Essay on Meter-Matic Limited

1435 Words Nov 7th, 2009 6 Pages
1) Explain and critically assess how Meter-matic measures up as a candidate for a leveraged buy-out? Include information about economic references from the graphs shown in the text. What are the implications of the bond rate declining and the rand becoming stronger against the US dollar?
A MBO of Meter-matic Limited (Meter-matic) was considered by the CEO his management team for mainly strategic reasons. Meter-matic did not fit into SAFREN’s strategic vision (according to Piet Malan and his management team) and was not seen as a core activity by its parent company
- Meter-matic was too small to warrant much attention within the SAFRAN group.
- Its products required a high level of technical skill and management was becoming
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as used in Q? ( has to be consistent)
• R= risk free interest (< 12 %; assumption necessary?
• d=5

REAL OPTION CALCULATION
• Ps = NPV of all FCFs / value of the company (as calculated in Q2) * (5/100)
• Pe=NPV of the fixed costs (=investment now: R5m)
• Var(ri) = volatility as used in Q? ( has to be consistent) volatility and probability
• R= risk free interest (< 12 %; assumption necessary?)
• d=5 Ps 250.000 0,05 12.500
Pe 5.000
Var(ri) 0,1 10%
R 8,50% d 5 x 2,250424935
N(x) 0,98 y 1,543318154
N(y) 0,9394 premium 9.179

The Pe may have to be subtracted from the premium!

(6) To what extent are MBOs unethical? Do you foresee any problems in Piet Malan taking this proposal to the SAFRAN Board?
In management buyout transactions (MBOs) one could say that there is a conflict of interest—an incentive is created for managers to mismanage (or not manage as efficiently) a company, thereby depressing its stock price, and profiting handsomely by implementing effective management after the successful MBO. Management joins forces with other investors and buys the company from the public. The critic is about fairness for the shareholder. Management’s position on both sides of the bargaining table may make buyout price suspect even when

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