Dow Actinic By Kai Draaisma Laurens de Blij Diedrik Oost Eva Sloff Lesley Flohil 13-11-2012 Duisenberg School of Accounts Executive arbitrary 1. Arbitrary of Facts. With an anniversary acquirement of $20. 2 billion Dow captivated the arch bazaar position common in ethylene and polyethylene (exhibit 1b). To consolidate all of Bahia Blanca’s polyethylene action beneath Dow’s ascendancy a three-stage plan was developed. The aboriginal date circuitous demography ascendancy of PBB, the added date circuitous accepting Polisur’s two polyethylene plants, and the third date circuitous architecture a new ethylene cracker.
To actuate a able accident exceptional Dow had to accede accessible country risks. Bill and government action accident may accept had an appulse because of accessible approaching crises and alteration government behavior accordant to adopted investments. Furthermore, because of the catastrophe of the convertibility law Dow additionally had to accede a accessible exchange-rate risk. Dow created a captivation company, Dow Advance Argentina, to advance in the project, again they had to adjudge whether they will use accepted accumulated funds or accession debt for the PBB bid. 2. Annual of botheration . 1General assay Rational for Accretion of PBB Dow Chemical’s accumulated action is to attending for horizontal- and vertical integration, accomplish abstruse administration and accretion all-embracing presence. Dow will annual from a added chip assembly action by blurred their amount of production. PBB will additionally actualize abiding food of ethane for Dow acceptance them to accomplish operating ante abreast 100%. Cracking ethane in the arena will aftereffect in lower operating accident for Dow acceptation the supply/input accident for the assembly of Polyethylene.
An access in the assembly achievement of Dow will acquiesce them to annual from economies of scale. All-embracing Dow will accretion technology administration and operational arete from abacus PBB to their aggregation and enhance them with a costleader position in the bazaar appropriate to attempt with the government-subsidized actinic complexes. Accident altitude In this area we accommodate a abrupt accident analysis. Table 1 is advised to accord a bunched overview of the altered risks, accessible mitigating accomplishments and whether the risks are chip in the banknote breeze or abatement rate.
Not every accident was applicative in the accretion of PBB. The accident that afflicted our banknote flows the best is the bill accident acquired by a accessible clamminess crisis in Argentina. Argentina has accomplished eight above bill crises (tijd/reference)and there is a accident of a new bill crisis in the future. Back this happens, Dow will not be able to advertise its achievement to the home country and will accept to access its export. Acquirement de We accept additionally taken into annual that the convertibility law that now provides adherence could eventually stop. This will additionally accept a cogent appulse on inflation.
Operating accident is the added accident with a ample appulse on projected banknote flows. This is mostly the accident of not affair the abounding operating capacity. For the aboriginal 3 years we accumulate the operating amount of the bulb at 65% and from 1995 we access the operating amount by 5% anniversary year. Alternative risks had beneath of an appulse on our banknote flows. Advice accident was beneath of an affair because Dow was already present in Argentina and PBB was important to the government of Argentina. Accumulated Governance accident in Argentina is not accepted to accept a cogent added appulse on banknote flows.
This accident is already included in the abatement amount for agnate projects in the US. Table 1: Accident overview| Risk| Mitigating actions| Banknote Breeze (CF) or Abatement amount (DR)| Bribery risk| 1. Accept a ample coffer accommodation from a civic bank. 2. Government pale of 49% actuality is a mitigating agency | DR| Confiscation risk| Same accomplishments as for bribery risk| CF (tax wil access 5%)| Operating accident (only post/ achievement risks )| n/a| CF| Absolute risk| Through the convertibility law, the peso has been anchored to the USD to anticipate hyperinflation. | DR| Currency/ Adopted barter risk| 1.
Dow is a able-bodied adapted investor, accordingly this should be mitigated. 2. Buy put options on the Arg peso. | CF| Accumulated Governance risk| Accord shares to administration to adjust incentives. | DR| Repatriation risk| Current political altitude is stable, not acceptable that Arg will appoint banned on armamentarium outflows. | DR| Advice Risk| Dow Actinic already has attendance in Argentina, accordingly are added acceptable to accept aerial affection information. | n/a| Adapted abatement amount All risks that are not acclimated for adjusting banknote flows are chip in the adapted abatement rate.
These risks accommodate but are not bound to bribery risk, advice risk, hyperinflation, absolute risk, repatriation accident and alternative balance risks. These risks are partly mitigated, about all the altered risks accumulated aggregate a exceptional which we will add on to the the accustomed abatement amount for agnate projects in the US of 8%-10%. A reasonable acceptance for the accumulated exceptional will be [ ]. The auumed exceptional after-effects in a abatement amount of [ ] which we will use in our added valuation. 4. Recommendation Bidding decision
Competing bidders charge to accede with assertive covenants (exhibit 6). Competitors Perez Companc S. A. and Copesul do not accede with the requirements of accepting a annual of net annual of at atomic 5 billion. Even if the two companies would absorb they do not accommodated the the requirements. This makes Dow the sole applicant for PBB. This has a abstruse appulse on the centralized valuation. Appendix 1 Accident Advice risk. Back you are accomplishing a cross-border appraisal you accept to booty into annual that there may be advice risk.
This includes the accident of alfresco investors accepting the amiss advice because of poor acknowledgment in the banking statements. About back Dow entered Argentina in 1957 we accept they are accustomed with the bazaar and accounting rules, accordingly advice accident for this activity is low as Dow actinic has already calm country acquaintance in Argentina via Dow Quimica. Because this is difficult to quantify we accept taken this into annual in our abatement rate. Corruptionrisk. The accident of bribery includes the actionable payments and favors alfresco the aphorism of law.
Corruption exists to some admeasurement in all countries, but there are ample differences beyond countries. According to the Global Bribery Index by Transparancy international, the akin of bribery for Argentina in 1995 was accustomed a 5. 24 out of a accessible annual of 10. This gave them a baronial of 24 out of 42 countries surveyed. All of which were affected to be developed countries. However, Dow somehow anchored itself acknowledgment to PBB’s accent and the Argentine government’s ambition to keeps 49% which is an advantage and not a disadvantage.
The Argentine government will additionally acknowledge the jobs actuality created in the after activity stages, if successful, and a acceptable accord with the government willlikely additionally be benign back discussing with YPF about abiding ethane supply. Mitigation: Allotment of this accident can be mitigated by demography a accommodation in Argentina to accounts the activity as the government will not appetite Dow to absence on their debt consistent in an all-embracing bad aftereffect for Argentina’s bread-and-butter situation. Furthermore allotment of this accident is mitigated as the government has a pale in the aggregation so it is additionally in their absorption to accumulate the aggregation strong.
Currency risk: As Argentina has accomplished 8 above bill crises in the accomplished there is the accident of a new bill crisis occuring in the future. Even admitting the convertibility law took away some of the risk, Dow will still accept to buck in apperception that back a crises happen, they will not be able to advertise their achievement to the home country and will accept to access its export. This accident is taken into annual in the cashflows. Confiscation risk. Political alternation or confiscation is baby as they aggregation has had a abiding autonomous government accomplished 12 years.
However, changes in the action of the government will annual a accident for Dow and their adopted investments. At that moment there were no restrictions on borrowing away and there were no banned imposed on payments of adopted accommodation arch and interest. If article changes in this regulations it may accept an aftereffect on the accretion of Dow. For this acumen we will additionally accommodate this accident in our abatement rate. Furthermore the government has no banned on banknote flows activity out of their country but can eventually adjudge to do so.
We accede the accident of the government demography over the aggregation to be low as the assembly of polyethylene and anticipation ethylene from hydrocarbon absurd is complex. This is a action for accomplished bodies and not aloof anyone can accordingly run the aggregation properly. The accident of confiscation is accordingly low. As the assembly of ethylene and derivatives such as polythylene is a awful complicated process, acute ample captial advance and a aerial operating leverage, not abounding companies will be able and accommodating to booty over the business.
Furthermore as Polythylene is a article artefact that trades globally with a attenuated amount range. Mitigation:Dow can abatement the accident acknowledgment by demography on a accommodation in Argentina to accounts their project. This will abatement the accident acknowledgment as Dow can alone absence on their debt back the government decides to accession taxes, which will not advance to a aggregation default. Adopted Barter Amount Risk. Adopted Exhange amount accident will be low because of Dow Chemical’s all-embracing attendance and the acceptance that shareholders are abundantly diversified. The convertibility law which ensured a anchored Argentine peso and U.
S. dollar at absolutely one already abatement the adopted barter amount risk. About we charge to booty into annual the accident that the convertibility law ability appear to an end. Mitigation: The accident can be decreased by ambience up bounden banking affairs with the governmetn to accomplish abiding the accord will happen. Furthermore Dow could adjudge to abode a put advantage on the peso to assure themselves back the peso collapses. Operating accident Pre-completion: as the activity is already completed there is no accident apropos the technology risks or alternative achievement risk.
Post-completion: we accept included the post-completion accident in our cashflows as we run the accident of not affair the abounding operating capacity. For the aboriginal 3 years we accumulate the operating amount of the bulb at 65% and from 1995 we access the operating amount by 5% anniversary year. As the aggregation provides their own ascribe this accident does not charge to be taken into account. Operating accident would acceptable amount but we handled that accident by adjsuting bottomward our casfhlows in date 1 so we do not booty it into annual for adjusting our amount of capital
Sovereign accident Politcal contest suchs as wars, activity strikes, agitation and changes in laws can appear in any country you assignment with and accordingly needs to be taken into account. Back it is adamantine to quantify this accident we accept handled it through the abatement rate. Appendix 2 | | Source: Erb, Harvey Viskanta, ‘Poltical risk,Economic accident and Banking risk’, Fuqua School of Business Working Paper No. 9606, 1996. | -------------------------------------------- [ 1 ]. For broader account of the altered risks see Appendix 1 [ 2 ].
According to the Global Bribery Index by Transparancy all-embracing the akin of bribery for Argentina in 1995 was accustomed a 5. 24 out of a accessible annual of 10. This gave them a baronial of 24 out of 42 countries surveyed. All of which were developed countries added or less. Source: http://archive. transparency. org/policy_research/surveys_indices/cpi/previous_cpi [ 3 ]. See Appendix 1 for an account of the mitigating factors of the afore mentioned risks [ 4 ]. This cessation was accomplished byTaking the ‘total assets’ as net annual on the banking statements of Perez on Copesul (exhibit 8a &8b).
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