JAI PAUL VASUDEVA

FINA 4050

FINAL PAPER

PART A:

A) The drivers for merger activities during the age of strategic megamerger (1992-2000)
were revolution in technology, deregulation, reduction in trade barriers and the global
trend towards privatisation. Purchase prices reached record levels due to a soaring stock
market, consolidation in many industries, technological innovation and benign antitrust
policies. The dollar volume as well as the number of transactions hit record figures each
year from 1995-2000 before they contracted sharply. This happened when the Internet
bubble burst, a recession hit the united states in 2001, and global stock market collapsed
with a worldwide recession, the combination of which was the reason for the eventual
downturn of the fifth wave- the age of strategic megamerger (1992-2000).

B) Market Model
1.Market Model applies when capital markets
are liquid

2.Market Model applies when financial disclosure

is high

3.Ownership and control are separate.

4. Shareholders focus more on short-term gains

5. This model is prevalent in U.S. and U.K.

Control Model
1. Control model applies when capital markets are illiquid
2.Control model applies when financial disclosure is limited.

3.Ownership and control overlap.

4.Shareholders focus more on long term gains

5. This model is prevalent in Europe, Asia & Latin America

C. Under the C corporation firms are taxed separate from its owner. It is a very common
form of strucutre
Pros:
Corporate legal shield: Firms are protected under this,
Limited liability. Shareholders of a close corporation are not personally liable for the
business's debt.
Unlimited Stockholders: Firms can have unlimited stockholders.

Cons:
Double taxation: The profits are double taxed under C Corporation. This is a major
disadvantage of a C corporation. It is a very common corporation structure.

Complexity: A C corporation is much more complex to operate than a LLC. More

formalities are required including a full legal setup.

D. Value creation in a LBO is a combination of a number of factors. Public companies

create value with an LBO by alleviating agency problems- underperformance which
would arise out of conflicts between management and shareholders is reduced as
shareholders are eliminated in an LBO. With private firms the channel to creating value
is providing access to capital since private companies can’t raise equity in the public
market. Private equity firms finance the firm’s restructuring. Factors common the LBOS
for private and public firms are temporarily deferring taxes(tax shield), reducing debt,
 improvement in operating margin, timing of the sale of business properly. LBOs create
value by reducing debt and increasing margins thereby increasing potential exit multiples.

PART B:

Q1.

Liquidation Value:

Cash $10

Accounts Receivable $14 (14%)

Inventory $6 (40%)

Net Fixed Assets excl land $2 (25%)

Land $7.2 (120%)

Total Assets $39.2

Total Liabilities $35

Shareholder’s Equity= A-L= $4.2

Liquidation expenses $2.9

Cash Remained $1.3
Q3:

Minimum purchase price for coronatech:

126.6+ 1.9

= 128.5

Maximum= 126.6+ 30

= 156.6

Part C:

SWOT Analysis as in the eyes of HKex for LSE would include the following factors:

1. Strengths: LSE is the largest market infrastructure group in Europe by Market Cap. It is
number 1 OTC clearer worldwide with US$ 1,077 Trillion cleared and has more than
90% market share globally in interest rate swaps clearing. Consistent growth of revenue
over the last few years, deducting no recurring incomes (Investment management) with
consistent gross profit margin.
2. Weaknesses: Basic earnings per share dropped by 10%. The current asset ratio shows that
the company can use cash more effectively which reflects poor financial planning in
some respects. R&D has been more than industry average but as for LSE they need grow
further into these aspects as they generate the largest revenue through this which can
crumple later if players are better in the market.
 3. Opportunities: LSE has been growing consistently over the past few years. Their
estimated growth for the next three year is 25% which is higher than what is expected
from HKex (24%). The company has highly complementary business diversified across
asset class, geography and verticals positioned for ongoing innovations.
4. Threats: Economic growth is expected to slow down while USA has seen positive
outlook in the same aspect. Brexit is going to impact the growth of LSE, financial
implications can be adverse as hub can be shifted greatly to Frankfurt or Paris which
would also affect the currency.

After looking at all the key drivers, the prospects and doing a SWOT analysis. We can come to
the conclusion that the key drivers such as sales growth, cost of sales as a percentage have been
consistent throughout the years with more synergy that can be creates as both the firms
complement each other and can help tap into different markets/ continents. Even despite the risks
the HKex might have to take the cost is less as compared to the profits. Doing a cash and stock
deal will also help in target dissolution while shareholder’s can be cashed out, it will allow
acquisition to get certain parts of Assets and liabilities, asset writeups and no minority
shareholder while keeping the transfer of taxes

References

https://www.hkexgroup.com/-/media/HKEX-Group-Site/ccd/Possible-Offer/20190910-IR-Deck-
vFF_EN.pdf

http://fernfortuniversity.com/term-papers/swot/nyse/7339-london-stock-exchange-group-plc.php

Annual reports https://www.lseg.com/investor-relations/presentations-and-webcasts/annual-

reports

Part D:

1. In recent years, the luxury goods industry has seen tremendous growth. The global luxury
goods market is expected to grow with a CAGR of 2.92% during 2019-2025 (PR
Newswire, 2020). With Covid-19 disrupting several industries including retail, the
following growth drivers help understand the performance of the industry pre-Covid 19:
  New Emerging Markets: According to a report by Ernst & Young in 2019, growth of
luxury goods industry, particularly the cosmetics industry, may be driven by the
emergence of new markets in countries like China, Russia, and the UAE. The report
further goes on to predict that the aforementioned markets will be 50% of sales in
personal care by 2020 (EY, 2019).
 Influence of Digital Media: According to a report by Ernst & Young in 2019, the
influence of digital media has played an important role in driving the luxury good
industry in recent years. “More than 60% of purchases are influenced by digital, and
more than 70% of consumers connect to their favorite brands through social platforms”
(EY, 2019).
 Experiential Luxury: According to a report by BCG, the rise of experiential luxury has
had a significant impact in driving the luxury good industry to new heights. The report
suggests that nearly half the consumers, predominantly the youth, are buying fewer
products and “buying experiences” instead. “By 2022, the experiential segment is
forecast to account for nearly two-thirds of the total luxury market—representing a
fundamental shift in consumer behavior, from owning to being” (BCG, n.d.).

According to a report by BCG in June 2020, sales of luxury goods have dropped from 25% to
45% in 2020 due to Covid-19. The following points relate to the general outlook of the luxury
goods industry in the near future:
 Recovering Markets: The recovery of the luxury industry directly depends on the
recovery of the markets that consume luxury goods. To explain further, China was one of
the worst hit countries initially during Covid-19, but today, China has already recovered
to a point where its GDP is expected to surpass 2019 as it continues to grow. “Sales of
luxury goods in China are expected to rebound and end the year as much as 10% above
the 2019 mark, as more Chinese who normally shop for luxury goods” (Willersdorf et al.,
2020). This is key in determining the performance of luxury goods in 2021.
 Adoption of Digital: Covid-19 has been an eye-opener in terms of understanding the
importance of e-commerce and online shopping. Retail going digital is not a choice
anymore, but a question of survival in the market. Hence, luxury brands need to use tech
 to analyse their sales, maintain customer relations, and forecast trends in order to stay and
grow in this new era of markets.
 Sustainability in Fashion: According to a report by Ernst & Young in 2019, consumers
and investors have “demonstrated growing interest in nonfinancial information –
including the social and environmental impacts – to evaluate potential investment
opportunities and manage risks” (EY, 2019).
This gives insight into another factor that gives luxury goods an edge – sustainability.
Informed consumers are switching to more sustainable goods and products over ones that
harm the environment.

References

https://www.ey.com/en_gl/consumer-products-retail/11-growth-drivers-fueling-
evolution-luxury-goods-industry

https://www.bcg.com/industries/consumer-products-industry/luxury-market’

https://www.prnewswire.com/news-releases/the-global-luxury-goods-market-is-
projected-to-grow-with-a-cagr-of-2-92-during-2019-2025--300986497.html

https://www.bcg.com/publications/2020/new-era-and-new-look-for-luxury

Stated below are some of the reasons why LVMH is considering buying Tiffany now:
 The main reason for behind LVMH buying Tiffany and Co is that LVMH is expanding
its jewellery and watch business, which was the one of the fastest-growing categories in
luxury until the pandemic hit (Lucas & Thomas, 2020). Furthermore, according to an
article by the Financial Times, LVMH wanted to expand its busines in watches and
jewellery since it was smaller than rivals such as Richemont, which owns Cartier
(Fontanella-Khan, 2020).
 LVMH wants to leverage on the current retail market which has been vastly affected by
Covid-19 to close in on the deal with Tiffany & Co. By acquiring Tiffany & Co, LVMH
is not only expanding its business in hard luxury, but also offering Tiffany, that had a
decline in sales from 2018 ($4,442.1 mil) in 2019 ($4,424.0 mil), and reported a sharp
decline in sales in Q1 ($1,003.1 mil in 2019 and $555.5 in 2020) and Q2 ($1,048.5 mil in
 2019 vs $747.1 mil in 2020) of 2020, a chance for revival [all financial data has been
obtained from: https://investor.tiffany.com/financial-information]
 Though LVMH is acquiring Tiffany at a relatively low-price cut, by closing the deal now,
LVMH saves a substantial amount on legal fees.
 Other macro reasons also revolve around the US elections – the election of Joe Biden will
have a significant impact on trade deals between France and the US (that happens to be a
huge market for luxury goods), that had been vastly affected when Donald Trump was
president.

References

https://www.cnbc.com/2020/09/09/lvmh-scraps-16point2-billion-deal-with-tiffany.html
https://www.ft.com/content/de56b836-d7ad-4782-8f0a-b89f5d288d5e

3. Pros of using cash:

• LVMH will get a better deal in an all-cash purchase.

• Purchase using cash avoids possible delays and financing issues and hence,
Tiffany and Co would be open to negotiating a better price.

• LVMH does not have to bother with the extra cost of interest from borrowing.

• In a cash deal, the roles of the two parties are well-defined, and the exchange of
money for shares completes a simple transfer of ownership.

Cons of using cash:

• Shareholders will have to pay potential capital gains taxes — which will further
increase after the acquisition. For all-stock acquisitions, these taxes for shareholders
would likely be absent.