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Corporate Finance - Lubrizol

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by

Rasmus Rasmussen

on 17 June 2013

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Transcript of Corporate Finance - Lubrizol

Provider of specialty chemicals
Acquisition of Lubrizol
Views on the deal
Sokol recommends Lubrizol
Sokol buys shares in Lubrizol
Results and conclusion to the deal
The insider trading case
- facts and dates
The hidden costs of loosing Sokol
- and why he did not fit
Evaluation of Lubrizol
Buffet bids for Lubrizol
R. Rasmussen
A. Svedberg
A. Krishnan
Y. Tang
A. Kryukova
M&A Consulting
Mild & Accurate Consulting
Additives for:
Transportation related fluids
Personal care products
Pharmaceuticals
Headquarters in Wickliffe, Ohio
Manufacturing facilities in 17 countries

Revenues for 2010: $ 5.4 billion
Number of employees: approx. 7,000
All cash transaction for $135 per share
Total $9.7 billion
Premium is 28 % over Lubrizol closing price on March 11, 2011
Acquisition completed on Sept. 16 2011
Management was kept intact
Debt of $0.7 billion included in the deal

WACC: 7.78 %
Valuation of Lubrizol: $10.215 billion
Against acquisition criteria
Large purchase $9.7 billion
High return on equity & Low debt-to-equity ratio
Leaders in their niche industry
High barriers to entry (Moat)
Trustworthy and effective management
CEO James Hambrick
No price negotiation
Lubrizol NOT a simple business
Contradicted the normal Buffett criterion
Lubrizol deal is done
Insider trading case revealed to Buffet
Price is accepted by shareholders
Lubrizol meets Buffets criteria
Turns out to be a good acquisition
January 14, 2011
March 14, 2011
March 13, 2011
Sokol meets with Lubrizol
January 25, 2011
January 7, 2011
March 19, 2011
Sokol resigns
March 28, 2011
Cultural fit

Weak due diligence

Hidden acquisition cost

Insider trading case damaged reputation

Synergies
Profitable acquisition
Benefits for Lubrizol
April 2010 –Find acquisition opportunities
18 prospective companies → Lubrizol of sole interest
Dec. 2010 – Board of Lubrizol informed about Berkshire Hathaway’s interest
January 5, 6, 7 – 96,060 Lubrizol shares - $104-a-share limit order
January 14 – Acquisition idea brought to Buffett
Amount of shares and when purchased
March 14 – Acquisition agreement signed
March 19 – Specifics of Sokol’s purchase brought to Buffett’s attention
March 28 – Sokol resigns
The fix-it guy
Rare at Berkshire

Helped Buffett earn millions

Loosing him add hidden cost to Lubrizol deal

Cultural misfit
His methods were damaging to the company image
"Lubrizol is exactly the sort of company with which we love to partner - the global leader in several market applications run by a talented CEO, James Hambrick."
Buffetts view:
James Hambrick:
"...We are very excited to have the opportunity to become part of the Berkshire Hathaway family."
"This transaction provides compelling value to our shareholders..."
"...James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain."
Sep. 16, 2011
June 9, 2011
Februar 25, 2012
WACC
According to the Bloomberg data, Lubrizol’s Beta=1.26.
According to Lubrizol’s 2010 10-K form,
Debt=long term debt plus noncurrent liabilities=1,351.6+151.6=1,503.2
Equity=market value=813.6
Tax rate=25.45%
Because Berkshire Hathaway wanted make the long-term investment, so all the return rates use the long term rates.

Risk premium=9.94% (S&P 500 25 years return in 2010)

Risk free return=4.25% (the average of US 30 years treasury yield rate in 2010)

Cost of Debt=interest expense/debt=7.8%

Cost of Equity=4.25%+1.26(9.94%-4.25%)=11.42%

WACC=813.6/2316.8*11.42%+1503.2/2316.8*7.8%*0.7455=7.783%
Full transcript