

 Terminal Value Perpetuity Growth Rate = 3% (Assuming industry growth rate

Reasons for selecting Belvino, Starshine and Bellini:

Reasons for NOT SELECTING other companies:

 International Beverage Corporation (IB)

Offers made to Belvino:

Second offer: $ 37.5

My response: Second offer $ 63

IB response: Did not agree again. Second offer - $ 58

My response: Third offer - $ 62

IB response: Did not agree. Tried to negotiate for $ 59

My response: Told $ 60 would be the final offer price.

Stock price Starshine: Increased by 4.57% to $ 60.

Stock price of Belvino: Decreased by 23.31% to $34

Stock price of IB: Increased by 3.57% to $67

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