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Adecco's Acquisition of Olsten

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Hannah Harty

on 25 September 2013

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Transcript of Adecco's Acquisition of Olsten

Adecco's Acquisition of Olsten
Alxander Pinfold
Hannah Harty
James Falloon
Brigitte de Lambert
Amanda de Latour
Tom Beauchamp

The Staffing Industry
Initially started to provide unskilled or temporary workers.
Industry has developed from industrial sector to providing skilled workers in all sectors.
Rather than providing stand-in workers, they now provide firms with just-in-time flexible workforces
Valuable link between employers and employees.
Olsten Corporation
Firms use for Employment Companies
Popular during the economic expansion due to the demand for workers.
still popular during the contraction as they helped employers reduce costs.
Staffing industry grew at a rate 13% per annum between 1987 to 1999.
Acquisitionsrose from 105 to 514 between 1994 and 1998.
27% of the market is occupied by the top 5 firms.
Background of Olsten
- Company went public in 1967
- 3rd Largest staffing company in the world
- Global market share 3.9%
- Growing IT sector
Current Position of Olsten
- Olsten family owns 66% of voting
- Acquired companies to extend into home health care.
- $150 million invested into acquisitions in Europe and Latin America
Current Position of Olsten
Suffering from:
- Government cutting costs and reimbursements
- Medicure fraud costs
- Its decisions to acquire the European subsidiaries

Debt risen to $746 million
- Unable to raise any further debt.

The Pentagon Approach
Valuing the target business as is
Valuing the target business with all synergies less any cost of integration
Adding any potential gains from Adecco's cross border financing strategy
Adding any potential gains from reduced tax liabilities accruing from Adecco's ownership of the business
Finally determining the suitable price to be paid

Pre-tax Cost of debt of 7.14%
Market Risk premium of 7.8%
A risk free rate of 5.76%

Not considered:
Olsten debt assumed by Adecco
Minority payments to subsidiary shareholders
Tax benefits
Acquisition completed 1st January 2000
Long term capital structure of 20% debt 80% equity
EBIAT calculated without removing amortization and goodwill
Kelly and Manpower have debt betas of 0.2
Cash flows growing at 5% in perpetuity
Cost Of Debt
Value per share: $11
Number of shares: 160million

Total Firm Value
= $11 x 160
= $1760million

Pentagon Approach: Step 2
Pro Forma Statement

Free Cash Flow to Firm (FCFF)
– Capital Expenditure (capex)
+ Depreciation
– Changes in non-cash working capital
+ Changes in Debt

Component 1: EBIAT
Tax rate = 33%

Component 2: Capital expenditure
Capext = Gross PPEt – Gross PPEt-1

Component 3: Depreciation
Component 4: Changes in non-cash working capital
EBIAT – Capital Expenditure + Depreciation
– Changes in non-cash working capital + Changes in Debt

Terminal Value
TV = FCFF2009 * (1+g)
(Wacc – g)

TV = 280.35

TV = 4588million

Total Firm Value
Total firm Value January 2000 = $2505million
Number of shares outstaing = 160million


Value Per share = $15.66


Time zero = January 2000
Wacc = 11.11%

Cost of Equity
Unlevered Beta
Olstens Beta
Which Model to use?
Is it Applicable to Valuation of Osten?
Best suited for firms expected to grow at steady state at some point
Need a constant and established dividend payout ratio
Therefore is not appropriate to value Olsten
Is FCFE appropriate?
FCFE like DGM is good for firms that have a period of stable growth below growth rate of the economy
Can be used if the firm pays out dividends that are unsustainably high or are significantly lower.
But If a company is levered with changing capital structure is not the best model.
Why we used FCFF
Olsten's debt structure will change to 20% debt to 80% equity
Limitations of WACC
Reason for Acquisition
- Increased profitability
- 88% of sales from staffing industry, 12% from IT and other specialised sales
- Olsten also a fast growing IT sector
- Compliment each other
- Number 1 or 2 in the market
- Achieved through rapid growth
- 20% national market share


Pentagon Approach: Step 1
- Become a large global players
- Economies of scale reached
- Increased profitability
Beta & WACC
Bottom up approach
Less noise
Kelly and Manpower considered comparable firms

Discount rate for future cash flows
Non-cash working capital = Accounts receivable + other current assets – current liabilities.

Change in non-cash working capitalt =
Non-cash working capitalt – Non-cash working capitalt-1

Comparing our Valuation to Market Value
- Our valuation is $15.66 per share
- The market value is $8.75 per share
Recommended Offer
- Adecco’s last offer $11 per share was declined

- Nothing below $16 per share would be accepted.
- Vedior N.V. was also in the hunt for Olsten’s staffing business
- Our valuation of $15.66 per share includes operating synergies within the US staffing business only but excludes synergies from non-US operations and also excludes the royalty payments
- It had been the policy of Adecco to not pay the full estimated value of the acquiring business.
- We recommend that Adecco offer $14 per share for the acquisition of Olsten Corporations staffing business.
Olsten Family Considerations
- Currently the Olsten family owns 16% of the equity of Olsten Corporation
- However, they own 67% of the company’s voting rights
- That is a signal that the Olsten family’s perspective on business practice is perhaps more control orientated.
- Perhaps, the Olsten family may be open to a stock swap agreement where they receive super-voting shares in Adecco.
- Olsten Corporation is in significant financial trouble.
- They simply will not survive as a company without an acquisition or merger.
-This puts Adecco S.A in a very strong position in talks with the Olsten board and family about an acquisition
Global Staffing Market Share
Firm Global Market Share
Adecco Background
Formed in 1996
Created from a merger of;
Adia SA, Number two staffing firm
Ecco, Number three staffing firm in the world
Combined sales of $6.2 Billion in 1996 toCombined sales of $15.3 billion 1998
Adecco was now industry leader
Rapdi growth leading to share price quadrupling
Market Leader in France, Canada, Switzerland, Australia and Spain.
Second in US and UK
Acquisitions since formation;
Massachusetts - TAD Resources International
New Jersey - Seagate Associates
Australia - ICON Recruitment
England - Delphi Group
Japan - Career Staff Co.
Background on staffing industry
Outline of Adecco and Olsten
Motivation for takeover
Acquisition Approach
Assumption and theory
Full transcript