In the late spring of 1999, Adecco SA, one of the world's top staffing organizations, was amidst its efforts towards the purchase of the staffing functions of Olsten Corp., a U.S. company. This case assesses the economics of the staffing business, fundamental valuation, cross-border challenges including duty arbitrage, valuation of minority interest, and the significance of financial wellbeing in merger transactions.
Profoma Financial Statements ($ millions) Year 1998 to Year 2009Statement Of Cash Flows ($ millions) Year 1998 to Year 2009
Securities Market Data for Olsten
Book Value of Debt
Market Value of Equity
Equity Beta βe
Asset Risk βa
Recent Equity Beta βe
Expected Market Return
Risk Free Rate
Return on Equity
Return on Debt
Net Present Value Of Future Cash Flows
Offer price per share
1. How has Adecco been able to outperform its rivals in the staffing industry? What is the strategic and economic rationale for its acquisition of Olsten?
2. Evaluate Olsten’s strategic and financial conditions as of mid-1999, in particular its funding needs and resources.
3. Based on Adecco’s pro forma estimates of the staffing business of Olsten in Exhibit 13, what is your estimate of total enterprise value? For this calculation make the following assumptions:
a.Evaluate the valuation from the perspective of Adecco U.S.
b.Assume the acquisition was completed as of January 1, 2000
c.Evaluate enterprise value at the long-term capital structure for Olsten, i.e., 20 percent debt and 80 percent equity.
d.The estimated EBIAT was arrived at without deducting amortization of goodwill.
e.Assume that the Olsten’s U.S. rivals (Kelly and Manpower) had a debt beta of 0.2.
f.For this calculation of total enterprise value, do not consider (1) any Olsten debt that might be assumed by Adecco, (2) any payments that Adecco might need to make to minority shareholders of some of its subsidiaries nor, (3) any special tax benefits enjoyed by Adecco SA through its ability to charge Adecco U.S. royalties.
4. Value the Olsten acquisition by understanding three important nuances in the valuation:
a. If Adecco were to assume $750 million of Olsten debt, how would this affect how much they would pay for the equity of Olsten’s staffing business?
b. Some of the enterprise value we calculated is actually “owned by” minority shareholders in some of Olsten’s subsidiaries. How would this affect how much Adecco would pay for the equity of Olsten’s staffing business?
c. The case describes a method whereby Adecco U.S. could make royalty payments to Adecco SA. What is the valuation impact of this “imperfection”? To simplify your analysis, assume that the royalties are 1.5% of revenues and value the net tax savings from the perspective of the U.S. firm.
5. As Adecco, how much would you bid for Olsten? Why? How would you convince the Olsten board to accept your offer?
6. As the Olsten board, how would you evaluate the competing offers? How might the Olsten family’s perspective differ from that of the other board members?