Dow Chemical Case
Dow Actinic Case Catechism 1 Polyethylene is the world’s best broadly acclimated plastic. Polyethylene plastic’s arch appliance was in packaging, from debris accoutrements to milk jugs. It was broadly acclimated in the accomplish of aggregate from debris bags, barbecue cutlery and debris pails, to artificial toys. Polyethylene additionally replaced glass, wood, and metal in assertive applications. There were three types of polyethylene, Low-density polyethylene, High body polyethylene and Low beeline body polyethylene. Polyethylene produced from ethylene. Ethylene is produced from oil or accustomed gas.
Ethylene plants afar either naphtha molecules (derived from awkward oil) or ethane molecules (derived from accustomed gas). The ethylene acquired from this action was acclimated to aftermath polyethylene. The analytical success factors in this business were basic accelerated and economies of scale. Polyethylene was a all-around article artefact and appraisement common about fell into a attenuated band. The appeal for polyethylene was ample because it was the world’s best broadly acclimated artificial and polyethylene barter were about baby and medium-sized artificial processing companies.
The big Risks in the industry: * The raw absolute accident - Arise naphtha (the raw absolute acquired from awkward oil) adapted abundant added energy, accomplishment intensity, and accessories than arise ethane (derived from accustomed gas). Accumulation of primary abstracts and electricity are acute to success of polyethylene production. * Amount accident - ample bulb sizes and the charge for economies of calibration rendered the ethylene industry awful basic intensive. A bulb for arise ethane was estimated to hundreds of millions and the amount for a bulb for arise naphtha is double.
Capacity additions or reductions could decidedly affect antithesis of accumulation and demand, influencing accommodation appliance rates, prices, and accumulation margins. * Ethylene advantage was deeply links to its all-around operating rate. The ethylene business links to oil companies, governments, authentic actinic companies, conglomerates, clandestine investors, and collective ventures. * Competition of polyethylene industry in Argentina and in the all-around market. The government abettor was anon or alongside costs basic – accelerated ethylene plants in adjustment to activate afterwards business.
Some of countries, the government accord the investment. * The margins for producers of ethylene and first-order derivatives (mostly plastics) were awful activated because the producers for them were awful integrated. Catechism 2 The stages of the project: * Date 1: circuitous demography ascendancy of PBB, which comprised the ethylene cracker and polyethylene plant, and again advance the accessories in adjustment to accomplish them internationally aggressive * Date 2: circuitous accepting Polisur’s two polyethylene plants * Date 3: circuitous architecture a new ethylene cracker and a polyethylene plant
These three stages are carefully accompanying to anniversary other. The abutting date would be accomplished alone if the antecedent stages achieved, and the followed stages ensure the success of the antecedent stages. Accepting PBB offers Dow the befalling to admission Argentina market, and this is the aboriginal footfall for Dow to booty over ascendancy of Bahia Blanca’s polyethylene activities. Dow is behest not alone for PBB in the privatization, but additionally an all-embracing plan for the development of Dow’s polyethylene business in Argentina.
Dow will adjudge on the amount to bid for PBB in the accessible privatization, the amount is based on the appraisal of the absolute action (stage 1, 2 and 3). The three stages are one big project. Dow’s bid for PBB should not be based alone on the amount of Date 1 of the project. Gaining ascendancy of PBB would be the aboriginal footfall in the project. But demography all the factors discussed aloft into consideration, Dow should amount all the 3 stages in adjustment to bid on the PBB project. Dow believed that it had the befalling to become the number-one amateur in the Latin American polyethylene industry.
To accomplish this goal, Dow would additionally accept to admission Polisur’s two polyethylene plants (stage 2) and aggrandize absolute capacity. The amplification of its polyethylene accommodation in Bahia Blanca would crave the aggregation to body a world-class aggressive cracker (stage 3). Doing so would about amateur PBB’s ethylene capacity. Therefore, Dow had to not alone accede what to bid for PBB in the privatization, but additionally advance an all-embracing plan for the development of Dow’s polyethylene business. Dow had to absorb the terminal amount of anniversary date of the project.
Question 3: The followings are the arguments that abutment the accretion of PBB: 1. The accomplished action will admission Dow shareholder’s wealth. As a accessible company, the aboriginal aim of the administration aggregation is to admission the actor wealth. The action proposed by the administration aggregation is absolutely connected with this goal. And behest on the PBB is the aboriginal date of the accomplished project. The exact admission in shareholders’ disinterestedness may be assorted at this point as it depends on lots of alternative factors ( we will altercate the accident of appraisal anticipation the accomplished case. , but in general, the administration aggregation is assured in the approaching outlook. 2. The alternative important cardinal purpose of accepting PBB is that it is the aboriginal date appear accumulation all Bahia Blanca’s polyethylene action beneath Dow’s control. The 3-stage action will accomplish Dow to be the arch aggregation of polyethylene in Argentina, alike in Latin America because of its MNC background. This will accept a connected appellation absolute admission in Dow’s banal amount as able-bodied as shareholders’ equity. 3. Also, as adumbrated in the case, the appeal of polyethylene will admission in the abutting brace years.
Argentina is an arising market, which is adverse a accelerated transformation. Dow’s carnality admiral advancing connected advance in standards of living, which will advance to admission appeal for polyethylene in Argentina, as able-bodied as in Latin America. The accustomed advance in polyethylene appeal fabricated PBB a potentially adorable acquisition. 4. PBB adapted now is a government controlled circuitous which is activity to privatize. For Dow, it is a absolute befalling to body connected appellation accord with Argentina government. It will accord Dow added opportunities in the bazaar of Argentina and Latin America. Catechism 4:
The followings are the mains risks of the action for Dow above the accustomed industry risks discussed in Catechism 1: 1. Country risk. Argentina is an arising market. It is broadly agreed that aback we appraisal the accident of arising bazaar by application the acceptable archetypal like CAMP, the aftereffect additionally unfavorable. Some affidavit are the bazaar is awful concentrated and integrated. And additionally the country accident cannot be diversified. So it brings the ambiguity to Dow’s valuation. 2. Political risk. Political accident is allotment of country risk. It is articular as the potentially adverse appulse a country’s ambiance has on a firm’s approaching banknote flows.
And it will affect Dow’s approaching accustomed allotment and appraisal measures. If there is some above political agitation in Argentina, the government expropriates PBB, Dow will face a cogent loss. Also, if the Argentina government absence on its debt, Dow would face the bad debt which is an huge amount and will annoyance bottomward the accustomed banknote flows. 3. Economics accident The privatization in Argentina was the advance to ascendancy the budgetary problems, like hyperinflation, stagflation and huge budgetary deficits. As an arising country, Argentina had not developed a advantageous banking bazaar aural the country.
The ambiguous abridgement would advance to a huge achievability of default. Addition accessible aspect was the economics accident of the world. If there was an economics downturn, the huge advance of the action would account beneath and Dow will adverse difficulties to acceleration disinterestedness to accounts the project. 4. Abrupt risk: (1) Abrupt curtailment of energy. The industry is absolutely action intensive. If there is a action curtailment such as the decreased accumulation of oil, the accomplished action will face abrogating return. (2) Abrupt acceleration in capricious cost, such as busline cost.
The abrupt acceleration in capricious amount will accept abrogating appulse on Dow’s banknote flow. The abatement of accustomed banknote breeze will advance the abatement amount of the project. (3) There are 3 stages of the accomplished project. If one of them did not assignment well, the all-embracing ambition will be afflicted and the accomplished action would accept the accident of failure. Catechism 5: Accustomed in the case that Dow’s amount of basic for agnate U. S. based projects is 10%, appropriately we chose to use NPV to appraise the altered stages of the project, by discounting anniversary year’s accustomed banknote breeze (Exhibit 9, 10 & 11) to the abject year-1995.
Stage 1 Appraisal Accustomed in the case, Dow is behest on the auction of 51% of PBB, therefore, if we account the Present Amount of the banknote flow, Dow should get 51%. Dow’s absolute investments for PBB Ethylene cracker and PBB Polyethylene cracker amid 1996 and 2000 are $128. 9 actor and $28 actor in Display 7 from the case. If we analyze these abstracts with Display 9A & 9B advance numbers amid 1996 and 2000, they are the aforementioned (shown in Table 1); this agency that the banknote breeze of PBB in display 9A is the banknote breeze afterwards alone deducting the advance from Dow.
So, we add aback Dow’s advance to get the absolute banknote breeze of PBB. Back Dow’s allotment in PBB is 51%, it gets 51% of PBB’s banknote breeze and we abatement the banknote flow. Abutting we account the sum of Present Amount of Dow’s advance in anniversary year, and abatement it from Dow’s 51% allotment in PBB. This cardinal reflects the absolute net banknote breeze been broadcast to Dow. The followings abridge the accomplish of the cerebration process: Footfall 1: Add aback Dow’s advance to PBB’s banknote flow, this gives the absolute approaching banknote breeze to be broadcast amid Dow (Dow owns 51% of PBB) and alternative owners.
Step 2: Acquisition the PV of absolute approaching banknote flows Footfall 3: Distribute the 51% of the PV of absolute approaching banknote breeze to Dow Footfall 4: Deduct PV of Dow’s advance from Footfall 3 The amount of Date 1 is $345. 71 actor as apparent in Table 2. Date 2 Appraisal In Date 2, we took polyethylene CFs anon from Display 10, and abatement them by adapted abatement rate, and accretion up these PV of the banknote flows we get the amount of Date 2, $399. 76 million. Addition point account advertence is the abacus of the terminal amount in 2010. Accustomed in the case, the advance is 3. % connected for the project, we took the banknote breeze in 2010, which is $82 million; assorted it by (1+g)/(k-g), and discounted it by 16 years to get the present value. Date 3 Appraisal Date 3 involves architecture a new ethylene cracker and a polyethylene plant. We summed up the absolute banknote flows of them and acquisition PV of the banknote flows in anniversary year. The absolute of all the PV of the banknote flows is the amount of Date 3, $ 993. 69 actor apparent in Table 4. Now we accept the amount for anniversary stage, and we get the absolute of the project, it is account $1739. 16 actor with the amount of Date 1, Date 2 and Date 3 are $345. 1 million, $399. 763 actor and $993. 690 actor respectively, beneath the acceptance that anniversary date is acknowledged aloof like Dow has planned. Catechism 6: There are two agency to do Discounted Banknote Breeze assay in an all-embracing context. We can acclimatize the abatement amount by abacus a country’s political accident exceptional or, acclimatize the banknote breeze of the project. In this question, we will altercate the adapted adjustment of the project’s abatement rate. In a country, the college accident that investors perceived, the college abatement amount that should be activated to the project’s banknote flows.
The risks we are talking about are not diversifiable. Back November 1995, the Convertibility Law angry the peso to the U. S. dollar, alike anticipation the bazaar thinks the anchored barter amount would aftermost for several years, but as the admiral of Dow, Virgnar and Marcer charge to accede the achievability of approaching crises. Ambiguity about approaching bill appropriately will admission the abatement amount of action in Argentina, which agency that Dow’s amount of basic is increased. Accessible appulse of government behavior accordant to adopted investments is addition issue, archetype added tax rate.
This will leave Dow with a lower advance acknowledgment than before. In convenance it is generally difficult to quantify the likelihood and appulse of political accident on all-embracing investments; accustomed US and Argentine Yields in the case, we can acclimatize the abatement amount by abacus the absolute crop advance amid U. S. and Argentina. The abstraction is that the band spreads amid two countries with aforementioned ability reflects country risk. The country with the college crop in this case is Argentina; it offers about 10% added than the U. S’ crop apparent in Display 12.
The acumen abaft that is Argentina has a college country accident than U. S. , so it has to action a college crop in adjustment to atone the investors for demography added risks. Accordingly Dow should booty these added risks into application aback evaluating the project. The adapted abatement amount for the action should be 20%, 10% ( amount of basic for agnate U. S projects from Q5) + 10% (Argentina’s country risk) and this change in the abatement amount will accept a big appulse on the amount of anniversary date in the action which we will appraise later.
There are two above advantages of adjusting the abatement amount by abacus the absolute crop spread. One of the advantages is the countries’ band yields are accessible to find, beam and access, investors can calmly account the country accident by adding the two band yields. Addition advantage is that the crop of band is forward-looking, it does not alone absorb today’s condition, additionally the crop reflects the market’s approaching apprehension of a country’s accident and acknowledgment so it is a acceptable representation of amount of disinterestedness in a authentic country.
Salomon Smith Barney archetypal is agnate to the archetypal that we aloof described, but with added inputs and refinements. If we accept added advice from S&P country absolute ratings, country ratings, and macro variables, we could acclimatize abatement amount for the action added accurately. Furthermore, the political accident exceptional that we can add to the abatement amount can be scaled up or bottomward based on abstract array for Dow’s admission to capital, susceptibility of the action advance to Argentina’s political accident and the accent of the advance for Dow.
Therefore, the added accordant advice we have, the added authentic abatement amount we can assemble to advice appraise the project. Catechism 7 The abacus action for is basically the aforementioned as in catechism 5, except actuality we use the amount of basic 20% instead of 10% to abatement accustomed banknote flow. Abacus shows in Table 5 (in Actor U$). The action account is $464. 734 which about alone 20% of the action amount if it amid in US. The abundantly abatement in action amount is due to the college country accident in Argentina than in the US.
The college country accident was reflected in the college abatement ante which lower the present amount of the banknote flow. In date 1, the present amount of accustomed banknote breeze (CFs) is 160. 32 which is 54% lower than the date 1 amount in catechism 5. The allotment of abatement is lower than the absolute action value’s decrease, back best of the amount in date 1 was accomplish from aboriginal years banknote flow. The country accident in the abbreviate run is lower than in the connected run. Because in the connected run there are added affairs for ambiguity contest to happened. In date 2, the present amount of CFs is 194. 81 and it is 51% lower than the action amount in US which additionally beneath than the allotment abatement of the absolute action value. And this is due to the aforementioned acumen as in date 1. In date 3, the amount is $109. 837 which is 89% lower than the catechism 5’s value. The cogent abbreviating amount is due to the amount of date 3 is mainly from terminal value. Back there are college country accident and added ambiguity in the connected run, date 3’s connected run banknote flows ( accommodate terminal value) are heavily discounted which advance to low present value. Question8
Dow should bid for PBB no amount the action is in US or Argentine, back the absolute action ethics and date 1 ethics are both absolute in these two countries. Because Dow is an American company, the shareholders affliction about the US returns. The Action banknote flows and date 1cash flows are discounted by the amount of basic in US and get absolute present values, which beggarly the PPB will admission Dow’s actor wealth. To free how abundant Dow should bid, the aggregation should acquainted that there are some requirements fabricated by the Argentina government.
First, the government set the minimum accustomed amount is 150million U$, which is the everyman ambit for Dow’s bid. Second, the government requires the applicant to accept a account of net account of at atomic 5 billion U$. While, Dow has two alternative competitors Copesul and Perez additionally appetite to bid PPB. However, Copesul alone has net account $929,538,000 and Perez has net account $1,461,000,000. Alike if Copesul and Perez amalgamate to bid PPB, their absolute net account about $2,391,000,000 will be abate than the $5 billion requirement. Therefore, Dow should not been threatened by Copesul and Perez’s bid, and they should not affect Dow’s biding strategy.
Therefore, for the behest price: Amount of the bid= Amount of (stage 1+2+3)-cost of PBB- amount of Polisur The amount of date 3 is already included in the amount of date 3. In catechism 3, we access the Amount of (stage 1+2+3) according to$464. 734 million. Back the Amount of the bid>0, again amount of (PBB+ Polisur) < $464. 734million According to the government requirement, Dow could bid PBB for $150 million, again their college ambit for Dow’s bid should be $ 314. 734 actor ($464. 734million- $150 million). Table 1: Table 2: Table 3: Table 4: Table 5:
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