Financial analysis of acquisiitons?

Discussion in 'Growing and Managing a Business' started by WillardWright, Apr 3, 2012.

  1. WillardWright

    WillardWright
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    Hello everyone. I'm a college student working on a business report, however I'm having some difficulty with the financial analysis section. My report is on Kellogg Co. and its acquisition of Pringles. I'm supposed to create a table with figures from the past 3 years to explain Kellogg Co.'s strategic action (acquiring Pringles).

    In any case, I'm having trouble deciding what figures would be relevant to Kellogg's strategic action, and I would like help in understanding what I should use and why it explains its action. I will post what I have used and attempted so far. Thanks in advance!
    --------------------------------------------------------
    • Total Assets
    • Total Debt
    • Total Shareholders' Equity
    • Net Sales (US Snacks)
    • Net Sales (US Morning Foods & Kashi)
    • Contribution to Net Sales (US Snack and morning food)
    • Operating income/profit (US snacks)
    • Long-term Debt
    • Free Cash Flow
    • D/E Ratio
    • D/A Ratio
    • Fixed Assets turnover
    • Return on assets
    • Operating profit margin (US Snacks)
    Kellogg Co.’s decision to acquire Pringles from P&G for $2 billion USD can be understood by examining the financial data provided in the table above. Net sales from its US Snack business have increased by $150 million USD since 2009, and its contribution to net sales has closed in to Kellogg’s largest business (Morning foods/Kashi) by 1.08% since 2009 (a current difference of 5.51%). This shows that Kellogg’s US Snack business is growing in profitability and importance to the company, leading to the need to consider acquisition to increase its market power.

    Kellogg Co.’s financial constraints also explain the driving forces behind its acquisition of Pringles. Its free cash flow is currently $1.1 billion, leading to the need to take on debt in order to fund the $2.7 billion USD acquisition. Kellogg’s Debt-Equity Ratio has increased an average of 0.92% since 2009, and long-term debt has increased an average of $101 million USD since 2009. This indicates that Kellogg is comfortable with taking on additional risk by borrowing money because they ?????? Despite an increase from 2009 to 2010, operating profits from the US Snack business saw a decrease of 2.48% in 2011. This is indicative that the US Snack business could perform more efficiently, and Kellogg Co. may be acquiring Pringles in order to gain synergistic benefits that will reverse this downward trend.

    Or if someone could just tell me what I should omit and what isn't useful in what i've written, that would be enough help.
     
  2. Business Attorney

    Business Attorney
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    It seems as though you are mixing and matching numbers that don't directly support your thesis.

    For example, you say "Net sales from its US Snack business have increased by $150 million USD since 2009, and its contribution to net sales has closed in to Kellogg’s largest business (Morning foods/Kashi) by 1.08% since 2009 (a current difference of 5.51%). This shows that Kellogg’s US Snack business is growing in profitability and importance to the company ..."

    An increase in sales does not always mean an increase in profitability. What is the profit margin on the new sales? Is one line of business more competitive or more price sensitive than another?

    Then you say "Its free cash flow is currently $1.1 billion, leading to the need to take on debt in order to fund the $2.7 billion USD acquisition." Free cash flow is an annual number from a cash flow statement (roughly parallel to an income statement in that it covers a period of time rather than a fixed point in time). Although cash flow is certainly relevant to a purchase that is paid over time, when dealing with most acquisitions, the relevant number as to whether the acquisition needs to be funded with debt is the cash and marketable securities on the acquiror's balance sheet.

    You say "long-term debt has increased an average of $101 million USD since 2009." An average of what? An average of $101 per year? Why is an average even relevant as opposed to stating the total increase over time? Also, I question your assumption that increased debt indicates comfort with taking on risk. Even companies that dislike debt may find themselves in a situation where it only makes sense to borrow money.

    Finally, I wouldn't necessarily agree that the 2.48% decrease in operating profits in 2011 "is indicative that the US Snack business could perform more efficiently." It could simply mean that competition drove the prices of snacks down or that the cost of raw materials increased and could not be passed through to consumers.

    I hope those observations give you something to munch on (bad pun).
     
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