case analysis

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HARVARD EXTENSION SCHOOL
Mergers and Acquisitions MGMT E-2720
Spring 2014
Midterm Case – Sterling Household Products Company

Contents
a.How much business risk is associated with Sterling’s proposed acquisition of the germicidal, sanitation, and antiseptic products unit of Montagne Medical? 3
What is the cost of equity capital appropriate for evaluating the free cash flow associated with this investment? 4

What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow? 4
b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022? 4
What is the terminal value of the final 10 years of the acquisition, as of 2022? 5 …show more content…

The acquisition of Montagne Medical’s Germicidal, Sanitation, and Antiseptic Products Division adds value of 64.6 million USD to Sterling under the condition of the base investment.
The acquisition of Montagne Medical’s Germicidal, Sanitation, and Antiseptic Products Division adds value of 166.8 million USD to Sterling under the condition of the base and expansion investment.
Further value to Sterling will be added when realizing potential synergies between Sterling and the acquired business. These are likely synergies in production facilities, procurement of materials and between overhead teams. Reductions in production and warehouse overcapacity by increased flexibility, office rentals and manpower are likely. Savings from internal currency hedges are possible.

d. What are the strategic issues associated with the proposed acquisition?
Sterling’s management should focus on the acquisition of Germicidal, Sanitation and Antiseptic Product Division of Montagne Medical. The strategic importance of growth in revenue and cash flow to Sterling's success demands looking for alternative markets with high potentials of synergies. While home market of Sterling Household is stagnating, the market for effective germicidal, sanitation and antiseptic products for use on medical equipment and for skin infection control is growing rapidly.
Purchasing company
Sterling is a consumer products company. Sterling had 3,281 million USD revenue in 2012

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