DOW CHEMICAL’S BID FOR THE PRIVATIZATION OF PBB IN ARGENTINA Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

DOW CHEMICAL’S BID FOR THE PRIVATIZATION OF PBB IN ARGENTINA Case Solution

In order to provide a valid reason for Dow to convince itself to invest in this acquisition project, there could be several potential benefits that significantly outweigh the problems or the issues associated with it.

The first and the foremost reason could be analyzed by analyzing the real source of income of Dow. It can be seen that the overall reason behind profitability and strong brand position of the company is due to the increase in demand as well as the sales of its ethylene product, which was just 7% in the year 1994 and grew to about 34% in 1995. Moreover, the demand for polyethylene product rose to about 28% in 1995 (22% as of 1994). The reason behind this sufficient growth is due to the increased growth in European market as compared to the rest of the world. Moreover, from the future perspective, it can be seen that the demand for the product in America is expected to increase three times, which strongly suggests that Dow must increase its overall capacity in order to fulfill the demand from the customers; the acquisition could therefore be favorable. Moreover, it can be seen that currently, the company lacks capacity of Polyethylene in Argentina, which could hurt its brand position.

It can be seen that the location of PBB site is highly beneficial because of the respective factors:

Presence of the two largest Argentine gas basins
Easy access to raw materials
Low transportation cost
Easy access (sea, rail, road)
Close to Buenos Aires (50% of market)
Adequate service infrastructure and human resources

With the help of this acquisition, Dow can not only expand its entire capacity, but also gain easier access to raw material as well as a huge domestic market. Last but not the least crucial factor relates to favorable economic conditions prevailing in Argentina with respect to the removal of extra charges and duties between the members of Mercosur. Thus, it can be seen that in order to have an increase control over the global demand in Latin America, the acquisition could favor the company with highly beneficial results.

However, it can be seen that certain risks are also attached with this overall acquisition that relate to currency risk, profitability risk, and the political risk; they could be minimized by using effective alternatives. Moreover, the increased demand in Argentina could help resolve these issues.
Although the project is highly profitable and strategically crucial, there are several risks behind it. Lastly, the capital repatriation issue has substantially reduced and it is not expected to cause any sort of harm in future.
How would you conduct a valuation of this project?

The valuation of the entire project is done using the cash flows projected for each of the three stages. The future expected cash flows are discounted back to its present value using the Discounted Cash Flow Method. However, the appropriate discount rate required some computation because the available discount rate of 8% to 10% does not account for the various risks that the company is facing. Therefore, the Capital Asset Pricing Model would be used to come up with the appropriate risk, which must satisfy the development risk and foreign exchange, but above all, the country risk. Moreover, with the help of risk analysis, the discount rate computed could significantly help in the sensitivity analysis on the basis of different tax rates applied by the company as well as different transportation cost. For each of the different stages of the project, DCF would be applied individually to each of them through which the entire valuation could be computed...................

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