When Saint Gobain Acquires Bpb

Birmingham Business School

MBA International Business 2005/06

07 15442: INTERNATIONAL BUSINESS FINANCE

Lecturer: Dr John Cadle:

Cross Border Acquisitions:

When Saint-Gobain acquires BPB

Student ID: 797300

Length: Approx.3000 words

OUTLINE

Executive summary

P3

Introduction: When Saint-Gobain acquires BPB

P4

Synergies thought to be gained from such acquisition

P5

* Operational synergies P5

* Financial synergies P7

The valuation of such acquisitions ( methods and problems)

P9

* Valuation of the current value of the target company. P10

* Problem: the valuation of the potential synergies to be gained P11

Conclusion

P12

References

P13

Appendixes

P15

Executive summary

By the end of 2005, Saint-Gobain, a French leading producer, processor and distributor of materials, acquired for Ђ5.8 billion the company BPB, British Plastic Boarder, the English leader in plasterboard: This acquisitionwill allow the French Company to become the world leader in building interior solutions.

The motive of this acquisition, as for any M&A, is to take advantage of the synergistic benefits to increase the company share value. In fact, there are multiple synergies to be gained from such acquisition: These synergies could be divided into operation synergies and financial synergies: While operational synergies mostly affect the operations of the combined firms and generally show up an increasing Cash Flow, the financial synergies are much more focused and may result in higher cash flows for the company but could also take the form of lower discount rates (A. Damodaran, 2005).

The board of Saint-Gobain believes that the acquisition of BPB will provide an access to key markets, a wider portfolio of activities, the acquisition of technical skills and the economies of scales resulting from a combined product offering and the sharing of commercial, operational and logistic practices. In addition to these operational synergies, more stable and predictable Cash Flows are also expected from the acquisition, allowing the new entity to take advantage of diverse financial benefits, often manifested as a lower cost of capital. Finally, the integration of BPB is a good way for the French group to diversify its operation, and therefore reduce its dependency relative to specific markets and activities...investors will then secure their investments in the company.

Prior to an acquisition, methods of valuation can differ from one company to one another and therefore we can say that there is no standard method to be used for the valuation of a company. The most famous tools are the analysis of the book value of the target company, the market multiple analysis, the comparative tools dealing with the company and its competitors, the income statement analysis determining the operating results and mainly the expected value of future CF, which will help to define the value of the company. Within the CF analysis, the most appropriate tool is certainly the Discounted Cash Flow.

The price paid by Saint-Gobain for this acquisition represents a premium of 51, 2% compared to BPB's stock price on 20th of July 2005. This price, higher than their initial bid, has been readjusted according to the expectation of the shareholders and is justified by BPB's higher-than-expected prospects for growth.

Such an issue clearly illustrates the difficulty of an acquiring firm to determine the price of its target, and especially when it comes to the determination of the premium to pay: synergies are a sensitive component of the company's valuation and should therefore be considered with a particular attention.

Introduction

Most of the companies operating in the construction industry are now facing an environment which tends to become more and more global but also an increasing Chinese competition. If these companies want to maintain their growth targets, the key issue is to gain a worldwide competitive advantage while continuing to follow their customers which, in the same competitive landscape, are also going global...This could be achieved through the launching of global products which could be transported and sold everywhere at a reasonable price. From both a theoretical and practical perspective, the acquisition of an asset that can effectively obstruct the entry of a major competitor and prevent the erosion of its market share has significant value ( David C. Lam & Michael Chiu, 2005).

Saint-Gobain, the company we will focus on in this paper, understood this issue and maintains its leading position through acquisitions. The company is a leading producer, processor and distributor of materials (glass, ceramics, plastics, cast iron, etc.) present in more than 50 countries: It transforms raw materials into advanced products for use in the daily life, as well as developing tomorrow's new materials.

In December2005, Saint -Gobain acquired the company BPB, British Plastic Boarder, the leader in plasterboard, after 4 months of negotiation with BPB's shareholders. This acquisition of Ђ5.8 billion will allow the French company to benefit from an important potential growth in the United States and in Canada and is expected to generate Ђ35 synergies in 2006 and Ђ100 million in 2007...

Prior to such an acquisition, the acquiring company has to determine whenever the target company will create value and try to determine the price to pay for such value in order to appropriately