Alfa Coller Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

Alfa Coller, Founded in 1960’s it produces and sells synthetic resins. Being among one of the largest companies in its sector in terms of its size, volume quality and variety, it is present in many different countries by means of large network of offices and agents. It has around 350 employees and a consolidated turnover of about 200 million euro’s. Its buyers are basically industrial companies who purchase these resins for a variety of purposes with the ultimate goal being of resale to the end consumers. It business strategy is focused on providing not only products to the customers but also provide highly developed technical support service which plays a crucial role as well in the after sale service.

It’s chief competitors are well known multinationals in the chemical industry, however there are persisting entry barriers in this industry since significant capital investment are required, a high minimum volume threshold is required, employees need to have specific technical skills to succeed & it implies a constant commitment to research & technological development.

Problem Statement

To calculate the maximum price that should be paid for the integration process with the Coller Company.

Alfa Group is trying to decide about the integration process along with Coller Company and for this it is trying to decide the right price to make the exchange with the company. It is overlooking the financial, marketing, management and operational aspects of this company that they intend to take under their wing.

Case Analysis

The case analysis is based on the evaluation of operating cash flows as well as assessment of the synergies of both companies in order to take the acquisition decision.

WACC

In order to calculate WACC, first of all it is required to calculate the cost of equity whereas the cost of debt was already available in the information given under the case. However in order to determine the cost of equity it has needed an additional information i.e. Beta Coefficient. The beta has been determined, on the basis of the information given in the year 2003, to be 0.62. After that the cost of equity has been calculated which turned out to be 7.5% by using the following formula:

Ke = RFR + MRP*(B)

Whereas:

Ke = Cost of Equity

RFR = Risk Free Rate

MRP = Market Risk Premium

B = Beta

The formula used for calculating WACC is as follows:

WACC = Ke*(E/F) + Kd*(D/F)*(1-T)

Whereas:

WACC = Weighted Average Cost of Capital

Ke = Cost of Equity

E/F = Total % of financing that is from equity

Kd = Cost of Debt

D/F = Total % of financing that is from debt

(1 - T) = 1- Tax rate

The WACC is calculated to be 6% in light of the information given in the case.

Operating Cash flows

For this part of the analysis, firstly all the variables that are necessary in order to arrive at the Cash flow from operations are determined. The formula used for this:

Operating Cash Flow = Net Income – or + Non Cash items effect on the Operating Activities

The net income of the company first decreased from 1999 to 2000 but after that it was constantly increasing up until 2006 showing a positive trend for the company. The net revenues are constantly increasing from 1999 till 2006 showing that the company is able to keep its cost to a minimum level in order to achieve a steady amount of net revenues.

However on the downside, their account receivable is also increasing consistently from 1999 which means that they are not able to solve their problem of circular debt which could be a problem in the long term especially in need of liquidity. Their accounts payable is also increasing ever since 1999 till 2006 which shows that they are not able to pay off their debts. This could in part be due to the problem of circular debt. Their inventories are also increasing consistently from 2000 till 2006 however from 1999 till 2000 they decreased which is a good sign but the increase shows that the company has invested too much in the stock itself which it is unable to turnover with the possibility that the stock might be damaged or lost in case of an accident...................

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