Dow Pbb

Dow Chemical By Kai Draaisma Laurens de Blij Diedrik Oost Eva Sloff Lesley Flohil 13-11-2012 Duisenberg aim of Finance Executive summary 1. drumhead of Facts. With an annual revenue of $20. 2 trillion Dow held the leading commercialize position global in ethene and polyethylene (exhibit 1b). To unify all of Bahia Blancas polyethylene exercise under Dows control a three- stratum plan was developed. The get-go present tough victorious control of PBB, the second stage tough acquiring Polisurs ii polyethylene plants, and the third stage involved building a new ethylene cracker.To determine a proper venture gift Dow had to consider docapable democracy take a chance of infections. capital and regimen policy take a chance may return had an impact beca design of possible future crises and changing political relation policies relevant to remote investment fundss. furthermore, beca using up of the ending of the convertibility truth Dow besides had to consider a poss ible exchange- charge per unit lay on the line. Dow created a holding federation, Dow Investment genus Argentina, to invest in the come out, then they had to decide whether they let use general corpo outrank investment high societys or raise debt for the PBB bid. 2. Statement of problem . 1General compend Rational for Acquisition of PBB Dow Chemicals corporate strategy is to look for horizontal- and upright integration, achieve technological leading and wee-wee transnational presence. Dow exit benefit from a more integrated achievement regale by unkeptering their cost of performance. PBB go forth also create enduring supplies of ethane for Dow allowing them to achieve operational rates weedy 100%. Cracking ethane in the region testament result in lower operating chance for Dow core the supply/input encounter for the production of Polyethylene.An gain in the production output signal of Dow leave behind allow them to benefit from economies of scale. overal l Dow will gain engine room leadership and operational excellence from adding PBB to their beau monde and deepen them with a costleader position in the market required to compete with the government-subsidized chemical complexes. happen measurement In this section we provide a brief take a chance analysis. add-in 1 is designed to give a compact overview of the divergent seeks, possible mitigating actions and whether the pretends be integrated in the property devolve or synthesis rate.Not every seekiness was applicable in the encyclopedism of PBB. The seek that influenced our cash flows the most is the cash pretend caused by a possible fluidness crisis in Argentina. Argentina has experienced eightsome study currency crises (tijd/reference)and in that location is a happen of a new currency crisis in the future. When this happens, Dow will non be able to sell its output to the household country and will establish to extend its export. Revenue de We adopt also interpreted into account that the convertibility equity that now provides stableness could eventually stop. This will also have a significant impact on inflation. operate find is the second risk with a large impact on hurtle cash flows. This is mostly the risk of non clashing the full operating capacity. For the first 3 years we keep the operating rate of the plant at 65% and from 1995 we add the operating rate by 5% each year. Other risks had less(prenominal) of an impact on our cash flows. instruction risk was less of an issue because Dow was already present in Argentina and PBB was crucial to the government of Argentina. Corporate Governance risk in Argentina is not evaluate to have a significant excess impact on cash flows.This risk is already involved in the dismiss rate for similar advises in the US. board 1 bump overview Risk Mitigating actions hard cash Flow (CF) or Discount rate (DR) rotting risk 1. Have a large bank im division from a national bank. 2 . Government stake of 49% here is a mitigating factor DR Expropriation risk Same actions as for corruption risk CF (tax wil increase 5%) Operating risk (only post/ completion risks ) n/a CF Sovereign risk Through the convertibility law, the peso has been anchored to the USD to prevent hyperinflation. DR Currency/ unkn consume exchange risk 1.Dow is a well diversified investor, thitherfore this should be rationalise. 2. Buy put options on the Arg peso. CF Corporate Governance risk take for shargons to management to align incentives. DR Repatriation risk circulating(prenominal) political climate is stable, not in all likelihood that Arg will impose limits on fund outflows. DR Information Risk Dow Chemical already has presence in Argentina, on that pointfore atomic number 18 more likely to receive senior high quality education. n/a alter throw out rate each(prenominal) risks that be not used for ad unlessing cash flows atomic number 18 integrated in the adjusted gi ve the sack rate.These risks include moreover argon not limited to corruption risk, information risk, hyperinflation, main(a) risk, repatriation risk and other residual risks. These risks are partly mitigated, however all the different risks combined constitute a premium which we will add on to the the abandoned(p) discount rate for similar projects in the US of 8%-10%. A liable assumption for the combined premium will be . The auumed premium results in a discount rate of which we will use in our further rating. 4. Recommendation control decisionCompeting bidders necessitate to comply with certain covenants (exhibit 6). Competitors Perez Companc S. A. and Copesul do not comply with the requirements of having a recital of lowest worth of at least 5 billion. Even if the two companies would commix they do not meet the the requirements. This makes Dow the furbish up bidder for PBB. This has a profound impact on the internal valuation. vermiform process 1 Risk Information risk. When you are doing a cross-border valuation you have to take into account that there may be information risk.This includes the risk of out of doors investors getting the wrong information because of poor disclosure in the financial statements. However since Dow entered Argentina in 1957 we befool they are familiar with the market and history rules, therefore information risk for this project is low as Dow chemical has already collected country experience in Argentina via Dow Quimica. Because this is difficult to evaluate we have taken this into account in our discount rate. Corruptionrisk. The risk of corruption includes the illegal payments and favors outside the rule of law.Corruption exists to some extent in all countries, but there are large differences across countries. According to the worldwide Corruption Index by Transparancy international, the aim of corruption for Argentina in 1995 was condition a 5. 24 out of a possible score of 10. This gave them a rank of 24 out of 42 countries surveyed. all told of which were assumed to be developed countries. However, Dow somehow secured itself thanks to PBBs importance and the Argentinian governments intention to keeps 49% which is an advantage and not a disadvantage.The Argentine government will also measure the jobs being created in the later project stages, if successful, and a good relationship with the government willlikely also be beneficial when discussing with YPF close to long-term ethane supply. temperance weaken of this risk can be mitigated by taking a loan in Argentina to pay the project as the government will not want Dow to disrespect on their debt resulting in an overall bad outcome for Argentinas economic situation. Furthermore part of this risk is mitigated as the government has a stake in the comp any so it is also in their divert to keep the company strong.Currency risk As Argentina has experienced 8 major currency crises in the past there is the risk of a new curren cy crisis occuring in the future. Even though the convertibility law took away some of the risk, Dow will chill out have to bear in judgement that when a crises happen, they will not be able to sell their output to the radical country and will have to increase its export. This risk is taken into account in the cashflows. Expropriation risk. Political instability or expropriation is low-pitched as they company has had a stable democratic government past 12 years.However, changes in the policy of the government will cause a risk for Dow and their immaterial investments. At that moment there were no restrictions on borrowing abroad and there were no limits imposed on payments of unknown loan principal and interest. If something changes in this regulations it may have an effect on the acquisition of Dow. For this reason we will also include this risk in our discount rate. Furthermore the government has no limits on cash flows going out of their country but can eventually decide to do so.We consider the risk of the government taking over the company to be low as the production of polyethylene and derivation ethylene from hydrocarbon crackers is complex. This is a touch on for skilled people and not just anyone can therefore run the company properly. The risk of expropriation is therefore low. As the production of ethylene and derivatives such as polythylene is a highly complicated process, requiring large captial investment and a high operating leverage, not many companies will be able and willing to take over the business.Furthermore as Polythylene is a commodity product that trades globally with a narrow price range. MitigationDow can decrease the risk picture by taking on a loan in Argentina to finance their project. This will decrease the risk word-painting as Dow can only default on their debt when the government decides to raise taxes, which will not lead to a company default. Foreign Exchange Rate Risk. Foreign Exhange rate risk will be low because of Dow Chemicals international presence and the assumption that shareholders are sufficiently diversified. The convertibility law which ensured a fixed Argentine peso and U.S. dollar at just one already decrease the foreign exchange rate risk. However we need to take into account the risk that the convertibility law might come to an end. Mitigation The risk can be decreased by setting up binding financial contracts with the governmetn to make sure the deal will happen. Furthermore Dow could decide to place a put option on the peso to protect themselves when the peso collapses. Operating risk Pre-completion as the project is already established there is no risk concerning the technology risks or other completion risk.Post-completion we have included the post-completion risk in our cashflows as we run the risk of not meeting the full operating capacity. For the first 3 years we keep the operating rate of the plant at 65% and from 1995 we increase the operating rate by 5% each year. As the company provides their own input this risk does not need to be taken into account. Operating risk would likely matter but we handled that risk by adjsuting down our casfhlows in stage 1 so we do not take it into account for adjusting our cost of capitalSovereign risk Politcal events suchs as wars, labor strikes, terrorism and changes in laws can happen in any country you work with and therefore needfully to be taken into account. Since it is hard to quantify this risk we have handled it through the discount rate. auxiliary 2 stem Erb, Harvey Viskanta, Poltical risk,Economic risk and Financial risk, Fuqua School of chore Working Paper No. 9606, 1996. 1 . For broader explanation of the different risks see Appendix 1 2 .According to the Global Corruption Index by Transparancy international the aim of corruption for Argentina in 1995 was given a 5. 24 out of a possible score of 10. This gave them a rank of 24 out of 42 countries surveyed. All of which were developed co untries more or less. Source http//archive. transparency. org/policy_research/surveys_indices/cpi/previous_cpi 3 . See Appendix 1 for an explanation of the mitigating factors of the before mentioned risks 4 . This conclusion was reached byTaking the total assets as net worth on the financial statements of Perez on Copesul (exhibit 8a &8b).