Structuring Repsol’s acquisition of YPF S.A (A). Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Structuring Repsol’s acquisition of YPF S.A (A). Case Solution

Advantages & Disadvantages of Stock financing:

The advantage of stock financing is that it will enable the firm to maintain credit rating, unused debt capacity for future unforeseen financial requirements and growth opportunities. Shareholders of YPF will be able to get a share in gain after the acquisition.

On the other hand,there are some disadvantages, such as: the earning per share will be decreased just because of dilution and the business will be riskier.Respol will bear the entire risk if it offers cash-only, but in this option; the risk will be distributed between both the firms.

So the cash option is less risky than the stock option for the YPF’s shareholders because they will not participle in any profit or loss after the merger, as they will just get a fixed price.

Assessment of alternatives of financing

There is a highest variation in the EBIT coverage ratio ifthe acquisition is fully financed with debtas compared to the blend financing option, as shown in the probability distribution graph of EBIT coverage ratio in exhibit 10, by running simulation at the base case. The probability of default is highest in all debt financing and lowest in all equity financing. After taking into consideration the minimum and maximum country risk; the all debt financing and all equity financing produce the highest value of the merged firm, and blended option produces minimum variation in values of the merged firm, but variation is least in all debt financing and highest in all equity financing. The default risk has a huge impact on the cost of capital, which will ultimately impact the post-merger valuation of the firm (Bob Bruner; Pablo Ciano; Fernanda Pasquarelli, 2000).

Recommendations

By considering all factors, such as: default risk, country risk, bylaws consideration of YPF and the strategic planning of Repsol; we would recommend the company to overcome the drawbacks of raising capital by issuing equity and to take into account the YPF's bylaws and all other relevant factors.Alfonso Cortina must make an all-cash payment for YPF at 44.78$ per share.

The key bets on which our recommendation depends are as follows: by acquiring the YPF Repsol will be able to finance ina less risky and less conflicting way, as YPF’s investors want full cash, not stock swap. This will help the company in growing internationally, offering sustainable dividend growth rates to shareholders and in transforming the profit and portfolio as well.

Influence of deal financing on other aspects of M&A deal design in general

Generally, we assess the financing alternatives through six dimensions, such as: flexibility, risk, income, control, timing, and others. Inflexibly, we assess the ability of the firm to meet the unforeseen financial requirement, income the option generates, risk of the variation in cash flows, and so on. All these factors influence the option of financing for M&A deal design (Financial Education Association, 2005)............................

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