Dow Chemical By Kai Draaisma Laurens de Blij Diedrik Oost Eva Sloff Lesley Flohil 13-11-2012 Duisenberg School of Finance Executive abridgment 1. Abridgment of Facts. Delay an annual proceeds of $20. 2 billion Dow held the ascititious traffic comcomlie worldwide in ethylene and polyethylene (demonsttrounce 1b). To inmunicipal all of Bahia Blanca’s polyethylene zeal beneath Dow’s regulate a three-rank plan was patent clear. The primeval rank concerned gate regulate of PBB, the succor rank concerned acquiring Polisur’s two polyethylene sets, and the third rank concerned edifice a new ethylene cracker.
To enumeadmonish a befitting betray prize Dow had to judge potential province betrays. Prevalence and synod cunning betray may own had an impression owing of potential advenient crises and changing synod policies permiting to outlandish enduements. Furthermore, owing of the fulfilment of the unity law Dow to-boot had to judge a potential substitute-admonish betray. Dow fashiond a employment fraternity, Dow Investment Argentina, to endue in the design, then they had to determine whether they fashion use public municipal capitals or foster liability for the PBB bid. 2. Declaration of whole . 1General decomlie Rational for Merit of PBB Dow Chemical’s municipal administration is to behold for horizontal- and upright integration, terminate technological start and fashion interpolitical nighness. Dow fashion boon from a elevate integrated formation rule by gloomy their require of formation. PBB fashion to-boot fashion stanch edibles of ethane for Dow confessing them to terminate generous admonishs nigh 100%. Cracking ethane in the tract-of-land fashion end in inferior generous betray for Dow signification the furnish/input betray for the formation of Polyethylene.
An extension in the formation output of Dow fashion confess them to boon from economies of lamina. Overall Dow fashion fashion technology start and operational brilliance from adding PBB to their fraternity and repair them delay a requireleader comcomlie in the traffic required to emulate delay the synod-subsidized chemical involvedes. Betray configuration In this minority we produce a mean betray decomposition. Tcogent 1 is purposeal to demonsttrounce a amalgamate aggravateview of the incongruous betrays, potential ameliorative actions and whether the betrays are integrated in the coin run or remittance admonish.
Not total betray was conducive in the merit of PBB. The betray that influenced our coin runs the most is the prevalence betray producerd by a potential liquidity exigency in Argentina. Argentina has conversant prospect elder prevalence crises (tijd/reference)and tless is a betray of a new prevalence exigency in the advenient. When this occurs, Dow fashion not be cogent to hawk its output to the residence province and fashion own to extension its ship-produce. Proceeds de We own to-boot captured into totality that the unity law that now produces uprightness could besides seal. This fashion to-boot own a forcible impression on inflation.
Operating betray is the succor betray delay a ample impression on purposeal coin runs. This is mainly the betray of not convocation the liberal generous distributes. For the primeval 3 years we binder the generous admonish of the set at 65% and from 1995 we extension the generous admonish by 5% each year. Other betrays had close of an impression on our coin runs. Counsel betray was close of an upshot owing Dow was already demonsttrounce in Argentina and PBB was weighty to the synod of Argentina. Municipal Governance betray in Argentina is not expected to own a forcible joined impression on coin runs.
This betray is already comprised in the remittance admonish for correspondent designs in the US. Tcogent 1: Betray aggravateview| Risk| Ameliorative actions| Coin Run (CF) or Remittance admonish (DR)| Dev betray| 1. Own a ample bank advance from a generally-known bank. 2. Synod scatch of 49% less is a ameliorative factor | DR| Expropriation betray| Same actions as for dev betray| CF (tax wil extension 5%)| Generous betray (merely post/ collection betrays )| n/a| CF| Efficacious betray| Through the unity law, the peso has been anchored to the USD to thwart hyperinflation. | DR| Currency/ Outlandish substitute betray| 1.
Dow is a courteous distributei-colored endueor, hence this should be subordinate. 2. Buy put discretions on the Arg peso. | CF| Municipal Governance betray| Demonsttrounce shares to administration to align incentives. | DR| Repatriation betray| Current political clime is stanch, not slight that Arg fashion fix limits on capital outflows. | DR| Counsel Risk| Dow Chemical already has nighness in Argentina, hence are elevate slight to assent-to proud sort counsel. | n/a| Adjusted remittance admonish All betrays that are not used for adjusting coin runs are integrated in the adjusted remittance admonish.
These betrays comprise but are not scant to dev betray, counsel betray, hyperinflation, efficacious betray, repatriation betray and other residual betrays. These betrays are somewhat subordinate, stationary all the incongruous betrays wholly execute a prize which we fashion add on to the the demonstraten remittance admonish for correspondent designs in the US of 8%-10%. A debatecogent arrogance for the wholly prize fashion be [ ]. The auumed prize ends in a remittance admonish of [ ] which we fashion use in our elevate valuation. 4. Recommendation Bidding decision
Competing bidders deficiency to give-in delay real covenants (demonsttrounce 6). Competitors Perez Companc S. A. and Copesul do not give-in delay the requirements of having a declaration of net excellence of at feebleest 5 billion. Even if the two companies would delay they do not as the the requirements. This executes Dow the uncombined bidder for PBB. This has a intense impression on the interior valuation. Appendix 1 Betray Counsel betray. When you are doing a cross-border valuation you own to catch into totality that tless may be counsel betray.
This comprises the betray of beyond endueors getting the wickedness counsel owing of meagre conduction in the financial declarations. Stationary gone-by Dow entered Argentina in 1957 we feign they are frank delay the traffic and totalitying legislations, hence counsel betray for this design is low as Dow chemical has already attentive province test in Argentina via Dow Quimica. Owing this is intricate to quantify we own captured this into totality in our remittance admonish. Corruptionrisk. The betray of dev comprises the illicit payments and favors beyond the legislation of law.
Corruption exists to some quantity in all countries, but tless are ample differences aggravate countries. According to the Global Dev Index by Transparancy interpolitical, the roll of dev for Argentina in 1995 was demonstraten a 5. 24 out of a potential charges of 10. This gave them a ranking of 24 out of 42 countries surveyed. All of which were feignd to be patent clear countries. However, Dow somehow impregneffectual itself benefit to PBB’s consequence and the Argentine synod’s purpose to binders 49% which is an service and not a hindrance.
The Argentine synod fashion to-boot recognize the jobs entity fashiond in the following design ranks, if lucky, and a cheerful interconnection delay the synod fashionslight to-boot be salubrious when discussing delay YPF about long-term ethane furnish. Mitigation: Distribute of this betray can be subordinate by gate a advance in Argentina to finance the design as the synod fashion not omission Dow to want on their liability ending in an aggravateall bad fruit for Argentina’s economic locate. Furtherelevate distribute of this betray is subordinate as the synod has a scatch in the fraternity so it is to-boot in their producer to binder the fraternity secure.
Currency betray: As Argentina has conversant 8 elder prevalence crises in the gone-by tless is the betray of a new prevalence exigency occuring in the advenient. Even though the unity law took afar some of the betray, Dow fashion stationary own to permit in purpose that when a crises occur, they fashion not be cogent to hawk their output to the residence province and fashion own to extension its ship-produce. This betray is captured into totality in the coinflows. Expropriation betray. Political inuprightness or expropriation is feeble as they fraternity has had a stanch subversive synod gone-by 12 years.
However, changes in the cunning of the synod fashion producer a betray for Dow and their outlandish enduements. At that trice tless were no restrictions on borrowing abroad and tless were no limits fixd on payments of outlandish advance foremost and producer. If something changes in this regulations it may own an pi on the merit of Dow. For this debate we fashion to-boot comprise this betray in our remittance admonish. Furtherelevate the synod has no limits on coin runs going out of their province but can besides determine to do so.
We judge the betray of the synod gate aggravate the fraternity to be low as the formation of polyethylene and deriving ethylene from hydrocarbon crackers is involved. This is a rule for skilled vulgar and not lawful anyone can hence run the fraternity befittingly. The betray of expropriation is hence low. As the formation of ethylene and derivatives such as polythylene is a proudly involved rule, requiring ample captial enduement and a proud generous leverage, not divers companies fashion be cogent and fashioning to catch aggravate the office.
Furtherelevate as Polythylene is a stock issue that trades globally delay a straight compensation class. Mitigation:Dow can wane the betray scylla by gate on a advance in Argentina to finance their design. This fashion wane the betray scylla as Dow can merely want on their liability when the synod determines to foster taxes, which fashion not administer to a fraternity want. Outlandish Substitute Admonish Risk. Outlandish Exhange admonish betray fashion be low owing of Dow Chemical’s interpolitical nighness and the arrogance that shareholders are sufficiently distributei-colored. The unity law which ensured a unwandering Argentine peso and U.
S. dollar at correspondently one already wane the outlandish substitute admonish betray. Stationary we deficiency to catch into totality the betray that the unity law dominion conclude to an end. Mitigation: The betray can be waned by setting up requireive financial contracts delay the governmetn to execute stable the trade fashion occur. Furtherelevate Dow could determine to locate a put discretion on the peso to secure themselves when the peso collapses. Generous betray Pre-completion: as the design is already completed tless is no betray about the technology betrays or other collection betray.
Post-completion: we own comprised the post-collection betray in our coinflows as we run the betray of not convocation the liberal generous distributes. For the primeval 3 years we binder the generous admonish of the set at 65% and from 1995 we extension the generous admonish by 5% each year. As the fraternity produces their own input this betray does not deficiency to be captured into totality. Generous betray would slight stuff but we handled that betray by adjsuting down our casfhlows in rank 1 so we do not catch it into totality for adjusting our require of capital
Sovereign betray Politcal events suchs as wars, effect strikes, terrorism and changes in laws can occur in any province you effect delay and hence deficiencys to be captured into totality. Gone-by it is constrained to quantify this betray we own handled it through the remittance admonish. Appendix 2 | | Source: Erb, Harvey Viskanta, ‘Poltical betray,Economic betray and Financial betray’, Fuqua School of Office Working Paper No. 9606, 1996. | -------------------------------------------- [ 1 ]. For broader sense of the incongruous betrays see Appendix 1 [ 2 ].
According to the Global Dev Index by Transparancy interpolitical the roll of dev for Argentina in 1995 was demonstraten a 5. 24 out of a potential charges of 10. This gave them a ranking of 24 out of 42 countries surveyed. All of which were patent clear countries elevate or close. Source: http://archive. genuineness. org/policy_research/surveys_indices/cpi/previous_cpi [ 3 ]. See Appendix 1 for an sense of the ameliorative factors of the anteriorly mentioned betrays [ 4 ]. This disposal was reached byTaking the ‘total assets’ as net excellence on the financial declarations of Perez on Copesul (demonsttrounce 8a &8b).