MERGE AND ACQUISITION AND VALUATION – THE CASE OF COMECO In Partial Fulfillment of the Requirements of the Degree of MASTER OF BUSINESS ADMINISTRATION In (specialization) By Mr: Nguyen Chi Thanh ID: MBA03029 International University - Vietnam National University HCMC August 2013 MERGE AND ACQUISITION AND VALUATION – THE CASE OF COMECO In Partial Fulfillment of the Requirements of the Degree of MASTER OF BUSINESS ADMINISTRATION In (specialization) By Mr: Nguyen Chi Thanh ID: MBA03029 International University - Vietnam National University HCMC August 2013 Under the guidance and approval of the committee, and approved by all its members, this thesis has been accepted in partial fulfillment of the requirements for the degree. Approved: ---------------------------------------------Chairperson --------------------------------------------Committee member ---------------------------------------------Committee member --------------------------------------------Committee member ---------------------------------------------Committee member --------------------------------------------Committee member Acknowledgements I would like to express sincerely thanks to those who have helped me during the prepeparation process. I hereby gratefully acknowledge my supervisor who gave me great supports to do the research and complete this master thesis: Ms. Nguyen Thu Hien, PhD, I just want to say that you are not only a really wonderful advisor, but also one of the most amazing lecturers that I have met throughout the time studying in university. I also would like send my gratefulness to my boss and my colleagues who supported me a lot and gave me their helps and comments during my study. I would like to send my special thanks to the faculty of School of Business and Administration and all of the lecturers of the International University for their enthusiasm and helpful lessons that I have learnt. I would like to express my deepest gratitude to my family for their support. Without their love, encouragement, and trust in me, I would not able to pursue and complete this program. Plagiarism Statements I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions. I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University – Vietnam National University Hochiminh City. Merge and Acquisition and Valuation – The case of Comeco 2 Copyright Statement This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author‟s prior consent. © Nguyen Chi Thanh/ MBA03029/2011-2013 Merge and Acquisition and Valuation – The case of Comeco 3 TABLES OF CONTENTS LIST OF TABLES ................................................................................................... 7 LIST OF FIGURES ................................................................................................. 8 ABSTRACT ............................................................................................................. 9 CHAPTER I: INTRODUCTION .......................................................................... 11 1.1BACKGROUND: .............................................................................................. 11 1.2RATIONALE FOR THE STUDY: ................................................................... 15 1.3RESEARCH OBJECTIVES: ............................................................................ 16 1.4SCOPE OF THE RESEARCH: ........................................................................ 17 1.5RESEARCH SIGNIFICANCE:........................................................................ 17 CHAPTER II: LITERATURE REVIEW ............................................................. 19 2.1M&A DEFINITION: ........................................................................................ 19 2.2MOTIVATION OF MERGER AND ACQUISITIONS ACTIVITIES: ......... 23 2.2.1.ECONOMIC MOTIVES: ............................................................................. 23 2.2.2.OPERATIONAL SYNERGY: ...................................................................... 23 2.2.3.FINANCIAL SYNERGY: ............................................................................. 24 2.2.4.THEORY OF MARKET POWER: .............................................................. 24 2.2.5.STRATEGIC REALIGNMENT: ................................................................. 25 2.2.6.REGULATORY CHANGE: ......................................................................... 25 2.2.7.TECHNOLOGICAL CHANGE: .................................................................. 25 Merge and Acquisition and Valuation – The case of Comeco 4 2.2.8.MIVALUATION HYPOTHESIC: ............................................................... 26 2.2.9.BUYING UNDERVALUED ASSETS (Q-RATIO):..................................... 26 2.2.10.DIVERSIFICATION: ................................................................................. 27 2.2.11.AGENCY PROBLEM: ............................................................................... 27 2.2.12.HUBRIS OF MANAGEMENT: ................................................................. 27 2.2.13.TAX MOTIVES: ......................................................................................... 27 2.3VALUATION MODEL: ................................................................................... 31 2.3.1.UNDERSTANDING THE INDUSTRY AND INTERNAL OPERATIONS:32 2.3.2.VALUATION: ............................................................................................... 34 CHAPTER III: RESARCH METHODOLOGY .................................................. 40 3.1RESEARCH MODEL: ..................................................................................... 40 CHAPTER IV: BUSINESS ANALYSIS ............................................................... 44 4.1INDUSTRY OVERVIEW: ............................................................................... 44 4.2VIET NAM MARKET OVERVIEW: .............................................................. 46 4.3OPPORTUNITY: .............................................................................................. 48 4.4THREAT: .......................................................................................................... 49 4.5COMPANY PROFILE: .................................................................................... 51 4.6BUSINESS DESCRIPTION: ............................................................................ 53 4.7SWOT ANALYSIS: .......................................................................................... 54 CHAPTER V: VALUATION ................................................................................ 58 Merge and Acquisition and Valuation – The case of Comeco 5 5.1FINANCIAL ANALYSIS: ................................................................................ 58 5.2FORECASTING: .............................................................................................. 64 5.3VALUATION: ................................................................................................... 80 COST OF DEBT: ................................................................................................... 80 COST OF EQUITY: .............................................................................................. 81 COST OF EQUITY CALCULATED BY INDIRECT METHOD IS DEFINED AS: ............................................................................................................. 84 LONG TERM GROWTH RATE:......................................................................... 86 CHAPTER VI: ACQUISITION OF COMECO BY PVOIL ............................... 89 6.1 VALUATION OF COMECO AS IF IT WERE MERGED INTO PVOIL: ........................................................................................................................ 89 CHAPTER VII: CONCLUSIONS AND RECOMMENDATIONS ..................... 92 APPENDICE .......................................................................................................... 79 BALANCE SHEET:............................................................................................ 79 INCOME STATEMENT:................................................................................... 87 CASH FLOW STATEMENT............................................................................. 90 BETA BY COMECO LISTED ON HOSE: ....................................................... 94 FORECAST INCOME STATEMENT: ............................................................. 96 FORECAST BALANCE SHEET: ...................................................................... 99 MERGED-FIRM: ............................................................................................. 114 DIFFERENT ASSUMPTION BETWEEN STAND-ALONE FIRM AND MERGED-FI Merge and Acquisition and Valuation – The case of Comeco 6 FORECAST BALANCE SHEET: .................................................................... 121 BETA BY INDUSTRY SECTOR IN U.S. ........................................................ 127 COUNTRY RISK PREMIUM: ........................................................................ 131 QUESTIONNAIRE OF ACQUISITION ............................................................ 148 REFERENCE ....................................................................................................... 153 Merge and Acquisition and Valuation – The case of Comeco 7 List of Tables Table1: Price of WTI Crude oil and Viet Nam A92 since 2007 ......................................... 35 Table 2: Sales Revenue, Net Income and World Oil Price of COMECO in years VND ..... 44 Table 3: Short-term Solvency Long-term Solvency of COMECO compared in years ........ 45 Table 4: Long-term Solvency of COMECO compared in years ......................................... 45 Table 5: Profitability ratio of COMECO compared in years ............................................ 46 Table 6: COGs forecast of COMECO in next 10 years ..................................................... 47 Table 7: Comparison the annual growth rate of Revenue and Cost of Goods Sold ........... 48 Table 8: The growth rate COGs, Crude oil and Exchange rate in years ........................... 49 Table 9: Revenue and COGs forecast of COMECO in next 10 years (VND) ..................... 50 Table 10: Selling Expense and Administrative Expense of COMECO forecast in the next 10years (VND). ........................................................................................................ 50 Table 11: Cash of COMECO forecast in the next 10 years (VND) .................................... 51 Table 12: Inventory Forecasting of COMECO in next 10 years (VND) ............................ 52 Table 13: Forecast of Account Receivable of COMECO in the next 10 years (VND) ....... 52 Table 14: Forecast of Other Current Asset of COMECO in the next 10 years (VND) ...... 53 Table 15: Fixed Assets forecasting of COMECO in the next 10 years (VND) ................... 54 Table 16: Capital Expenditures and Depreciation forecasting of COMECO in the next 10 year (VND) ................................................................................................................. 55 Table 17: Account Payable Forecasting of COMECO in the next 10 years (VND) ........... 55 Table 18: Change in Net Working Capital forecasting of COMECO in the next 10 years (VND) .................................................................................................................... 56 Merge and Acquisition and Valuation – The case of Comeco 8 List of Figures Figure 1: Historical data on M&A Activity – Vietnamese Targets .................................... 11 Figure 2: Viet Nam Oil Production and Consumption, 1990-2011.................................... 12 Figure 3: Model Of Business Analysis And Valuation ....................................................... 22 Figure 4: SWOT Analysis Framework .............................................................................. 24 Figure 5: Equity valuation with FCFE ............................................................................. 28 Figure 6: Equity valuation with FCFF ............................................................................. 29 Figure 7: Model of Methodology ...................................................................................... 30 Figure 8: Common Theories of What Causes Mergers and Acquisitions ........................... 31 Figure 9: World liquid fuels consumption, world GDP, and WTI crude oil price .............. 34 Figure 10: Materials-Petroleum Joint Stock Company (COMECO)’s ownership structure 2011 ................................................................................................................. 39 Figure 11: Viet Nam Real GDP growth rate and Inflation rate. ........................................ 48 Figure 12: Inventory Forecasting of COMECO in next 10 years (VND) ........................... 63 Merge and Acquisition and Valuation – The case of Comeco 9 Abstract In recent years, Merger and Acquisition (M&A), has been developing very fast in the value and number of deals. The aim of this research is to investigate the competition between Vietnam Oil Corporation (PVOIL) and Sai Gon Petro Company Limited (SGP) in acquiring Materials-Petroleum Joint Stock Company Oil (COMECO), specifically about the acquisition decision between PVOIL and COMECO. Several models and methods are applied in order to find the intrinsic value of COMECO as a stand-alone firm and as a merged firm. Being merged into PVOIL, COMECO may receive potential additional value from the acquisition by PVOIL. The analysis and valuation based mainly on the data and information sources given by the valuation process and the interviews with key personnel in PVOIL. The findings of the research are that the merge may bring significant benefit to COMECO. The discussion further expands to the fact that price fluctuation after the announcement has not reached to reflect the premium due to the nature of the negotiation process, the bargaining power of PVOIL and its timing of the market. This research with its interesting findings, are expected to give the managers of COMECO and PVOIL clearer views about valuation, benefits and costs realized from the acquisition, so that they can proceed with suitable strategies to make more benefit from the deal. Merge and Acquisition and Valuation – The case of Comeco Abbreviations APEC : Asia-Pacific Economic Cooperation ASEAN : Association of South East Nations COGS : Cost of Goods Sold COMECO : Materials-Petroleum Joint Stock Company Oil EIA : Energy Information Administration GDP : Gross Domestic Product M&A : Mergers and Acquisitions OPEC : Organization of the Petroleum Exporting Countries PETEC : Petec Trading & Investment Corporation Petechim : Petro Vietnam Trading Company Petrolimex : Vietnam National Petroleum Group PVOIL : Vietnam Oil Corporation SGP : Sai Gon Petro Company Limited WTI : West Texas Intermediate WTO : World Trade Organization 10 Merge and Acquisition and Valuation – The case of Comeco 11 Chapter I: Introduction 1.1 Background: In the Sixth National Party Congress in December 1986, Viet Nam launched “Doi Moi”, popularly known as renovation policy which officially abandoned the central planned system and shifted Viet Nam to a market-oriented economy under a Socialist Orientation, aiming to restructure and modernize the economy to encourage foreign investment. The main elements were the state‟s recognition of private ownership and multi-sector development, the liberalization of foreign trade and FDI, and the implementation of the socio-political and economic reforms (des Lestrange & Richet 1998; Mai, Bilbard, & Som 2009. For more than two decades, Viet Nam has been becoming a true emerging market, growing opportunities for investors and integrating into the world economy ever since. Viet Nam is involved in several ongoing economic integration processes when becoming a full member of Association of South East Nations (ASEAN) in 1995, the Asia-Pacific Economic Cooperation (APEC) in 1998 and World Trade Organization in January 2007, negotiated a trade treaty with the European Union and US in 2001. The overall cumulative impacts of economic integration process have been very positive for economic growth and development in Viet Nam and the inflation rate was reduced sharply to around 20 percent in 1990s.The whole economy has gained high development when the GDP growth rate achieved 9.5 per cent and 9.3 per cent in 1995 and 1996 before the Asian crisis and continued growing up from 4.8 per cent in 1999 to 8.5 per cent in 2007.Because of the global economic crisis, the GDP growth rate reduced to 6.3 percent and 5.3 percent in 2008 and 2009 respectively before returned 6.8 percent in 2010 and fell down to 5.9 percent in 20111.Because of the crisis, Viet Nam‟s economy had faced many Merge and Acquisition and Valuation – The case of Comeco 12 difficulties such as the credit crunch and high interest rate which caused the economic and financial crises which significantly affected on Vietnamese stock market. As a result, many stocks are being traded undervalue and even below par value. In addition, more than 90 per cent of companies in Viet Nam are small-and medium sized enterprises, which may have low competitive advantage, small scale, low technology, poor management skill, etc.., that make them become the target in industry restructuring in Viet Nam. Because of the economic downturn, many companies faced difficulties in operation and capital access so they were forced to be bankrupt or sell to others. Merger and Acquisition (M&A) have made immediate contribution to restructuring of the trouble economies such as operational restructure, more productive re-allocation of physical and financial resources in the economy. The total deal volumes plunged from 41 deals in 2003 to 23 deals in 2004 and further to 22 deals in 2005. But the number of deals recovered in 2006 and reached 413 deals in 2011, set a new record, with impressive growth of 135 per cent and worth $ 4,700 billion (See Figure 1). 1 Total Value of Deal Year Number of Deals (US Million) 2012(Q1) 1 1,500 2011 413 4,700 2010 345 1,750 2009 295 1,138 2008 167 1,117 Stock Plus, Viet Nam M&A Research Report, Issue 2, 15 May 2012, Opportunities in Distressed Companies and increase deal flow from Japan Merge and Acquisition and Valuation – The case of Comeco 2007 108 1,719 2006 38 299 2005 22 61 2004 23 34 2003 41 118 13 Figure 1: Historical data on M&A Activity – Vietnamese Targets (Source: Thomson Reuters, PricewaterhouseCoopers research) The value of Viet Nam M&A deal was USD 1,5 billion in the first quarter of 2012 , grew by 270 per cent compared to the same period last year and ranked 8th in deal value in Asia Pacific 2.Because of restructuring and seeking capital after economic crisis, the M&As in Viet Nam will increase quickly in the next few years and many foreign investors, private equities many divest in Viet Nam market through M&As which create more opportunities for other companies to expand their business. The consulting firms and professional brokers will take more important role in linking the transactions. M&As activities in Viet Nam are forecasted to continue rising in many sectors, ranging from finance, banking, consumer goods to even in importing and distributing petroleum products. Even Viet Nam does not intend to sell stake in petroleum distribution companies to investors and this sector is dominated by state-owned, the high economic growth rate and demand on energy consumption , is forecasted increase 5 percent to 7 percent at annual rate which is highly potential for many investor and distributors . The distributors and retailer energy in Viet Nam is dominated by the State, this means there is minimal competition in the domestic market. Furthermore, the high 2 Viet Nam Investment Review 2012 Merge and Acquisition and Valuation – The case of Comeco 14 economic growth rate and demand on energy consumption in Viet Nam, is forecast to increase 5%-7% at annual will be very potential for many investors and distributors to acquire other company to expand their business. (See Table 2) Figure 2: Viet Nam Oil Production and Consumption, 1990-2011 (Source: EIA International Energy Statistics) Viet Nam‟s oil is running by state-owned Viet Nam Oil & Gas Corporation (Petro Viet Nam), under the Authority of Ministry of Industry and Trade who control fully the operator and regulator in the industry and contributes a quarter of the state budget. The two state-own companies, Vietnam National Petroleum Group (Petrolimex) who accounts for 60 per cent and Vietnam Oil Corporation (PVOIL) holds 20 per cent of market share in petroleum distribution network. Sai Gon Petro Company Limited (SGP) and Petec Trading & Investment Corporation (PETEC) Merge and Acquisition and Valuation – The case of Comeco 15 currently who hold 12-15 percent individually in market 3.Because of the domination of Petrolimex under government-support in Viet Nam whole sale and retails in petroleum market, the two major stated -owner, PVOIL and SGP are trying to compete and open more market size. Although in Vietnam oil sector is still exclusively imported and domestic petroleum business, but whether after the end of 2018, will this monopoly end? At that time, retailers can negotiate directly with the distributors on price, would have more competition on market and distribution system. This is probably why PV Oil has been purchasing additional shares of Materials- Petroleum Joint Stock Company Oil (COMECO) - a listed company specializing in supplying and distributing petrol and oil. 1.2 Rationale for the study: After 1975, Gas and oil control department of Public Traffic office formed to function as managing and providing petroleum product in HCMC, then renamed to Gas and oil supply department, being a former of Materials-Petroleum Joint Stock Company Oil (COMECO). In August 2006, COMECO company‟s shares firstly were exchanged in HCM securities trading center. COMECO developed an infrastructure system to receive, store and distribute petroleum, oil products to Ho Chi Minh City (HCMC) and other regions in the South. Until now, company has retail distribution network, mostly located in prime locations and the storage being built in Dong Nai and the COMECO building located on Dien Bien Phu street, Ho Chi Minh. In particular, COMECO owned retail distribution network throughout Ho Chi Minh City with 33 petrol stations, and continue expanding more network by expanding distribution network. This is believed to be the reason for why PVOIL and SGP want to acquire COMECO in order to expand the retail distribution network in 3 US Energy Information –Country Vietnam-Last updated May 2012 Merge and Acquisition and Valuation – The case of Comeco 16 Ho Chi Minh to compete with Petrolimex which holds 60 per cent of the market in Viet Nam. The reports on retail market share of COM showed that the company stands just behind Petrolimex Company in Ho Chi Minh. In late 2011, PV Oil and SGP has been competing to buy shares COMECO and the ownership of PVOIl in June 2012 of COMECO was 31.4 per cent compared with 30 per cent last year and the shares of SGP about 26.6 per cent. Especially, PVOIL and SGP have two people in Board of Director of COMECO at the annual shareholders‟ meeting of COMECO in April 2012. Currently, PV Oil has registered to buy 494,039 shares to raise ownership up 34.9 per cent from June 2012 to July 2012 by purchasing on stock exchange. In the trading report in August 2012, PVOIL hold 31.5 percent and continues register buying in order to increase up to 33.99 percent. Furthermore, PVOIL can take advantage of the ownership of PETEC, who is the subsidiary of National Oil Corporation of Viet Nam (PVN), in COMECO of 3.4 percent. Taking this into account, the ownership of PVOIL in COMECO could be more than 10 percent than that of Saigon Petro. (Cafef 2012) The announcement of acquisition of COMECO by both PVOIL and SGP, which is called "a campaign for the COMECO target", however has not ended yet. PVOIL has tried hard for the target. Whether the decision to purchase and take full control of COMECO is a strategically wise? What are the motivations behind the transaction? If this is a wise strategic step for PVOIL to take full control over COMECO, what should be an appropriate offer price for the deal? This research aims to answer the above question. 1.3 Research objectives: This research aims to perform following objectives: Merge and Acquisition and Valuation – The case of Comeco  17 Analyze the motivations behind the acquisition of COMECO on the point of views of PVOIL and verify whether the acquisition is a good decision.  Perform business analysis and valuation of COMECO to come up with a reasonable price on the point of views of PVOIL. 1.4 Scope of the research: The scope of research is to study be the decision to acquire COMECO by PVOIL and the valuation of COMECO by collecting data for the period from June 2006, when the company initially listed on the stock market. 1.5 Research Significance: This research might be helpful to PV Oil in a way that its findings and analyses help the company to reconsider benefits and costs of the acquisition of COMECO. Also, it helps to reconsider the fundamental factors impacting on the future growth of COMECO and helps to estimate a reasonable price for COMECO, avoiding overpaying for the target. Furthermore, the fact that Vietnam is being a WTO member will bring some welldefined obligations requiring furthering more open markets to foreign competition, which would impress more competition on Petroleum market and distribution system. It is expected that the market for oil and gas distribution network be more and more fierce in the near future when foreign investors are allowed to enter the local market. Building distribution network cannot be done in a short period of time. Merger and acquisition in this case is a helpful tool for vertical expansion. The fact that Dung Quat Refinery factory, which is currently wholly state owned, is to be privatized and sold out to foreign investors its 49 percent of ownership shows a potential increasing trend of merger and acquisition activities in oil and gas distribution sector. How to value local distribution companies who enjoy across provinces gas stations, storages, Merge and Acquisition and Valuation – The case of Comeco 18 and transportation vehicles requires a deep industry understanding. This research aims at analyzing business opportunities in oil and gas distribution sector to allow achieving a reasonable valuation of local distribution companies. 1.5 Methodology: This research applies both qualitative and quantitative approaches to achieve the research objectives. In analyzing the acquisition transaction to explore the motivations and benefits of the transaction to PVOIL, qualitative research will be conducted through interviewing the key personnel of PVOIL, collecting published news, articles, about the acquisition and some previous relevant report. The author will search information first by indentifying the motivation of the acquisition that happening in the market and then investigating such information about the deal based on theoretical model for merger and acquisition motivations and benefits to conduct the qualitative research. In analyzing the target firm to arrive at a reasonable price for COMECO, theories for business analysis and valuation will be applied. Firstly, discounted cash flow valuation will be used in order to find the intrinsic value of firm in case of operating independently. Thereafter, the author will analyze the advantage and disadvantage of COMECO being acquired by PVOIL, in which discounted cash flow model is used to value the firm as if the company were fully merged into PVOIL. From this point, the deal premium coming from synergy of acquisition will be recommended for both investors and target firm. Merge and Acquisition and Valuation – The case of Comeco 19 Chapter II: Literature Review 2.1 M&A Definition: Mergers and acquisitions (M&As) and corporate restructuring have become the most popular methods of growth companies in corporate finance world. Merger refers the combination of two companies into one business entity and when a small company is purchased by one firm by paying shares, cash or other assets is called the acquisition. According to Gaughan (2007) “A merge is a combination of two corporations in which only one corporation survives and the merged corporation goes out of the existence” (p.12). Black‟s Law Dictionary defines mergers and acquisition as the following: Merger: The union of two or more corporations by the transfer of property of all, to one of them, which continues is existence, the others being swallowed or merged therein Acquisition: The act of becoming the owner of a certain property Divestiture: to deprive; to take away; to withdraw Merge can be defined as an arrangement the assets of two or more firms become one, or under the control of a company. In other words, merge is the combination of two companies to become a large firm and considered to be successful if it increases the acquiring firm‟s value. The activities include the conversion or payment in cash for the target firm. In case of merge between two companies, there often is an exchange of stock by one firm issues new share to the shareholders of the other firm at a certain ratio. The firm has the share continue to exist is referred to as the acquiring firm, even if that occurs under an alternate company name and the firm Merge and Acquisition and Valuation – The case of Comeco 20 whose shares are being replaced by the acquiring firm usually called the target firm. ). According to KPMG‟s report4, six periods of high merger activity, often called merger waves, have taken in the history of the world by categorizing types of M&A‟s. The First Wave (1893-1904) was known as major horizontal mergers in the manufacturing and transportation industries. After that, in the Second wave in 19191929 bring the consolidation of the industries which created by the first Wave. The third Wave (1955-1970) indicated the new picture of expansion and diversification which was helpful for firm entering in new markets. In the Fourth Wave (1974-1989) was known as the leveraged taker over and the collapse of bank‟s capital structure because of the large investment bank financed this transactions, commonly in “hostile takeover”. The Fifth wave (1993-2000) was one of major appetite for larger economies of scale and made multinational conglomerates. The Sixth Wave (20032008) was the picture of the globalization of firms needs to create a multi-national reach A merger activity is occurring when the two firms are in the same industry and agreeing to combine in new business with the greater scale and higher competitiveness. Considering the financial structure, a merge differs from a consolidation and are sometime used interchangeably. The consolidation happens when two or more companies are merged under new legal entity and formed an entirely new company whose name is a combination of the names of the merged companies. A Merger between Lien Viet Bank and Viet Nam Postal Saving service Company created Lien Viet Post Commercial Joint Stock Bank in 2011. Vietnam Postal Saving Service had fund raising from the public but was not allowed to lend meanwhile Lien Viet Bank was a young bank and wanted to invest and develop their 4 KPMG;The Seventh Wave of M&A (2011) Merge and Acquisition and Valuation – The case of Comeco 21 branches and transaction office network. The merge had saved a huge amount of money of Lien Viet Bank by using nearly 10,000 outlets of the postal company to expand its banking services. 5. According to the Law on enterprises 2005, the consolidate enterprise is “Two or more enterprises transfer all the assets, rights and liabilities, and legal interests to form a new enterprise, simultaneous cease the exits of consolidating enterprises” (Article 17 Competition Law). In case of one company has consolidated market share since 30 per cent to 50 per cent of relevant market, the legal representative of company being consolidate must notify the agency managed competition before proceeding consolidate. However, the competition law prohibits the consolidation of market shares of enterprises participating in economic concentration account for over 50 per cent on the relevant market, except of bankruptcy or the consolidation which contributes the socio-economic development, technical and technological advance5 ( Article 18,19 Competition Law ) Like mergers, the term “acquisition” tends to be used when larger firm absorbs a smaller firm for seeking advantage of synergies such as economies of scale, efficiencies and enhanced market visibility from this acquisition .Unlike all mergers, all the acquisition involves one firm purchasing another can integrate or create a larger company from two smaller companies (Adward & Gerald, 2005).The term acquisition is used instead of takeover, to replace of owner ship or by acquiring the right to control the management by an individual, group or individual company. In take over activities, the company owner has the right to alter the Executive Committee and redirect the business of the target company. The brand name of target companies can be retained or changed depending on the acquiring firm and it increases efficiency 5 Stoxplus 2011 Merge and Acquisition and Valuation – The case of Comeco 22 of business, market share and especially the competitiveness. The activities include not only the purchasing firm in cash, shares or combination of both, but also by buying all the assets of the purchased company. An acquisition may be friendly or hostile. In case of hostile, the two companies‟ proceed negotiations, but the target company is either not willing to sell or the management of Target Company being unaware of intention of the buyer. Takeovers can occur in many ways such as merger, tender offer, or proxy contest and the combination of all activities. In case of merger through tender offer, the buyer will proceed to buy common stock of target firm at a price which could be over the market value by bidding firm who will negotiated and approved by target‟s board of directors before voting of target shareholder for approval. The tender refers the buying of shares directly with the shareholders of target firm who are to sale stocks to the bidding firm. In addition, the proxy contests indicate the group of dissatisfied manager or large stockholder try to take control on the board of directors.(Jensen and Ruback ,1983) There are three types of mergers and acquisition and classified into horizontal, vertical, and conglomerate. The horizontal refers the synergies or economies of scale of competing companies in the same industry, which reduce competition and gain greater market power. Vertical is between the firms have buyer – seller relationship or in the value chain in order to reduce uncertainty and transaction costs and control the whole value chain. The advantage of vertical merger is to ensure and control the quality of raw materials or products, reduce the intermediaries cost and manage source of competitor's outputs. When two or more companies are not in the same business but want to diversify and expand their business activities in the other area, the transaction is called a conglomerate merger. It provides the advantage of decentralization and autonomy of the acquired. (Gaughan,2007) Merge and Acquisition and Valuation – The case of Comeco 23 2.2 Motivation Of Merger And Acquisitions Activities: The motivation of M&A activities have been discussed for many years and numerous theories to classify M&A motives into economic scope and scale, efficiency improvement and cost reduction or based on types of M&A activities such as horizontal, vertical and conglomerate. Three main motives for takeovers which have been figured of in the literature as synergy motive, which indicates the benefit of economic scale when merging two sources of companies. Secondly, the agency motive refers the potential profit to both acquirer and target firm or main purpose is to maximize the share holder value. Finally, the hubris hypothesis is mentioned that there is no synergy in the acquisition but and overestimation in valuing in the target firm, which causes the losses of the bidder to the target firm.(Berkovitch, E., & Narayanan, M.P. 1993). Because of the numerous explanations available, we will categorize the motives of takeovers in the most common in the literature which have development of some hypotheses to explain motives. The motives of takeovers are divided into: Economic motives, Strategic realignment, Market timing and other motivation. 2.2.1. Economic Motives: Theory of synergies: this term refers to the combination of two businesses creates greater shareholder value than if they are operated separately. The two basic types of synergy are operational and financial synergy. 2.2.2. Operational Synergy: The operating synergy has a important role to create wealthy of shareholder which has both economies of scale and economies of scope (Houston, James, and Ryngaert, (2001); Delong, 2003 (cited by Depamphilis 2012)). It refer the economies of scale by dividing the fixed cost such as depreciation of equipment and amortization Merge and Acquisition and Valuation – The case of Comeco 24 of capitalized software, maintenance expense on more number of units and consequently, it increase profit margin or decrease selling price, sale increase. Economic of Scope tends to show the ability of firm to create a broader range of products and services from the inputs. In general, Operational Synergy tends to look for cost-reducing synergies, improve market reach and industry visibility. 2.2.3. Financial Synergy: It refers the possibly of lower cost of capital by combining one or more companies. The combination of two firms would reduce the cost of capital, risk if the firm's cash flow stream are not correlated .It is the possibly to use of the surplus funds of the subsidiaries. When the two companies have cash flow uncorrelated merger together this will increase shareholder value because of taking surplus capital of each others in order to reduce the cost of capital. This is explained because if a company is growing (often short of cash) was merged with a stable company operating in saturated markets (have abundant cash receipts and stability), will support each other very well in combining capital resources in stable operating companies 2.2.4. Theory of Market Power: In the theory of market power, the purpose of merge is to increase their monopoly power in the current market, but there are less empirical which prove such theory. In fact, many studies proved the market power theory has affects on the performance of operating firm more efficiency than to increased market power of the combined firms. (Depamphilis 2012, page 12). Furthermore, Market power mentions the ability of firm when taking over, the possibility of rapid growth, extend more powerful on current geographical and environment, the firm could take more control the quality, price and supply of its products because of the profit on the economic scale. Merge and Acquisition and Valuation – The case of Comeco 25 2.2.5. Strategic Realignment: The strategic realignment theory refers the change in external environments consist of two factors regulatory and technological innovation by using M&As to make rapid adjustments, even though that the change can come many different sources. (Depamphilis 2012, page 9) 2.2.6. Regulatory Change: Those industries that have been subject to significant deregulation in recent years, financial services, healthcare, utilities, media, telecommunications, defensehave been at the center of M&A activity because deregulation breaks down artificial barriers and stimulates competition. (Mitchell and Mulherin, 1996,Mulherin and Boone, 2000, (cited by Depamphilis 2012, page 10). When Viet Nam became a member of World Trade Organization (WTO) in January 2007, Viet Nam had to issue the licenses to wholly foreign-owned banks such as Hong Kong and Shanghai Banking Corporation (HSBC), Standard Chartered and ANZ Bank as obligation of international commitments and regulation of WTO. 2.2.7. Technological Change: The development of technology creates new products and industries. The large companies have been putting that money to work in mergers and acquisitions, building on their strong position by moving into new product and service lines. By M&A s , they are pursuing vertical acquisition opportunities to capture a large share of the value chain , cost-reducing in R&D and innovating new products, technologies .Google announced an entrance into the mobile handset market in a big way with the acquisition of Motorola Mobility. Microsoft Corporation plays a role in developing prepackaged software specializing in social and real-time communication over the Internet by acquiring Skype Global. Merge and Acquisition and Valuation – The case of Comeco 26 2.2.8. Mivaluation Hypothesic: In the shortage of full information, investors can ascertain over-or undervalue a firm. And the acquirers can make profit from purchasing undervalue targets by cash below the true value or by using equity. In case of the target is overvalued, the acquirers still make profit if the value of target which is overvalued still lower than the bidding firm‟s stock.(Dong et al., 2006, Ang and Cheng, 2006 cited by Depamphilis 2012, page 12). 2.2.9. Buying Undervalued Assets (Q-Ratio): The q-ratio is the ratio of the market value firm‟s asset divided their replacement value. The value of firm could be undervalue because of economic crisis, inflation, depression, lower management and some acquirers will try to purchase with a market value less than what it would cost to replace the assets in order to expand their business activities or believe that good management will increase the the firm‟s performance and profitability.(Depamphilis 2012, page 11). According to Viet Nam M&A Research Report 2012, Stoxplus, the average of stock price listed in Viet Nam Stock market are traded undervalue or below book value, account 75 percent and especially many cheap stock currently is under par value ( VND 10,000 or US 0.5) account 60 percent because of global economy crisis since 2008 and credit crunch. Furthermore, the tightening monetary policy, high inflation which leaded the high interest rate caused many companies hardly looking for capital or no longer afford to finance. Along with that, the impact from the economic crisis, investors lack capital to abandoned projects and real estate consists of housing and landing in Ha Noi and Ho Chi Minh City decrease 40 – 50 percent during 2011. Many investors have many opportunities to purchasing cheap assets such as the total value of M&A deal in Viet Nam in real estate accounted 251 million during the first nine months in 2011. Merge and Acquisition and Valuation – The case of Comeco 27 2.2.10. Diversification: When the company conducts purchase other companies aims to diversify products and services or it growing outside a company‟s current industry category. It could be that the firm expands in new industry for opening the market and products or in more profitable than the acquiring firm's current industry. Moreover, the benefit of diversification refers to the new earning stream which brings more financial synergy. 2.2.11. Agency problem: The agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. This happens when the managers only focus to maximize their own wealth instead of increasing shareholder value. And the share holder will bear the cost of such mismanagement by the current managers. The manager often suffers the pressure when the stock price is low or undervalue and the mergers as way to correct such mismanagement in case of difference between managers and shareholders. (Fama and Jensen,1983, cited by Depamphilis 2012, page 11). 2.2.12. Hubris of management: “Acquirers may tend to overpay for targets, having been overoptimistic when evaluating synergies. Competition among bidders also is likely to result in the winner overpaying because of hubris, even if significant synergies are present”. (Roll, 1986 Depamphilis 2012, page 10). This hypothesis explain the bidder accept their own valuation of target is superior and tend to overpay than accept the market's valuation or it excess of its economic value. 2.2.13. Tax motives: Tax benefit refers as motivation of M&A activity because the combined firms can reduce the accumulated losses by lower future tax liabilities. In addition, the Merge and Acquisition and Valuation – The case of Comeco 28 revalued the book value of acquired assets in to current market value by purchasing method of accounting leads the increasing of assets and the depreciation, which us deducted from revenue in order to calculate a company‟s taxable income, so that the future taxable income which generated by combined firms can be reduced.(Ayers, Lefanowicz, and Robinson (2003) cited by Depamphilis 2011) Merge and Acquisition and Valuation – The case of Comeco 29 Academic Meaning List of Theories Researches Synergies are gained when the sum of the Jensen and Ruback parts is more productive and valuable than the (1983), Houston, sum of individual components. The value James and +Theory of created by the combination may result from Ryngaert (2001), synergies more efficient management, economies of and Delong (2003) scale; improve production techniques, the ( by Depamphilis) combination of complementary resources, the redeployment of assets to more profitable uses, the exploitation of market power. +Theory of Increase market share to improve ability to set Kim Market Power prices above competitive levels +Strategic Acquire capabilities to adapt more rapidly to Mulherin Realignment environmental -Technological achieved if the capabilities were developed Change internally. -Regulatory and Political Change changes than and Singal 1993 could be Booner (2000) and Merge and Acquisition and Valuation – The case of Comeco 30 Acquire assets more cheaply when the equity Sheleifer of existing companies is less than the cost of Vishny buying or building the assets. and (2003), Rhodes and Viswanathan +Misvaluation (2004), Dong (2006), Hien (2007) M&A are motivated by a belief that acquiring Lang, Stulz and firm‟s management can better manage the Walking (1989), + Buying target‟s resources. The acquirer believe that Servaes (1991), Undervalued its management skills are such that the value Martin (1996), Assets (Q- of the target would rise under its control Jovanic Rousseau Ratio) and (2002), Mork, Shleifer and Vishny (1990) Diversification means growing outside a Berger and Ofek company‟s current industry category (1995); Lins and +Diversification Servaes (1999); Morck, Shleifer and Vishny (1990) + Hubris of It is implied the results of over-optimistic, Roll (1986), Baker management reckless and ambitious of Board Directors (1992) Merge and Acquisition and Valuation – The case of Comeco 31 + Agency This hypothesis implies that managers seek to Fama and Jensen problem acquire firm for their own personal motives (1983) Tax benefits, such as loss carry forwards and Ayers, investment tax credits can be used to offset Lefanowicz, and +Taxes Motives the taxable income of firms that combine Robinson (2003) through M&As, and also used to lower future tax liabilities Figure 3: Model Of Business Analysis And Valuation (Source: Hien & other authors,2012) 2.3 Valuation Model: The valuation of potential firm is the combination of many analyses such as financial, legal, accounting process which focus both the acquirer and target firm. The acquirer need to ascertain the value of the target to determine the proper offering price and the target need to know what its company worth. Each acquisition candidate has its own unique characteristics that make it different from other firms. The most significant valuation potential firm is friendly deals and hostile deals for the bidders access the internal financial data. In general, a friendly transaction makes both parties work closely together to reach the detailed internal financial data. In contract, the limited information required by law is shown to the bidder in hostile deals. This mean that the bidder has to conducts its valuation analysis using publicly available information and it puts the bidder many disadvantages in valuation firm. Before Merge and Acquisition and Valuation – The case of Comeco 32 valuation approach, most of investors need to have through understanding of business itself such as internal operations, external factor, trends in the economy and industry. 2.3.1. Understanding the Industry and Internal Operations: Analyzing internal operations of firm is a qualitative process that evaluates how the firm operates in comparison with its peer and its own past performance. Albert Humphrey was an American business and management consultant devised the SWOT analysis technique while working for the Stanford Research Institute. The theory seems simple enough to evaluate the Strengths, Weaknesses, Opportunities and Threat that involved in business of firm. This model also provides frame work that help to analyze the strategy, potential development, and business direction of a company. This model is one of the most appropriate techniques to analyze how a company running its business through indentifying the internal and external factors of that company or setting achievable goals or objective for organization. Internal factors are analyzed in the SWOT model are the Strengths and Weakness of enterprises, besides, the external factors of SWOT model are Opportunities and Threats influenced by outside environment. Merge and Acquisition and Valuation – The case of Comeco 33 Figure 4: SWOT Analysis Framework (Source : http://www.bcelf.org/swot.htm) The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. The factors may include all of the 4P's; as well as personnel, finance, manufacturing capabilities, and so on are analyzed based on evaluating firms and make a comparison to the competitors. In general, these internal factor tend to help to recognize the present situation of the firms.  Strengths: characteristics of the business or team that give it an advantage over others in the industry. It includes tangible and intangible to organizations like sources and capabilities of firms such as human competencies, financial resource and brand images.  Weaknesses: are characteristics that place the firm at a disadvantage relative to others. It includes the limitation of financial resources, management, distributions or the lack of technology, precise marketing plan and weak market brand which detract the ability of firms to achieve their goals, maintain market segment or influence their growth.  The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position. The results are often presented in the form of a matrix.  Opportunities: external chances to make greater sales or profits in the environment. The opportunities arise when firms can recognize and take the benefits of conditions in the environment they operate in, such as rapid Merge and Acquisition and Valuation – The case of Comeco 34 market growth, economic boom, support policies form government or discovery of new products or technology, in order to create accurate plans and execute business strategies to achieve higher profit and improve the firms‟ development  Threats: external elements in the environment that could cause trouble for the business. The threats arise when business conditions in the external environment can be harmful to the operating activities of corporations. The threats to firms appear when due to economic recession, rival firms apply new products or technologies, strict policies of government, and the products of firms go to decline in their life cycle. In fact, the SWTOT analysis is tool to recognize fully the business‟s performance by comparing to the competitors to finger out the advantage, disadvantage and opportunities in order to increase the competition in the market. However, this model is only to provide a personal‟s view point and not fully recognizes the internal, external which may really affect on the firm‟s performance. In fact, many investors use the historical data as availability and accuracy of financial data provided in financial statements of firms, cash flow statements, which call financial analysis to evaluate whether firms are stale, solvent, liquid or profitable through financial ratio. 2.3.2. Valuation: In general, analysts use a wide range of model to value, ranging from the simple to the sophisticated. There are three approaches to valuation including discounted cash flow valuation, relative valuation and contingent claim valuation. The discounted cash flow valuation which relates to the value of an assets to the present value of the estimated future cash flow. Secondly, relative valuation helps to estimate Merge and Acquisition and Valuation – The case of Comeco 35 the value of business or asset by comparing the price of assets in same environment which have a common variable such as earnings, book value or sales. Finally, contingent claim valuation, using option pricing models to measure the value of assets that share option characteristic.  Discount cash flow model (DCF): According to Damodaran (2002), discounted cash flows are fundamental valuation method for determining the current value of a company using future cash flows adjusted for time value. The future cash flow set is made up of the cash flows within the determined forecast period and a continuing value that represents the cash flow stream after the forecast period. Therefore, the value of any assets is the present value of expected future cash flow that the asset generates. Where, n: Life of assets CFt: Cash flow in period t r: Discount rate reflecting the riskiness of the estimated cash flows Because the cash flows cannot be calculated indefinitely, the cash flow forecasting of firm is done for a time horizon, then after completed by a terminal value of firm. The terminal value can be calculated by three ways. One is to assume a liquidation the firm‟s assets in the terminal year and estimate what others would pay for the assets that the firms has accumulated at that point. The other two approaches are done with the assumption that firm is a going concern at the time of the terminal value estimation. One applies a multiple to earnings, revenues or book value to estimate the value in the terminal year. The other assumes that the cash flows of the firm will grow Merge and Acquisition and Valuation – The case of Comeco 36 at a constant rate forever- a stable growth rate. With stable growth, the terminal value can be estimated using a constant growth model.  Categorizing Discounted Cash Flow Models: There are many of valuation models in existence. In this thesis only Discounted Cash flow model (DCF) and Relative Valuation in order to find out the intrinsic value of firms based upon its fundamentals. The DCF model including Dividend discounted Model (DDM), free cash flow to equity (FCFE), and Free Cash flow to firm (FCFF). There are two components to relative valuation by comparing the price to earnings (P/E), price to book value (P/B) and price to sales (P/S) with other similar firm in the same industry. The most popular valuation approach professionals rely on discounted free cash flow approach. The FCFE is cash flow available to be paid out as dividends or stock repurchases, the model is used to estimate how much cash a firm can afford to return to its share holders. The free Cash flow to Equity model is defined as the cash flow left after the change of working capital, net debt and net income. FCFF is cash flow available to all fund providers, including both debt and equity holders. - Cost of Equity Cost of equity is the expected rate of return required by shareholders when they invest to firms. There are two methods can be used to approach the cost of equity of firms, such as direct method and indirect method. Direct Method – using The Capital Asset Pricing Model (CAPM): rE  r f   (rm  r f ) Where, rE : Cost of equity Merge and Acquisition and Valuation – The case of Comeco 37 rf: Risk free-rate rm : Expected market return β: Beta of the security - Indirect Method: Because there are many difficulties in estimating beta of companies listed on the exchange in developing stock market due to the inefficient performance and unreliable trading transaction data in these stock exchanges. It will be more accurate to calculate the cost of equity based on the standard measurement of another developed security exchanges, such as the United State of America stock exchanges. Cost of equity calculated by indirect method is defined as: E [RA] VN = E[Rsame industry] US+ RPC + RPE Where, E [RA] VN : Expected return on equity of firms operating in Vietnam E[R same industry] US : Expected return on equity of firms in same industry in US used as standard measurement RPC: Country risk premium RPE: The exchange rate risk premium - Weighted Average Cost of Capital (WACC) The Weighted Average Cost of Capital (WACC) is the rate that firms are expected to pay on average to all its security holders to finance their assets. When conducting DCF model, the WACC rate is generally used as discount rate, which reflects the risk of the cash flows. The WACC is defined as: WACC  rE  E D  rD  (1  Tc)  ED ED Merge and Acquisition and Valuation – The case of Comeco 38 Where, rE :Cost of Equity rD : Cost of Debt E: Market value of equity D: Market value of debt TC: Corporate tax EQUITY VALUATION WITH FCFE Financing Weights Debt Ratio = DR Cashflow to Equity Net Income - (Cap Ex - Depr) (1- DR) - Change in WC (!-DR) = FCFE Expected Growth Retention Ratio * Return on Equity Firm is in stable growth: Grows at constant rate forever Terminal Value= FCFEn+1 /(ke-g n ) Value of Equity FCFE1 FCFE2 FCFE3 FCFE4 FCFE5 FCFEn ......... Forever Discount at Cost of Equity Cost of Equity Riskfree Rate : - No default risk - No reinvestment risk - In same currency and in same terms (real or nominal as cash flows + Beta - Measures market risk X Type of Business Operating Leverage Risk Premium - Premium for average risk investment Financial Leverage Base Equity Premium Country Risk Premium Figure 5: Equity valuation with FCFE (Source: Damoradon 2002)  Free Cash Flow To Firm (FCFF) Model: The Free cash flow to firm is the sum of the cash flows to all claims holders in the firm, including share holders, bondholders and preferred shareholders. By this model, the investors not only measure the profitability after all expenses and investing activities , but also see the performance of firm by the cash flow. Merge and Acquisition and Valuation – The case of Comeco 39 VALUING A FIRM Cashflow to Firm EBIT (1-t) - (Cap Ex - Depr) - Change in WC = FCFF Value of Operating Assets + Cash & Non-op Assets = Value of Firm - Value of Debt = Value of Equity Expected Growth Reinvestment Rate * Return on Capital FCFF1 FCFF2 FCFF4 Terminal Value= FCFF n+1 /(r-gn ) FCFFn ......... FCFF5 Forever Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity)) Cost of Equity Riskfree Rate : - No default risk - No reinvestment risk - In same currency and in same terms (real or nominal as cash flows FCFF3 Firm is in stable growth: Grows at constant rate forever + Cost of Debt (Riskfree Rate + Default Spread) (1-t) Beta - Measures market risk Type of Business Operating Leverage X Weights Based on Market Value Risk Premium - Premium for average risk investment Financial Leverage Base Equity Premium Country Risk Premium Figure 6: Equity valuation with FCFF Source: (Damoradon 2002)  Relative Valuation Model: In the discounted cash flow, the objective is to find the value of assets, given their cash flow, growth and risk characteristics. In relative valuation, the objective is to value assets, based upon how similar assets are currently priced in the market. There are two components to relative valuation. The first is that to value assets on a relative basic, price has to be standardized, usually by converting prices into multiples of earning, book values or sales. The second is to find similar business, but it may be difficult to estimate because of the difference on rick, growth potential and cash flow. Merge and Acquisition and Valuation – The case of Comeco 40 ChapterAPTER III: Research MethodologyRESARCH METHODOLOGY 3.1 Research Model: Previous literatures studies have shown the motivations for M&A. Some of these theories suggest that M&A can be motivated by economic motives, strategic realignment, market timing and others motives. In this context, we conduct a research on case of PVOIL acquires COMECO that has undergone a acquisition over last two years (from 2010 until now) to see the motivation behind the acquisition of COMECO and perform business analysis and valuation of COMECO to come up with a reasonable price on the point of views of PV Oil. This research applied both qualitative and quantitative approach. Figure 7: Model of Methodology Merge and Acquisition and Valuation – The case of Comeco 41 The qualitative method is performed by interviewing the key personnel in PVOIL. The purpose of this procedure is to investigate the motivations of M&A process in the case of COMECO. It will assess the overall motivations and the questionnaire developed was prepared and used as interview guide during the interviews. The questions were constructed from the list of theories motivation of M&As, some of them are rather long and open-ended which was opening-up for a discussion by the interviewee, also allowed for a broad picture of the whole case situation and author could yield a lot of information from the interviewees.. Later on, the interview will be summarized by a short conversation.  Qualitative research step: Qualitative methods are, according to Miles and Huberman (1994), a set of data collection and analysis techniques that emphasize a fine grained, process oriented, observation approach to data collection and analysis and provide a mean for developing understanding of complex phenomena from the perspective of those that are living it. They are a mean of exploration, of investigating a situation in order to better understand it (Barr, 2004).Qualitative methods allow the researcher to discovery new linkages and processes and are particularly useful for creating a better and more in depth understanding of complex processes and influence of individual perspectives in those processes (Barr, 2004). Below is model for acquisition motivations Merge and Acquisition and Valuation – The case of Comeco 42 Figure 8: Common Theories of What Causes Mergers and Acquisitions  Quantitative research step: Quantitative methods are based on the gathering of numerical data or data that will be quantified (Saunders et al., 2003). In this study, the quantitative method is used for the valuation process including business, strategy and competitive analysis in this study. The valuation follows the top-down method which starts form the macroeconomic analysis to industry analysis, and then analyzing the performance and business position of company in which valuation can provide the intrinsic value for the acquisition. This thesis uses secondary data obtained by the financial statement provided by Materials- Petroleum Joint Stock Company Oil (COMECO) and transaction data on Ho Chi Minh Stock Exchange (HOSE). Besides, this research also Merge and Acquisition and Valuation – The case of Comeco 43 applies collecting primary data by contacting the investors who understand the business performance of COMECO. Merge and Acquisition and Valuation – The case of Comeco 44 Chapter IV: Business Analysis 4.1 Industry Overview: Nowadays, Oil market is the largest commodity market and the most important macroeconomic factor in the world economy. In fact, the world oil price and consumption fluctuation directly reflect or impact the health of global economy which had expanded rapidly and affected in the high growth oil consumption, particularly from emerging market countries. Oil is used in many ways from the manufacture of goods, to transport of goods, people, to food production, to operate construction equipment, to mine, etc. Crude oil price has been associated with major developments in the world economy seen as for inflation, recession, effective supply quantity and demand quantity of this commodity in the market. In accordance with the economic basic theory, the crude oil price moved down during 1981-1990, up to $10 per barrel by mid-1986, because of the surplus of oil supplying from Non-OPEC production increased. As the results of Gulf War and Soviet Union collapse, the crude oil price moving up to nearly $40 per barrel and entered a period of steady decline the lowest level in 1994.The price increases came to rapid in 1997 and 1998 when the impact of the economic crisis in Asia and began to recover in early in 1999. After a dip during the 2001 recession, oil prices began a sustained increase that took them near $75 per barrel by mid-2006. Soon after, the price increase accelerated, with prices topping out at more than $145 per barrel in July 2008. The onset of the Great Recession helped send prices sharply lower, as a barrel of oil averaged about $43 in the first quarter of 2009. The economy of the world has been experiencing a series of major economic and financial problems since 2007. The crisis played a significant role in the threat of collapse of large financial institutions, the bailout of banks by national governments, downturn in the stock market. After high growth of world‟s GDP gradually since Merge and Acquisition and Valuation – The case of Comeco 45 2003-2008, the downturn in economic activities leading to the global recession and contributing to the European sovereign-debt crisis since 2008 until now. The down turn economic side effects of the European sovereign debt crisis, accompanied with slowing US and Chinese growth and emerging countries. The growth of economy has influenced the oil price, oil consumption and vice verse. The recovery from the recession, combined with concern over potential supply disruptions in Libya and other oil producers, has sent prices higher again this year. Prices broached the $100 mark in 2011.The fluctuation in international oil price over the past decades can have a macroeconomic impact by the strong growth in large developing, emerging economies, monetary policy and the intensity of oil in production. Figure 9: World liquid fuels consumption, world GDP, and WTI crude oil price Merge and Acquisition and Valuation – The case of Comeco 46 Figure 9: World liquid fuels consumption, world GDP, and WTI crude oil price (Source: U.S Energy Information Administration.) 4.2 Viet Nam market Overview: Viet Nam‟s energy policy objectives to ensure energy supply security for the domestic demand and control both the upstream and downstream segments. The fuel downstream segment remains under full state control even though the current laws and regulation do not specifically exclude foreign companies have right to import, distribute or retails goods. Viet Nam maintains wholesale and retail oil prices lower than international oil market than international oil market price and under Decree 84 allows to increase by 7 percent when the international prices fluctuate by the same rate within 30 day period but the government tries to maintain lower price for consumer, sustain a growing economy, keep inflation from rising and protest consumers, resulting in revenue losses for oil distributors when the international world oil price increases sharply and domestic prices have not yet adjusted, importing and storing reserves of oil in large volumes means the importers has to bear Merge and Acquisition and Valuation – The case of Comeco 47 substantial risks leading the less profit or commission directly to the retails in domestic market.(EIA-VietNam 2012). According to Decree No. 84, (1) adjustments in the domestic gasoline retail price lag behind global price changes for a period of time, and (2) petroleum importers are required to maintain a minimum reserve lasting for at least 30 days. However, in the opposite scenario where world oil price decreases or stable, the importers‟ profit margin can be improved leading the stable profit or high commission to importer and retailer. Table1: Price of WTI Crude oil and Viet Nam A92 since 2007 Source: MOF The rising international oil price and the limited adjustment and stabilize retail oil price by Government have forced to cut the amount of commission to the retailers by some petrol importers in Viet Nam causing to fail to make a profit. In 2011, the tightening monetary policy of the Government to control the inflation rate, high lending rate, weakness of Viet Nam Dong (VND) against to the US dollar and reduction the capital for lending by State Banks of Vietnam (SBV) had made many Merge and Acquisition and Valuation – The case of Comeco 48 difficulties for domestic entities in operating businesses especially for the trading oil company often need high capital. 4.3 Opportunity: In general, with many advantages from large young population, fast economic growth is set to drive high oil consumption around 24% in total energy consumption in Viet Nam, according to EIA 2012.The majority of petroleum products consumed in consist of diesel, gasoline, fuel oil (FO), and Kerosene which highly demand in diesel, followed by gasoline and kerosene sales being smallest proportion of petroleum consumption. In addition, the transportation is the biggest user of energy which account for 38% of primary energy demand (PED). Industry comes a second with a 36% share and other categories of consumer take the remaining 26% of energy (Viet Nam Oil & Gas Report Q4, 2010). Motorbike users are the dominant retail subsegment currently; there are approximately 16 million registered motor bikes in Viet Nam. Growth in this sector is very high, averaging 10-15% over last 2-3 years. Auto manufacturers are bullish in the Vietnam market, with a record of 600,000-700,000 autos .Viet Nam is a relatively small consumer of petroleum compared to the world and its ASEAN peers, but the average growth of consumption around 7% each year, reaching 358,000 barrel per day in 2011, around 8.9% in 2011 compared to the global consumption growth rate 0.7% , OCED declined by 1.2%, Non-OCED increasing 2.8%, with countries in the Asia-Pacific region seeing growth 2.7%.(BP statistic 2012).Furthermore, Dung Quat is Viet Nam‟s only refinery with total around 135,000 barrel per day and in order to ensure energy supply security for the domestic demand, Viet Nam mainly has to import petroleum product and face a rising import burden because of continuing grow on demand refined products. As strong economic growth over next ten years and forecasts average GDP growth of 6.7% between 2012-2016 Merge and Acquisition and Valuation – The case of Comeco 49 which set to push petroleum product demand up from 358,000 barrel per day in 2011 to 410,000 barrel per day in 2016 at annual about 6%-8%. 4.4 Threat: The consequences of the global economic crisis in 2008 had a serious impacts on the Viet Nam„s economy reduce the demand for many industries, GDP‟s growth rate slightly reduced to 6,3% and 5.3% in 2008 and 2009 respectively. The growth returned to 6.8% in 2010 and fell down to 5, 9% in 2011 (World Bank 2012). Even Viet Nam‟s economy was remarkable achieve a relatively high positive growth rate in the context of the world economic recession, the high inflation in 2008 around 22.1% and in 20110 have reached the the two –digit 11.9 % by 1.7% times compare with 2009 and increased up to 20.9 % in 2011. Entering the year 2011, the State Bank Viet Nam monetary management policies such as exchange rate management, limits the proportion of outstanding loans in the non-manufacturing sector with outstanding maximum to 30/6/2011 was 22% and the date 31/12/2011 is 16% cause the shortage of working capital for many companies. In addition, the interest rate for loans is very high at about 25% per year and in 2012, the State Bank of Viet Nam is going loosen monetary policies by issuing limited interest rate and inflation. Price volatility has increased, the price of fuel, electricity, building materials simultaneously increased. In general, the current macroeconomic factors generate many difficulties for business activities in term of raising capital because of high demand of bank loans will affected by fluctuation in interest rates and reduce the efficiency of business operating and investment. In general, the cycle of growth economy in the world is affecting the development of economic sectors like recession, interest rates and high inflation which impact on the business activities of the enterprises. In addition, in the period from 2007, the world Merge and Acquisition and Valuation – The case of Comeco 50 oil price continuously broke new stage to reach highest price 147 USD per barrel in 2008 because of global economic crisis and political instability of the Oil-Exporting countries. In 2009, the impact and slightly decreased to 33 USD per barrel, at average about 62 USD per barrel. In 2010, world oil prices rose in March 2010 at 94USD per barrel and decreased in the third quarter of 2010, average prices maintained at 79.5 USD per barrel. To 2011, oil prices surpassed 100USD per barrel due to unstable performance in oil exports. The increasing world oil price will affect business operations of petroleum firms and COMECO particularly even as the retailer. In addition, the whole and retail sale of petroleum also faces many difficulties last year, and may last to several years in near future. All wholesalers and distributors and most retailers are State Owned Enterprises combined with government controls on petrol pricing, this means there is minimal competition in the domestic market. The monopoly in whole and retails petroleum market in Viet Nam control by government-running companies and hold more than 80 % of total market share with many advantages such as preferential loans, huge capital with low interest, large fixed asset system, large wholesale and retail system with conventional location etc, modern ware house and transportation systems. According to Saigon Securities Inc, there are 13,500 petroleum retail stores in across country and Petrolimex accounts for 16%, however consumption is very high about 30% of market share. SGP under Ho Chi Minh City People‟s Committee currently hold more than 1,000 petroleum stations in Southern area and Mekong Delta, accounts for more than 10% of market share. PETEC accounts more than 13% of market share with more than 1,400 petroleum stations across country and 70 petroleum stations in Ho Chi Minh City. Meanwhile, COMECO is only whole sale and retails petroleum with more than 33 petroleum stations in Ho Chi Minh and purchase the petroleum product from exclusive importers Merge and Acquisition and Valuation – The case of Comeco 51 like Petrolimex, PVOIL, SGP. Furthermore, the largest weight in cost structure is cost of goods sold (COGS) account 95 - 97% of total revenue, selling & administrative expense accounts for about 3-4% of total revenue. The profit mostly comes from the commission of selling product, around 600 VND-1,000 VND per litter, account 2%3% of total revenue. Therefore, the global fluctuation of crude oil price has a big influence on COGS, commission and business‟s activities of COMECO. 4.5  Company Profile: The Company Overview: COMECO has full name of Materials-Petroleum Joint Stock Company (COMECO). It was listed on the stock market with a code of COM on August 07, 2006. Currently it has total shares outstanding of 13,755,792 shares. The company's main kinds of business are Merchandise of petroleum, oil, providing automobile washing service and transportation services; Providing equipments for petrol stations, materials and transportation means; Civil and industrial construction, especially constructing petrol stations and warehouses; Providing real estate services and offices leasing; and others.  Company History: COM was formerly known as Petroleum Management Division of HCM Transportation Department, established in 1975. It was then renamed as Petroleum Supply Division. It again changed name to Transportation Materials Company in 26th January 1993 and then to Materials-Petroleum Joint Stock Company (COMECO) with a chartered capital of VND 141 Billion. Currently it has a Market Capital of VND 371.4 Billion. Merge and Acquisition and Valuation – The case of Comeco 52 After 1975, gas and oil control department of public Traffic office formed to function as managing and providing gas and oil in HCMC, then renamed to Gas and oil supply department, being a former of COMECO. COMECO was formed according to decision no. 42/QD-UB dated 26/01/1993 of HCMC people committee. Mainly activities in: wholesales, retail gas, oil, lubricant, fuel transport and all kinds of equipment for public Traffic. In 1998, COMECO was selected by HCMC people committee to be privatized unit base on decision no. 4225/QD-UB-KT dated 15/08/1998. In August 2000, COMECO was approved by Prime Minister‟s decision no. 94/2000/QĐ-TTg dated 09/08/2000 regarding changing private company to COMECO, officially operated since 01/01/2001 with charter capital of 25 billion VND. In June 2005, company has issued 900.000 more shares to mobilize capital and pay dividend to shareholders, increased charter capital to 34 billion VND. 7th August 2006 Company‟s share first exchanged in HCM securities trading center. The charter capital is increasing gradually from 34 billion in 2005 up to 141 billion in 2011 continuously with the equity from 25 billion to 357 billion at the same time  Board of Directors and Major Shareholders:  Corporation Board of Director: Board of Management of Materials-Petroleum Joint Stock Company (COMECO) includes 11 members include:  Major Shareholders: Materials-Petroleum Joint Stock Company (COMECO) has 11.3% shares belong to the state-ownership; foreign shareholders are holding 0.65% of outstanding shares of COMECO respectively. Currently, Petro Viet Nam Oil Corporation (PVOIL) and Sai Gon Petrol are most major shareholders holding Merge and Acquisition and Valuation – The case of Comeco 53 30.32% and 25.56% outstading shares; Sai Gon Thuong Tin Commercial Joint Stock Bank (Samcombank) has 4.91% shares. Figure 10: Materials-Petroleum Joint Stock Company (COMECO)’s ownership structure 2011 (Source: COMECO – 2011) 4.6 Business description: There are now 12 enterprises specializing in importing and distributing petroleum nationwide. They are both state-owned and private-run companies, while fuels retailing is fully controlled by government-run companies. Materials - Petroleum Joint Stock Company (COMECO) is a Vietnam-based company engaged in the marketing and trading of oil and gas products. It is involved in the wholesale and retail trading of petroleum, gasoline, refined oil, lubricants and other petrochemicals with the operations of 33 petrol stations in Ho Chi Minh City where is highly development and consumption accounts more than 50 percent of the country‟s demand. In addition, the company also has wholesale business relations and retail network with partners in the Merge and Acquisition and Valuation – The case of Comeco 54 South East region in Viet Nam, including Ho Chi Minh City, Binh Phuoc, Binh Duong and Tay Ninh, Dong Nai and Ba Ria Vung Tau, continue expanding more gas stations and agencies for opening market in South East Viet Nam. COMECO controls around 14 percent of Ho Chi Minh fuels market through its 33-strong petrol stations in sale volume just after Petrolimex. The distribution of petroleum products, the largest weight in cost structure is COGS (92 - 97% of total revenue), selling expense accounts for about 3-4% of total revenue and income is heavily relying on commission for importers. Main business activities are distributing petroleum and gas products in which petroleum sales account for 90 percent revenue and 75 percent profit. The distribution is conducted via a wide storage system of approximately 25 ha in Nhon Trach, Dong Nao and in Thu Duc. COM‟s key suppliers are PETEC, Sai Gon Petro, and Petrolimex Sai Gon for petroleum products and Esso Viet Nam, Castrol Viet Nam, BP Petco for lubricants. It also provides vehicle wash services, as well as tanker trucking and warehousing services for petroleum and related products. The Company is engaged in the development and construction of gasoline stations and warehouses. In addition, it develops office buildings for lease, and offers automotive repair and maintenance services. Recently, COM is ranked 149th among 500 biggest companies in Viet Nam. It also earns a high reputation in the security market. 4.7 SWOT Analysis: STRENGTHS OPPORTUNITIES - - Comeco has good facilities with land 261,849 m2, is located in a economic convenient location for development business such as 33 petrol station over -The stable political situation and the structure has shifted towards services and industrial - The high development of many Merge and Acquisition and Valuation – The case of Comeco Ho Chi Minh City and other provinces nearby, 20 hectares of land industries in Ho Chi Minh - planning being constructing for ware house and crude oil reserves and distribution in terminal can receive vessel more than order to stabilize production capacity 20,000 of petrochemical plants, ensuring tons, which increase circulation and stabilizing the market COMECO is highly positioned in the of consuming petroleum products to market and also is a strong brand all name in the retail petrol industry. In contributing to ensure energy security addition, COMECO retail system is will currently ranked second in the retail development of Comeco. - regions be of the country, advantageous for Oil remains a strategic commodity Minh City after Vietnam Petroleum and no easy substitute for petrol and Corporation (Petrolimex) in the COMECO has strong financial - Future, when the petroleum market is system, transparency, high and stable totally regulated by the market growth with annual average of 23% mechanism since 2001-2011 - develop systems of petroleum production, petrol distribution business in Ho Chi - Government in Nhon Trach, Dong Nai which is competitiveness in market. - 55 - It is expected in 2015, domestic COMECO has strong management petroleum product supplying will team with high ability, suitable account for about 50-60% of market strategy, good vision and Workers share leading the stable price and who is enthusiastic, energetic and supplying source experienced, especially in the field of - The growth rate of Vietnam economy Merge and Acquisition and Valuation – The case of Comeco oil and gas business. 56 still maintains approximately 6 to 7% in recent years, and expected to keep this rate in the near future. It means that the demand in petroleum product also has chances to grow, and it brings potential opportunities for COMECO to achieve their goals and expand its business in the future WEAKNESSES THREATS - - - COMECO is not active in sources and prices of petrol product petroleum When the corporation has expanded management its petroleum products, COMECO will business, ability,the - Unfavorable fluctuations in world its investment management and special mechanism on human encounter difficulties when world resource have not developed much to petroleum price increase which cause satisfy new requirements. the rising cost, decrease commission The market information, competitors and reduce effectiveness of business are activities. slowly in prices cause competitiveness in the market weak - Most likely the foreign enterprises are allowed oil and gas business in Viet Nam. - Because of limitation the development of petrol stations and distributions in the city, the Merge and Acquisition and Valuation – The case of Comeco 57 company's existing stations will be adjusted according to the planning or relocation - Petrol and oil trading business focused implementation strategy to expand retail network of petrol, the market will be increasingly fierce competition Merge and Acquisition and Valuation – The case of Comeco 58 Chapter V: Valuation 5.1 Financial Analysis: Firstly, the thesis will analyze the performance of COMECO by looking through the historical financial statements which is very useful to figure out the past of firm‟s performance and from this point; we can bring the perspective company in the future. The total revenues of COMECO which most of this amount came from the retailing sale of petroleum followed the pattern of oil price movements which is set out currently with revenue and net income. In the distribution of petroleum, the COGS accounts 96 per cent – 97 per cent of total revenue and therefore, global fluctuation of world oil price have affected on COGS of importing-price and because of domestic prices have not yet adjusted with the sharply increasing world oil price, means the importers and distributors as COMECO has face substantial risk. The revenue and net income increased by 47 per cent and 28 per cent from 2007 to 2008, currently crude oil prices increased by 34 per cent .From 2008-2009, the revenue declined by 8 per cent and oil prices fell by 37 per cent and profit after tax of corporation increased sharply 225 per cent compared to 2008, which just reached nearly 63 billion VND. As the crude oil price recovered by 29 per cent from 2009 to 2010, the firm‟s revenue increased by 28 per cent, but the net income decreased sharply nearly 26 billion VND lower than the previous year, but higher than 20072008. In 2011, the crude oil price brought a further 39 per cent increasing and driving up the revenues of firm by 31 per cent, but the profit after tax slightly reduce by 3 billion VND. Looking through historical date of COMECO, the firm had an amazing increasing in its net income, due to suitable strategic and efficient cost of goods sold management and continue construct more petrol stations, fix assets, expand its Merge and Acquisition and Valuation – The case of Comeco 59 distribution channel in future during the recession of the economy all over the world, expect highly development again when recovery of World and Viet Nam Economy Merge and Acquisition and Valuation – The case of Comeco 60 Table 2: Sales Revenue, Net Income and World Oil Price of COMECO in years VND Sales Revenue (VND) Net Income (VND) Revenue's Growth rate Income's Growth rate Crude Oil Price (USD) Crude Oil's Growth rate 2007 2008 2009 2010 2011 2,087,941,306,74 2 15,189,911,195 3,071,594,898,84 8 19,453,395,938 2,821,219,829,27 0 63,223,836,892 3,616,801,420,38 0 36,918,675,273 4,732,648,392,68 1 33,271,622,253 72.39 47% -8% 28% 31% 28% 225% -42% -10% 97.26 61.67 79.50 110.90 34% -37% 29% 39% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) These ratios can help to measure the ability of COMECO to pay its liabilities in short-term, which can show a safe position of company‟s business in current situation. They are really important since short-term liabilities in 2009 and 2010 reached nearly 118 billion and 101 billion VND, which increased about 261.2 percent compare to 2008, meanwhile the current asset only increased up to 50.3 %, means that firm use the shorter liabilities for their operating activities. The liquidity ratios of COMECO since 2009- 2011 were lower than the previous years. The current ratio was highly in 2007 and 2008, which reached 5.93 and 7.03, because of the decreased in current liabilities and current asset kept stale during this period. Since 2009-2011, because of difficulty of the whole economic, unstable world oil price, tightened monetary policy with high financial expense, COMECO had suffer these problem with increasing in inventories and liabilities which cause the lower current ratio. The quick ratio and cash ratio also decreased since 2009 to 2011, after kept stale during 2007-2009, because of the increasing in inventories and shorter liabilities which cause the lower ratio. Furthermore, the item Cash and cash equivalent accounted high percentage in current asset, hence the amount of cash reported can Merge and Acquisition and Valuation – The case of Comeco 61 help COMECO has ability to cover its current liabilities and reflect the safety in its business performance. Merge and Acquisition and Valuation – The case of Comeco 62 Table 3: Short-term Solvency Long-term Solvency of COMECO compared in years Short-term Solvency 2007 2008 2009 2010 2011 Current ratio = Current Asset / Current Liability 5.93 7.03 2.93 2.62 2.69 Quick ratio = (Current Asset - Inventory) / Current Liability) 5.37 5.46 1.46 1.80 2.19 Cash ration = Cash / Current Liability 2.90 2.96 0.16 0.13 0.45 (Source: Author‟s calculation; COMECO, Annual Report 2007-2011)  Financial Leverage ratios: Financial leverage ratios provide the ability of long-term solvency of firms, which can indicate whether the firms use their long-term debt efficiently. In addition, these ratios can also help to evaluate the efficiency of capital structure of COMECO. From the point of view, the debt-to-asset ratio of COMECO was low, which was just 0.14 and 0.12 in 2007, 2008, and increased up to more than 0.26 since 2009. It indicated that COMECO has been financed by short-term debt more than using its equity in recent years and reduced the dependent on firm‟s equity. However, the longterm debt of Comeco increased in recent years because of two project, Comeco Buidling and Ware House, Terminal in Long Thanh Dong Nai, which around 0.26 in 2009, gradually decrease in 2010-2011. In general, Comeco has table capital structure and liabilities accounted 25% of total asset. Table 4: Long-term Solvency of COMECO compared in years Long-term solvency 2007 2008 2009 2010 2011 Debt to Equity 0.17 0.14 0.36 0.30 0.25 Debt to Assets 0.14 0.12 0.26 0.23 0.20 Equity Multiplier 1.17 1.14 1.36 1.30 1.25 (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) Merge and Acquisition and Valuation – The case of Comeco 63 The equity multiplier of COMECO kept stable since 2007-201 and the capital structure was very efficient in managing its cost of debt efficiently, even though the firm had continue to increase its debt for two project which mentioned above.  Profitability ratios The profitability ratio which measures of how the firm generates earnings and runs its business. According to this ration on the table, the overall profitability ratio since 2007-2011 showed us the firm‟s performance has been fluctuating during this period, increased quickly from 2007-2009 and gradually reduced these years. The main reason was explained that the world oil price which went down deepest in 2009 compare the high growth rate consumption of petroleum product, the firm had increased revenue through sale capacity and reduced sale expense in order to achieve high growth in 2009. Since 2010, because of difficulties of the whole economy, tightened monetary policy of government and the increasing of world oil price up to 110.09 USD per barrel comparison 61.67 USD per barrel in 2009 (Source: BP Statistic 2012) which cause decreasing of the firm‟s performance in recent year. However, when compare to the performance in 2007 and 2008 when the world oil price was still lower than 2010 and 2011, it implied that Comeco still has high growth rate and would have an optimistic profitability position in future when the world‟s economy recovery. Table 5: Profitability ratio of COMECO compared in years Profitability ratios Profit margin = Net income / Sales 2007 2008 2009 2010 2011 0.73% 0.63% 2.24% 1.02% 0.70% Return on assets (ROA) = Net Income / Total asset 5% 6% 13% 8% 7.4% Return on equity (ROE) = Net income / total equity 5.33% 6.69% 18.26% 10.33% 9.30% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) Merge and Acquisition and Valuation – The case of Comeco 64 In general, there are many valuation methods such as Dividend Discount Model (DDM), Relative Model, Discount Cash Flow (DCF), but in fact, the valuation of COMECO in this thesis is mainly based on DCF model which can evaluate the cash flows of the corporation easily, more accurately than the others and this model bring the comprehensive analysis of business including fundamental factors consists of firm‟s core value, mainly operation actives and opportunities. The main reason here is that the firm has been listed since 2006 in which has no stable dividend policy, less public company in the retails petroleum market in Viet Nam and most of them are running by state-owned. Furthermore, the Viet Nam stock market was born 11 years ago and suffer Global Financial Crisis in 2008 which cause the stock price does not reflect the real value of listed securities and especially almost domestic investors have been investing based on their emotions. 5.2  Forecasting: Revenue & Cost of Goods Sold (COGS) forecasting: In Vietnam petroleum selling price is tightly managed and regulated by several governmental bodies, such as the Ministry of Finance and the Ministry of Industry and Trade. One of the most important legal document regulating petroleum trading activities is Decree No. 84/2009/ND-CP issued on October 15 2009, in effect from December 2009, and Circular 234 guiding the implementation of Decree No. 84. The base price formula is as follows: Base price = (CIF + Import tax + Special Consumption tax) * Exchange rate + Fixed cost margin + Price Stabilization Fund + Fixed profit margin+ VAT + fuel fees + Other Taxes and charges.) Merge and Acquisition and Valuation – The case of Comeco 65 The revenue of COMECO mainly comes from wholesale and retail of petroleum, lubricants through 33-strong petrol stations, which accounts more than 95% of total revenues of the corporation and 80% of profit and continue opening market by build more petrol station in order to increase capacity of retails and market share in Ho Chi Minh and neighborhood .The COGS accounted for nearly 95% of sale and income mostly relying on commission from distributors such as PETEC, SGP. COMECO has 33 strong petrol stations in Ho Chi Minh City where is highly development and consumption accounts more than 50 % of the country‟s demand, enjoy 14% of market share in Ho Chi Minh, just after Petrolimex, and compete with many strong distributors like PETEC, SGP, PVOIL. During the last 4 years, COGS accounts 94% to 97% of revenue because of the fluctuation of world oil price and import-tax which is affecting on the COGS. And as retails and wholesaler petroleum, the profit of COMECO mostly comes from the commission of selling product, around 600 VND-1,000 VND per litter, account 2%-3% of total revenue. Global fluctuations of oil price therefore have a big influence on COGS, commission and other petroleum suppliers, but in fact COGS of COMECO as retails petroleum would dominate high percentage of revenue, therefore, we forecast that COGS which equal 96 % of total revenue in next 10 years. Table 6: COGS forecast of COMECO in next 10 years COGS 2007 2008 2009 2010 2011 Revenue 2,087,941,306,742 3,071,594,898,848 2,821,219,829,270 3,616,801,420,380 4,732,648,392,681 COGS 2,015,793,743,705 2,958,247,829,488 2,658,098,188,270 3,469,540,156,193 4,600,725,559,266 96.50% 96.30% 94.20% 95.90% 97.20% Percentage (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) Average COGS: 96 percent of total Revenue. Merge and Acquisition and Valuation – The case of Comeco 66 In addition, the growth rate of revenue and COGS of COMECO since 20072011 which almost has a similar. So, the estimation growth of COGS which affect the revenue is used as indicator on firm‟s business. The world oil price is major determinant for the economic outlook, demand for products and growth rate COGS. The price is expected keep stable compare the high average price in 2011, around 110.09 USD per barrel in order to bring the estimation growth in next 10 years which cause no change in COGS. Merge and Acquisition and Valuation – The case of Comeco 67 Table 7: Comparison the annual growth rate of Revenue and Cost of Goods Sold History 2007 Revenue 2,087,941,306,742 2008 2009 2010 3,071,594,898,848 2,821,219,829,270 3,616,801,420,380 4,732,648,392,681 47% -8% 28% 31% 2,958,247,829,488 2,658,098,188,270 3,469,540,156,193 4,600,725,559,266 47% -10% 31% 33% Growth rate COGS 2,015,793,743,705 Growth rate 2011 (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) As a developing country, Vietnam‟s consumption of petroleum products on average growth by 7% each year in the past 10 years, this is a high rate compared to the rest of the world: global consumption growth rate in 2010 and 2011 was 3.1% and 1%, with countries in the Asia-Pacific region seeing growth at 6 % and 3% and (source: BP statistics 2012). In 2010 and 2011, Vietnam oil consumption will increase annually 6%-8%, reflecting the economic growth and industrial developments within Southeast Asia. In the period from 2000 to present, world oil prices have shown the price continuously broken new ceilings to establish his price in 2007 and 2008 due to the global economic crisis and political instability of the oil-exporting countries. Oil prices reached to the highest level on July 2008, about 147 USD per barrel and decreased at the end of 2008 to 33 USD per barrel. In 2009, as being impacted by the economic crisis oil prices fell in the lowest of 32.7 USD per barrel on January 2009 and annual averaged 62 USD per barrel. In 2010, world oil prices rise in March 2010 to 94USD per barrel and decreased in the third quarter of 2010, average prices maintained at 79.5 USD per barrel. In 2011, the average price is 110,9USD per barrel due to unstable performance in oil-exporting countries. Merge and Acquisition and Valuation – The case of Comeco 68 Figure 11: Viet Nam Real GDP growth rate and Inflation rate. Looking through the past, COMECO has increased its revenue at annual rate of 25% in 2007-2011, compared to the annual growth of oil consumption in Viet Nam of 6%-8% per year. In addition, since the world economy has recovered slowly after the Global recession in 2008 and European sovereign debt crisis in 2010 with stable rates. In 2009, Viet Nam‟s GDP growth rate was only 5.32% because the consequences of the crisis in 2008 which had a serious impact on the macro economy and caused a reduction in activities of many industries together with a dramatically increase in the average consumer price (CPI) and inflation of more than 20% in 2008. Vietnam has been struggling to keep inflation under control but 2011 inflation was still at high level of 18.58%, the GDP in 2011 reached 5.9% and is forecasted to reduce to 5.4% in 2012. Furthermore, the State Bank of Viet Nam is now loosening monetary policy but subdued global economic performance will also cause the external demand to weaken in 2012, which is forecasted as follows. Table 8: The growth rate COGS, Crude oil and Exchange rate in years 2007 2008 2009 2010 2011 Average COGS 2,015,793,743,705 2,958,247,829,488 2,658,098,188,270 3,469,540,156,193 4,600,725,559,266 47% -10% 31% 33% 97.26 61.67 79.50 110.90 (VND) Growth rate Crude Oil Price 72.39 25% Merge and Acquisition and Valuation – The case of Comeco 69 (USD) Growth rate 34% -37% 29% 39% 17,433 18,472 19,488 20,649 8% 6% 6% 6% 17% Exchange rate 16,100 (VND) Growth rate 6% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) As per the above table, it is noted that COGS of a local petrol company is affected by three factors, growth in world oil prices, growth in quantity demanded and the exchange rate changes. Estimation of COGS is therefore depends on estimation of the three factors. COGS = World oil prices/barrels * Sales (barrel) Quantity * Exchange rate. The assumption that world oil price is to keep stable compared to the high average price in 2011, which is around 110.09 USD per barrel, will result in almost no growth in world oil prices in the next 10 years. Secondly, the exchange rate of VND / USD is expected to keep stale at 6 percent in the next 10 years under the successful monetary control policies with more stable inflation rate (of about 8% per year, while USD inflation rate is expected to be 2% per year). Thirdly, the growth of sales units of COMECO is expected to maintain at the growth rate of 14% per year. As a result, COGS of COMECO is expected to grow as presented in the Table... Merge and Acquisition and Valuation – The case of Comeco 70 Table 9: Revenue and COGS forecast of COMECO in next 10 years (VND) Revenue & COGS Forecast Revenue COGS/ evenue COGS Growth rate 2012F 2013 F 2014 F 2015 F 2016 F 5,463,361,601,628 6,228,232,225,856 7,100,184,737,476 7,810,203,211,224 8,591,223,532,346 96% 96% 96% 96% 96% 5,244,827,137,563.24 5,979,102,936,822.09 6,816,177,347,977.18 7,497,795,082,774.90 8,247,574,591,052.39 14% 14% 14% 10% 10% 2017F 2018F 2019F 2020F 2021F 9,450,345,885,58 10,395,380,474,1 11,227,010,912,0 12,125,171,785,03 13,095,185,527,83 1 39 70 6 9 96% 96% 96% 96% 96% 9,072,332,050,15 9,979,565,255,17 10,777,930,475,5 11,640,164,913,63 12,571,378,106,72 7.63 3.40 87.30 4.30 5.00 10% 10% 8% 8% 8% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011)  Selling expenses & General and administration expenses forecasting: In the last four years, the selling expense and administrative expense had decreased after picked up around 3.6% and 0.44% of total revenue in 2009 which have lowest average crude oil price. Since 2010 and 2011, such expense decreased slightly when the crude oil price skyrocketed in 2011, around 110 USD per barrel. But when the economy is forecasted to recover slowly since 2012 because of tightened monetary policy to control inflation of government, and crude oil price forecasted keep stable price compare to 2011, the selling and the administrative expense is Merge and Acquisition and Valuation – The case of Comeco 71 estimated to growth at the average of in last four years (2007-2011) in comparison to revenue. Table 10: Selling Expense and Administrative Expense of COMECO forecast in the next 10 years (VND). Selling & Administrative 2012F 2013F 2014F 2015F 2016F 5,463,361,601,62 6,228,232,225,85 7,100,184,737,47 7,810,203,211,22 8 6 6 4 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 2.40% 2.40% 2.40% 2.40% 2.40% 16,936,420,965 19,307,519,900 22,010,572,686 24,211,629,955 26,632,792,950 0.31% 0.31% 0.31% 0.31% 0.31% Expense Revenue Selling expenses SE / Sale 8,591,223,532,346 Administrative expense AE / Sale Merge and Acquisition and Valuation – The case of Comeco 2017F 2018F 2019F 72 2020F 2021F 9,450,345,885,581 10,395,380,474,139 11,227,010,912,070 12,125,171,785,036 13,095,185,527,839 226,808,301,254 249,489,131,379 269,448,261,890 291,004,122,841 314,284,452,668 2.40% 2.40% 2.40% 2.40% 2.40% 29,296,072,245 32,225,679,470 34,803,733,827 37,588,032,534 40,595,075,136 0.31% 0.31% 0.31% 0.31% 0.31% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011)  Current Assets Forecasting:  Cash balance liquidity forecasting: The cash ratio of COMECO has been decreased since 2007 till 2011 because of the investment in purchasing inventory, opening more petrol stations, wide storage system, office buildings for lease and other constructions. Besides, even though the rate of cash to sale was decreased quickly in last four years, it is also estimated to increase in next year because of completed construction of a building located in Ho Chi Minh with total capital investment of around 120 billion VND, and in order to increase ability to spend for emergency situation in the future. The rate of cash to sales is estimated to increased slightly in 2012 but may not reach the rate in 2007 due to whole economy is still facing many difficulties with slow recovery and company still opens market through investing in new petrol stations. Table 11: Cash of COMECO forecast in the next 10 years (VND) History Revenue Cash 2012F 2013F 2014F 2015F 2016F 5,463,361,601,628 6,228,232,225,856 7,100,184,737,476 7,810,203,211,224 8,591,223,532,346 43,706,892,813 56,676,913,255 71,001,847,375 78,102,032,112 85,912,235,323 Merge and Acquisition and Valuation – The case of Comeco Cash / Revenue 0.8% 0.9% 1.0% 73 1.0% 1.0% FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 9,450,345,885,581 10,395,380,474,139 11,227,010,912,070 12,125,171,785,036 13,095,185,527,839 94,503,458,856 103,953,804,741 112,270,109,121 121,251,717,850 130,951,855,278 1.0% 1.0% 1.0% 1.0% 1.0% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011)  Inventory Forecasting: Based on historical data, the inventory, which consists of goods in transits, accounts high percentage in year 2008-2009-2010 but the actual commodity is rising up gradually because of the difficulty of whole economy, which reduces the demand of energy consumption. Therefore, we assume that in the next ten years, the good in transits would be absent and the growth of inventory should be based on growth of actual goods. In addition, the world economy will recover slowly in 2012 which would also led to high amount of inventory in history and continues to grow in the next 10 years at average rate in the last 4 years (2007-2011). Table 12: Inventory Forecasting of COMECO in next 10 years (VND) History FY 2007 Inventory FY 2008 22,724,259,725 Goods in transits Goods 19,045,746,860 Revenue Inventory Inventory / FY 2010 FY 2011 51,726,474,594 174,856,909,492 83,324,158,476 28,160,508,385 148,949,765,610 50,078,946,713 22,258,916,059 23,225,652,281 33,153,576,940 42,067,759,300 16.9% 4.3% 42.7% 26.9% Growth rate of Goods Forecast FY 2009 42,122,346,995 2012F 2013F 2014F 2015F 2016F 5,463,361,601,62 6,228,232,225,85 7,100,184,737,47 7,810,203,211,22 8,591,223,532,34 8 6 6 4 6 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 2.4% 2.4% 2.4% 2.4% 2.4% Merge and Acquisition and Valuation – The case of Comeco 74 Revenue 2017F 2018F 2019F 2020F 2021F 9,450,345,885,581 10,395,380,474,139 11,227,010,912,070 12,125,171,785,036 13,095,185,527,839 226,808,301,254 249,489,131,379 269,448,261,890 291,004,122,841 314,284,452,668 2.4% 2.4% 2.4% 2.4% 2.4% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011)  Account Receivable forecasting: The account receivable account high percentage compare to the revenue and total assets. In recent years, due to difficulties in corporation‟s operating activities, Comeco would decided to tighten its account receivables and the receivable of the firm in next 10 years would are forecasted which equal to 2% by average of growth rate of Account receivable compare to sale. Table 13: Forecast of Account Receivable of COMECO in the next 10 years (VND) Forecast 2007 2008 2009 2010 2011 2012F 2,087,941,306, 3,071,594,898, 2,821,219,829, 3,616,801,420, 4,732,648,392, 5,463,361,601, 742 848 270 380 681 628 59,440,557,29 44,258,007,17 80,264,567,20 101,900,717,4 95,207,785,25 109,267,232,0 Receivable 0 9 6 21 9 32 AR/ Rever 3% 1% 3% 3% 2% 2% Sale Account 2013F 2014F 2015F 2016F 2017F 6,228,232,225,856 7,100,184,737,476 7,810,203,211,223 8,591,223,532,346 9,450,345,885,580 124,564,644,517 142,003,694,749 156,204,064,2248 171,824,470,646 189,006,917,711 2% 2% 2% 2% 2% Merge and Acquisition and Valuation – The case of Comeco 2018F  2019F 2020F 75 2021F 10,395,380,474,139 11,227,010,912,070 12,125,171,785,035 13,095,185,527,838 207,907,609,482 224,540,218,241 242,503,435,700 261,903,710,556 2% 2% 2% 2% Other current assets: The current assents of COMECO are mainly for opening distribution through new building the petrol stations. COMECO is planning to increase from 39 stations in 2011 to 60 stations in 2020, which lead the current assets increase in next 10 years. The other current asset which is estimated comparison to the revenue during 20072011 and equal to 0.2% in next 10 years. Table 14: Forecast of Other Current Asset of COMECO in the next 10 years (VND) Other Current Assets Forecast 2007 2,087,941,306,742 Revenue Other Current Assets Current 2008 Assets 2009 2010 2011 3,071,594,898,848 2,821,219,829,270 3,616,801,420,380 4,732,648,392,681 7,711,978,973 10,006,686,442 5,703,392,974 8,740,376,770 7,881,461,919 0.37% 0.33% 0.20% 0.24% 0.17% / Revenue 2012F 2013F 2014F 2015F 2016F 5,463,361,601,628 6,228,232,225,856 7,100,184,737,476 7,810,203,211,224 8,591,223,532,346 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 0.20% 0.20% 0.20% 0.20% 0.20% 2017F 2018F 2019F 2020F 2021F 9,450,345,885,581 10,395,380,474,139 11,227,010,912,070 12,125,171,785,036 13,095,185,527,839 18,900,691,771 20,790,760,948 22,454,021,824 24,250,343,570 26,190,371,056 0.20% 0.20% 0.20% 0.20% 0.20% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011)  Fixed Assets: Merge and Acquisition and Valuation – The case of Comeco 76 Since 2007-2011, the fixed asset accounted 30% of total asset and continue increasing until 2010, since COMECO has been investing most of capital for many project like opening more petrol station, building which operating in 2011 and especially a ware house in Thu Duc will commence in use in 2014. As per COMECO‟s announcement, firm indentifies the core value of business in retail and wholesaler of petroleum in next 10 year by increasing up to 60 petrol station in 20152020 and commence using ware house storage with terminal can receive vessel 25,000 tons. Our assumption that fixed asset will increase annually 33% and 20% to 2014 for the ware house storage in Thu Duc, and after that gradually increase investment for opening distribution in retails petroleum through launch new petrol station. Merge and Acquisition and Valuation – The case of Comeco 77 Table 15: Fixed Assets forecasting of COMECO in the next 10 years (VND) . II. Fixed assets 2007 2008 93,235,305,092 98,553,003,083 20,614,407,076 18,015,301,438 2009 2010 2011 122,704,224,19 194,687,719,87 214,936,162,08 7 2 7 109,143,006,98 110,869,827,08 9 8 145,615,592,34 151,826,178,54 9 2 20,739,273,445 1. Tangible fixed assets 45,499,794,321 46,305,492,002 53,092,776,438 + Cost Growth Rate + Accumulated 2% 15% 174% 4% (24,885,387,24 (28,290,190,56 (32,353,502,99 (36,472,585,36 (40,956,351,45 5) 4) 3) 2) 4) -7% -9% -8% -3% (3,404,803,319) (4,063,312,429) (4,119,082,369) (4,483,766,092) depreciation Depreciation rate Depreciation expense 3. Intangible fixed assets 11,697,048,222 11,439,556,542 11,182,064,862 20,367,220,798 19,834,700,541 + Cost 12,874,584,020 12,874,584,020 12,874,584,020 22,500,584,020 22,500,584,020 0% 0% 75% 0% (1,435,027,478) (1,692,519,158) (2,133,363,223) (2,665,883,479) -2% -2% -3% -2% (257,491,680) (257,491,680) (440,844,065) (532,520,256) 69,098,145,103 90,782,885,890 65,177,492,086 84,231,634,458 13% 31% -28% 29% Growth rate + Accumulated (1,177,535,798) amortization Depreciation rate Depreciation expense 4. Construction in progress 60,923,849,794 Y-O-Y 2012F 2013F 2014F 2015F 2016F 225,269,891,982 236,744,285,598 249,481,172,113 255,965,200,054 265,402,672,045 112,388,088,874 114,027,811,602 115,798,712,148 110,060,994,378 104,093,767,896 163,972,272,825 177,090,054,651 191,257,259,024 198,907,549,384 206,863,851,360 8% 8% 8% 4% 4% (51,584,183,952) (63,062,243,050) (75,458,546,875) (88,846,555,007) (102,770,083,464) -7% -7% -7% -7% -7% (10,627,832,498) (11,478,059,098) (12,396,303,826) (13,388,008,132) (13,923,528,457) 19,384,688,861 18,934,677,180 18,484,665,500 18,034,653,819 23,209,788,144 22,500,584,020 22,500,584,020 22,500,584,020 22,500,584,020 28,125,730,025 Merge and Acquisition and Valuation – The case of Comeco 78 0% 0% 0% 0% 25% (3,115,895,159) (3,565,906,840) (4,015,918,520) (4,465,930,201) (4,915,941,881) 2% 2% 2% 2% 2% (450,011,680) (450,011,680) (450,011,680) (450,011,680) (450,011,680) 93,497,114,248 103,781,796,816 115,197,794,465 127,869,551,857 138,099,116,005 11% 11% 11% 11% 8% 2017F 2018F 2019F 2020F 2021F 269,682,171,184 274,597,268,044 280,208,739,907 286,582,623,418 293,790,651,216 97,887,852,355 91,433,700,193 84,721,381,944 77,740,570,965 70,480,527,547 215,138,405,414 223,743,941,631 232,693,699,296 242,001,447,268 251,681,505,159 4% 4% 4% 4% 4% (117,250,553,059) (132,310,241,438) (147,972,317,352) (164,260,876,303) (181,200,977,612) -7% -7% -7% -7% -7% (14,480,469,595) (15,059,688,379) (15,662,075,914) (16,288,558,951) (16,940,101,309) 22,647,273,544 22,084,758,943 21,522,244,343 20,959,729,742 20,397,215,142 28,125,730,025 28,125,730,025 28,125,730,025 28,125,730,025 28,125,730,025 0% 0% 0% 0% 0% (5,478,456,482) (6,040,971,082) (6,603,485,683) (7,166,000,283) (7,728,514,884) 2% 2% 2% 2% 2% (562,514,601) (562,514,601) (562,514,601) (562,514,601) (562,514,601) 149,147,045,286 161,078,808,908 173,965,113,621 187,882,322,711 202,912,908,528 8% 8% 8% 8% 8% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) Table 16: Capital Expenditures and Depreciation forecasting of COMECO in the next 10 year (VND) Forecast 2010 2011 2012F 2013F Capital Expenditures 76,543,422,107 25,264,728,565 21,411,574,074 23,402,464,393 Depreciation (4,559,926,434) (5,016,286,348) (11,077,844,178) (11,928,070,778) 2014F 25,583,202,022 2015F 20,322,047,752 2016F 23,811,012,129 2017F 19,322,483,335 Merge and Acquisition and Valuation – The case of Comeco (12,846,315,506) (13,838,019,812) 2018F 2019F 79 (14,373,540,137) (15,042,984,196) 2020F 2021F 20,537,299,839 21,836,062,378 23,224,957,062 24,710,643,708 (15,622,202,979) (16,224,590,515) (16,851,073,551) (17,502,615,909) (Source: Author‟s calculation;)  Account Payable Forecasting: Table 17: Account Payable Forecasting of COMECO in the next 10 years (VND) Account Payable 2007 Revenue Account Payable 2009 2010 2,087,941,306,742 3,071,594,898,848 2,821,219,829,270 3,616,801,420,380 38,901,073,485 32,912,170,377 59,877,802,559 76,727,192,400 1.9% 1.1% 2.1% 2.1% Account Payable / Revenue 2011 2008 2012F 2013F 2014F 2015F 2016F 5,463,361,601,62 6,228,232,225,85 7,100,184,737,47 7,810,203,211,22 8,591,223,532,34 8 6 6 3 6 51,709,554,775 92,877,147,227 105,879,947,839 120,703,140,537 132,773,454,590 146,050,800,049 1.1% 1.7% 1.7% 1.7% 1.7% 1.7% 4,732,648,392,681 2017F 2018F 2019F 2020F 2021F 9,450,345,885,580 10,395,380,474,139 11,227,010,912,070 12,125,171,785,035 13,095,185,527,838 160,655,880,054 176,721,468,060 190,859,185,505 206,127,920,345 222,618,153,973 1.7% 1.7% 1.7% 1.7% 1.7% (Source: Author‟s calculation; COMECO, Annual Report 2007-2011) Merge and Acquisition and Valuation – The case of Comeco 80 Table 18: Change in Net Working Capital forecasting of COMECO in the next 10 years (VND) 2012F 2013F 2014F 2015F Current asset 295,021,526,488 343,175,595,645 397,610,345,299 437,371,379,829 Change in NWC 23,636,867,358 35,151,268,545 39,611,556,956 27,690,720,476 2016F 2017F 2018F 2019F 2020F 2021F 481,108,517,811 529,219,369,593 582,141,306,552 628,712,611,076 679,009,619,962 733,330,389,559 30,459,792,524 33,505,771,776 36,856,348,954 32,433,587,079 35,028,274,046 37,830,535,969 (Source: Author‟s calculation) Valuation: The Free Cash Flow to Firm (FCFF) values the corporation‟s intrinsic value with the calculation of Weight Average Cost of Capital (WACC) being used as discount rate in order to convert the future cash flow into the present value. Especially, cost of debt and equity of the corporation are calculated by the following formula in which the most important factors is the WACC. To come up with an estimation of WACC, the first step is to estimate weight of deb and equity. Based on the debt and equity in 2011: Equity (E) = 319,226,656,439 (VND) and Debt (D) = 32,837,463,378 (VND) Cost of Debt:  COMECO’s cost of debt in 2011: = Loan interest expenses / Average debt of COMECO in 2010-2011 = 6,658,946,569/ 32,837,463,378= 0.203 Merge and Acquisition and Valuation – The case of Comeco 81  RD = 20.3% Based on the cost of debt calculation above and compared to the market interested rate in Viet Nam, It is extremely high and inappropriate because of the high inflation rate and the tightened monetary policy in 2011, which caused up high surge of firm‟s loan in this year. An application of the 2011 interest rate for the valuation may lead to inappropriate debt interest rate in the future. In addition, since 2012 the State Bank of Viet Nam (SBV) was loosening monetary policy and it was expected that the interest rate for enterprise to be cut back. The announced interest rate for loan of all commercial banks in Viet Nam will be the cost of debt of firm at the current moment. Finally, based on Vietcombank (VCB)‟s announced interest rate for loan for corporation like COMECO in December 2012, which is about 14 percent, the estimated cost of debt of firm in next 10 years would be 14%.  RD = 14 %  COMECO’s corporate tax rate (Tc) 2011: In general, the corporate tax rate applied for enterprise in Viet Nam which equals to 25%. Therefore, COMECO will have to pay 25% of its profit before tax as regulation. Tc = 25% Cost of Equity: 5.3.1 Direct Method We estimated a beta coefficient by running the regression between the excess returns of COMECO is trading on Ho Chi Minh Stock Exchange (HOSE) and VNIndex market price provided public in HOSE since 2006-2012 based on historical data provided as following formula: Merge and Acquisition and Valuation – The case of Comeco 82 Therefore, the cost of equity based on CAPM method is calculated by several main components including o Rf: Government bond 5 yield announced by Bloomberg on December, 2012 was 9.73% o (Rm-Rf): The market premium was taken from Country Default Spread and Risk Premium (updated November, 2012 which is updated on Damodaran's website) was 11% o Beta= 0.454708 (Appendix) o Cost of Equity WACC  rE  15% = 9.73% + 0.454708 x 11% = 15 % E D  rD  (1  Tc)  ED ED × + 14% × (1-25%) × = 14.3% 5.3.2 Indirect Method: Furthermore, compared to the development of stock market in other countries, Ho Chi Minh Stock Exchange (HOSE) was emerging stock market, firstly launched in July 2000, and now still nascent which is very much in transparent. So, using the direct method to estimate beta has significant weakness, which mainly is based on short-term historical data. Merge and Acquisition and Valuation – The case of Comeco 83 As a result, a second method is applied. The β of COMECO will be estimated using information given on a "similar" enterprise in a developed market like the US market with an assumption that the more developed market's data allow to estimate a more reliable risk for a company. By collecting beta of Oil/Gas Distribution industry in US, cost of equity of COMECO will be estimated as follows. As per Damodaran's website, the unlevered beta of U.S steel industry is 0.64 updated to December, 2012, the COMECO‟s beta is recalculated based on the US industry unlevered beta and COMECO‟s financial leverage as in the following formula: Where, βU: Unlevered beta of Oil/Gas Distribution βl: Beta of COMECO Tc : The corporation tax rate Indirect Method Beta Calculation Beta 0.700 Oil/Gas Distribution (Unlevered) 0.65 Tc 25% Debt / Equity 2011 0.10 Debt 2011 Equity 2011 36,963,916,950 357,835,518,719 Therefore, beta of COMECO in the indirect method is 0.70 Merge and Acquisition and Valuation – The case of Comeco 84 In addition, the US risk free rate in this method is estimated to be about 1.76 per cent, which is the US bond yield 10 years published on Bloomberg on 23 December 2012, The US‟s risk premium is 6 per cent which is published in Country Default Spread and Risk Premium (updated December, 2012) The VietCombank (VCB)‟s interest rate of deposit for 5 years in VND and USD, around 10.50 per cent and 2 per cent and the risk of difference in exchange rate is calculated by 8.5 percent, so called Exchanged risk premium. Cost of equity calculated by indirect method is defined as: E [RA] VN = E[Rsame industry] US+ RPC + RPE Where, E [RA] VN: Expected return on equity of firms operating in Vietnam E[R same industry] US: Expected return on equity of firms in same industry in US used as standard measurement RPC: Country risk premium RPE: The exchange rate risk premium Risk free rate-US Government 10 year 1.76% Market risk premium 1/11/12 5% Beta 0.69 Country risk Premium 6% On Bloomberg updated 23/12/2012 Merge and Acquisition and Valuation – The case of Comeco Exchange rate premium VND interest rate depoist 5 year 85 8.50% 10.50 23/12/2012, % interest Vietcombank‟s 23/12/2012 USD intrest rate deposit 5 years 2% Exchanged rate risk premium 8.5% Cost of Equity 19.7 %  ,Vietcombank‟s interest The market risk premium and country risk premiums were taken from Country Default Spread and Risk Premium (updated November, 2012) WACC  rE  19.7% E D  rD  (1  Tc)  ED ED × + = 18.8% COMECO Average WACC WACC direct method 14.3% WACC indirect method 18.8% Average WACC 16.5% 14%× (1-25%) × Merge and Acquisition and Valuation – The case of Comeco 86 Long term growth rate: As an emerging market, Vietnam‟s consumption of petroleum products on average grows by 7% each year in the past 5 years, this is a high rate compared to the rest of the world: global consumption growth rate in 2010 and 2011 was 3.1% and 1%, with countries in the Asia-Pacific region seeing growth at 6 % and 3% and (source: BP statistics 2012). In 2010 and 2011, Vietnam oil consumption will increase annual 6%-8% every year, reflecting the economic growth and industrial developments within Southeast Asia. And as mentioned, when the world economy recovered slowly, the GDP of Viet Nam is forecasted to be 5.4 per cent in 2012, and the inflation will average 9.8 percent in 2012 after high inflation in 2011, which around 18.7 per cent because of high global commodity prices and easy using the availability of credit. In addition, the SBV devalued the VND four times in the period 2009-2011, which caused the cumulative of falling the its value against the US dollar around 6 percent. So, it is appropriate to assume that COMECO will increase at 14 percent in next 3 years. Later on, a narrow current-account deficit will reduce the pressure on the local currency in the future, the inflation slows further and relax the monetary policies system to be issued in next 5 years, which will lead to the recovery of Viet Nam‟s economy growth, which is expected 7 percent. As a result, the firm is expected to grow more slowly at 10 percent during 2016-2018 because of high growth to drive high oil consumption in Viet Nam. This gradually points to an average of 8 percent growth rate between 2018 and 2021 and reach the stable growth of 6 per cent till 2021 close to average real GDP growth of 6.7 percent since 2021. The estimation of COMECO‟s FCFF is done for the period of 10 years from 2013 to 2021 before a terminal value is estimated. The whole valuation calculation is shown in the following table, with the use of the average WACC. Merge and Acquisition and Valuation – The case of Comeco (VND) 2012F 2013F 2014F 2015F 2016F 70,477,364,66 80,344,195,71 91,592,383,11 100,751,621,42 110,826,783,56 1 4 3 5 7 52,858,023,49 60,258,146,78 68,694,287,33 75,563,716,069 83,120,087,675 6 5 5 11,077,844,17 11,928,070,77 12,846,315,50 13,838,019,812 14,373,540,137 8 8 6 21,411,574,07 23,402,464,39 25,583,202,02 20,322,047,752 23,811,012,129 4 3 2 23,636,867,35 35,151,268,54 39,611,556,95 27,690,720,476 30,459,792,524 8 5 6 18,887,426,24 13,632,484,62 16,345,843,86 41,388,967,652 43,222,823,160 2 5 3 16.5% 16.5% 16.5% 16.5% 16.5% NOPAT or EBIT*(1-t) less: Tax Add: Depreciation Less: Capital Expenditure Less: Change in working capital Free Cash Flow To Firm (FCFF) WACC (Direct method) 2017F 87 2018F 2019F 2020F 2021F 121,909,461,924 134,100,408,116 144,828,440,766 156,414,716,027 168,927,893,309 91,432,096,443 100,575,306,087 108,621,330,574 117,311,037,020 126,695,919,982 15,042,984,196 15,622,202,979 16,224,590,515 16,851,073,551 17,502,615,909 19,322,483,335 20,537,299,839 21,836,062,378 23,224,957,062 24,710,643,708 33,505,771,776 36,856,348,954 32,433,587,079 35,028,274,046 37,830,535,969 53,646,825,528 58,803,860,274 70,576,271,632 75,908,879,464 81,657,356,214 16.5% 16.5% 16.5% 16.5% 16.5% 21,406,494,790 20,132,959,659 20,732,933,442 19,133,520,118 17,660,291,461 FCFF WACC ( Average) Long-term growth rate 16.5% 6% Present value of the next 10 years cash flow 178,167,627,234 Terminal value 820,705,224,514 Present value of terminal value 177,496,482,137 Merge and Acquisition and Valuation – The case of Comeco Total company present value 355,664,109,370 Less: Net Debt 36,963,916,950 Add: Non-operating assets 62,315,031,000 Construction Progress 59,000,000,000 Value of equity Outstanding numbers of shares Present stock price (VND) 88 440,015,223,420.462 13,750,875 31,999 Based on average of WACC, the intrinsic value of COMECO stock price: PCOM= 31,999 (VND) Merge and Acquisition and Valuation – The case of Comeco 89 Chapter VI: Acquisition of Comeco by PVOil 6.1 Valuation of COMECO as if it were merged into PVOIL: To argue for an appropriate offer price for COMECO, it is necessary to look at the value of COMECO as if it were merged into PVOIL. In this part, the valuation is repeated with the changes in assumption to reflect the fact that COMECO were a subsidiary of PVOIL after it were fully merged into PVOIL and operated as a fully controlled strategic business unit. Petro Viet Nam Oil Corporation (PVOIL) is a subsidiary of Viet Nam National Oil and Gas Group (Petro Vietnam),which was established in June 2008 by the consolidation of Petro Vietnam Trading Company (Petechim) and PetroViet Nam Oil Processing and Distribution Company (PDC). The core business of PVOIL is the main downstream, which consists of exporting crude oil, importing and trading petroleum product, engineering equipment and infrastructure investment, distribution of petroleum in domestic market. In the downstream sector, PVOIL also has a condensate manufacture company in which it can produce the petroleum products flexibly for the domestic market instead of importing. Furthermore, the most advantage of PVOIL is the main distributor for Dung Quat Oil Refinery in the domestic, so that can compete with others fuel oil distributors in Vietnam. After 4 years of development, PVOIL has extensively grown, expanded its activities throughout domestic and abroad, accounted 20 per cent of market share with more than 2000 whole-sale and retail stations network in domestic. Currently, PVOIl is continuing open more market share to compete with other fuel distributor, especially Petrolimex state-owned fuel oil distributors‟ accounts 60 per cent of the Merge and Acquisition and Valuation – The case of Comeco 90 country's total petroleum distribution market. And COMECO is one of target that PVOIl aims to acquire because of the wide petrol station network in Ho Chi Minh, about 33 stations in convenient location and continue to build up more in future. Because of the limited license to build new petrol stations in Ho Chi Minh and the high cost of investment in such petrol for purchasing or lending convenient landing located in the center, through M&As is the best way to expanding the retails distribution network. And until now, COMECO is the firm which has strong network in retails petroleum in Viet Nam and listed in HOSE. Along with the impact from the global economic crisis in 2008, the tightening monetary policy, high inflation, credit crunch which leaded the high interest rate caused many companies hardly looking for capital and decrease of stock price list in Viet Nam Stock market since 2010 bring the opportunities for the investors. Especially, COMECO currently holds many large fixed assets system in the center such as COMECO high quality office building in Dien Bien Phu Stress, Ho Chi Minh, wide storage system with international terminal can receive vessel more than 25,000 metric ton and capacity around 60,000 cubic meter located in Nhon Trach Dong Nai and Thu Duc. This is an important factor to a distributor in expanding wholesale and retail system because of the strategic location will help PVOIL improve the control of distribution network in the Southern of Viet Nam, reduce the cost of selling and administration , improve stabilization of price, thus having an advantage over other competitors. In case of acquisition, COMECO would be subsidiary of PVOIL who supplier directly petroleum product instead of purchasing from others distributor such as PETEC, SAIGON PETROL, PETROLIMEX. The COGs still accounts 96 per cent of revenue, income heavily relying on commission for importers and the growth rate keep stable in case of valuation COMECO running individually. However, the cost of Merge and Acquisition and Valuation – The case of Comeco 91 Selling and Administration expense will be decrease slightly compare to the average of last four years (2007-2011) in comparison to revenue. FCFF Assumptions WACC ( Indirect method) Long-term growth rate Present value of the next 10 years cash flow Terminal value 16.5% 6% 342,589,473,445 1,313,771,912,187 Present value of terminal value 284,133,554,628 Total company present value 626,723,028,074 Less: Net Debt 36,963,916,950 Add: Non-operating assets 62,315,031,000 Construction Progress 59,000,000,000 Value of equity Outstanding numbers of shares Present stock price (VND) 711,074,142,123.741 13,750,875 51,711 The valuation and calculation as stand-alone firm, which leading the result is the merged value of calculation. PCOM= 51,711 (VND). All valuation calculations relating to the value estimated for COMECO as if a merged firm is presented in the Appendix... Merge and Acquisition and Valuation – The case of Comeco 92 Chapter VII: Conclusions and Recommendations Since the middle of 2011, the competition of acquisition COMECO between PVOIL and SGP has been hostile when both of firms try to raise ownership of COMECO by continuously register to purchase stocks in HOSE. The ownership of PVOIL and SGP had risen up to 31.4 percent and 26 per cent, respectively. Both firms have two representatives in Board of Director of COMECO in April 2012. In addition, PVOIL has advantage over SGP when PETEC, who currently has 476,000 share equivalents 3.4 per cent, belongs to National Oil Corporation of Viet Nam (PVN). This amount of share can be transferred to PVOIL to increase the competitiveness of PVOIL, not only competes against SGP, but also control over the management of COMECO. The acquisition by PVOIL can produce synergies value for both firms. Specifically, the benefit of the acquisition to each parties is to analyze as below. Merge and Acquisition and Valuation – The case of Comeco COMECO’s Benefits - PVOIL’s benefits COMECO has cost synergy – easy - increasing Chi Minh city the power of Ensuring the stable source of input and output products, reduce expense, the selling expense and risk of world gasoline administrative downtrend price and having an Easy to access the capital for advantage over its competitors in investing in many projects such as developing distribution network. - Petrol Expanding more storage system and distribution network through stations. This is a valuable benefit the in consideration of high interest improve competitiveness by cost rate and credit crunch since 2010. saving of transportation and ware Increasing business performance house. and management by applying - COMECO‟s system to Taking advantage of experience advanced know –how in sale of COMECO in developing retail administration by PVOIL. network Expand the market through PVOIL‟s distribution network and increase competitiveness over PETROLIMEX - - Cost saving is to reduce financial Dong Nai, Nhon Trach, - Acquiring wide retail network to directly access customers in Ho Ware house system storage in - - to access the based price to , purchasing petroleum products, - 93 Ensure the availability of product Merge and Acquisition and Valuation – The case of Comeco in distribution maintaining network the 94 and storage performance. - Improve the ability of management and business in oil storage system because of high demand storage of distributors‟ petroleum of PVOIL. Figure 12: the benefits of COMECO and PVOIL The valuation of COMECO in two scenarios, as a stand-alone firm and as a merged-firm, shows that the merged firm value (which is 31,999 VND per share) of COMECO is 1.6 times higher than the stand alone value (which is 51,177 VND per share). Before the announcement of the merger and acquisition, prices of COMECO fluctuated within the band of 27,000 to 32,000 VND. After the announcement of the M&A transaction in November 2011, the prices still maintain at prices from 31,000 to 37,000 in the period of November 2011 to Mid of 2012. It is questionable why afterannouncement price of COMECO has not successfully reached the estimated merged price of 52,000 VND. To understand clearly the transaction, it is worthy to learn about the transaction. Currently, PVOIL and SGP are largest major shareholders, which hold 36 percent and 31 percent outstanding shares, respectively; Sai Gon Thuong Tin Commercial Joint Stock Bank (Samcombank) holds 4.91 per cent, Saigon Securities Inc. (SSI- HOSE) holds 5 percent and BOD of COMECO hold about 15 per cent. Sacombank and SSI (together hold 9.91 percent) are considered long-term investors, Merge and Acquisition and Valuation – The case of Comeco 95 who are not expected to sell shares to the acquirers. Therefore, the only challenging transaction for PVOIL is to successfully acquire shares from SGP. To acquire the shares from SGP, PVOIL actually faces another difficulty. Similar to PVOIL, SGP has 2 representatives on the BOD of COMECO; the decision to acquire COMECO is therefore 50-50 chance because COMECO has only 5 members in the BOD. Theoretically, if PVOIL could successfully acquire the shareholding of 9.91 percent hold by STB and SSI, and hold 51 % of shares afterward, this level of ownership still does not help PVOIL to have full control over the COMECO. There are two solutions to the situation, PVOIL needs to either purchase the ownership currently hold by the management of COMECO (who together hold 10%) or purchase the ownership by the SGP (who holds 34%). In either case, the successful offer price is expected to approximately reach the COMECO‟s merged value of 52.000 VND per share. The reason why after-announcement prices have not reached to 52,000VND per share is because PVOIL has not tried to directly offer to either the COMECO management or the SGP, it actually started to acquire through the open market transaction, which is to purchase shares on stock market and not through private placement. In fact, the interviews with PVOIL key executives have shown that PVOIL is not in a hurry to complete the transaction. With respect to economic recession going on in Vietnamese economy, it is understandable why there is some hesitation to acquire the target company and expand the market. PVOIL also is waiting for an approval to increase charter capital, which is an important source of funds to help the company reap the benefits from the acquisition. Merge and Acquisition and Valuation – The case of Comeco 96 Finally, the story about the acquisition is quite meaningful and helps to explain the changes in stock prices of COMECO before and after the announcement of the merger and acquisition. Merge and Acquisition and Valuation – The case of Comeco 79 Appendices  BALANCE SHEET: ASSETS 2007 2008 2009 2010 2011 A. CURRENT ASSETS 239,145,078,488 231,462,394,286 347,877,887,567 265,481,180,791 230,217,066,677 I. Cash and cash equivalent 116,790,450,940 97,497,314,671 19,610,913,495 22,936,221,124 38,142,270,504 1. Cash 116,790,450,940 97,497,314,671 19,610,913,495 12,844,554,457 38,142,270,504 2. Cash equivalent 10,091,666,667 II. Short-term investments 32,477,831,560 27,973,911,400 67,442,104,400 48,579,707,000 46,863,202,000 1. Short-term investments 32,778,201,000 46,146,016,000 74,481,816,000 57,374,636,000 62,315,031,000 (300,369,440) (18,172,104,600) (7,039,711,600) (8,794,929,000) (15,451,829,000) III. Accounts receivable 59,440,557,290 44,258,007,179 80,264,567,206 101,900,717,421 95,207,785,259 1. Trade receivables 34,024,040,500 21,207,927,650 41,763,462,150 50,248,810,615 44,232,408,071 2. Provision for the diminution in value of short-term securities Merge and Acquisition and Valuation – The case of Comeco 2. Advances to suppliers 80 25,195,610,009 22,766,808,748 36,946,097,852 49,268,145,138 48,675,606,070 220,906,781 283,270,781 1,555,007,204 2,383,761,668 2,299,771,118 IV. Inventories 22,724,259,725 51,726,474,594 174,856,909,492 83,324,158,476 42,122,346,995 1. Inventories 23,879,004,459 53,086,718,085 175,561,970,100 84,017,990,010 42,535,326,869 2. Provision for decline in inventory (1,154,744,734) (1,360,243,491) (705,060,608) (693,831,534) (412,979,874) 7,711,978,973 10,006,686,442 5,703,392,974 8,740,376,770 7,881,461,919 512,281,265 702,172,414 690,554,468 402,553,894 1,082,443,430 1,620,345,356 1,132,340,719 3. Receivables from related parties 4. Other receivables 5. Provision for doubtful debts V. Other current assets 1. Prepaid expenses 2. VAT deductible 2,840,910,070 3. Tax receivables and other receivable from the State 4. Other current assets B. NON-CURRENT ASSETS 7,199,697,708 6,463,603,958 5,012,838,506 6,717,477,520 5,666,677,770 93,235,305,092 98,553,003,083 122,704,224,197 198,845,719,870 218,338,162,087 Merge and Acquisition and Valuation – The case of Comeco 81 I. Long-term receivables 1. Long-term trade receivables 2. Equity capital alloted to subsidiaries 3. Long-term receivables from related parties 4. Other long-term receivables 5. Provision for doubtful long-term receivables II. Fixed assets 93,235,305,092 98,553,003,083 122,704,224,197 194,687,719,870 214,936,162,087 1. Tangible fixed assets 20,614,407,076 18,015,301,438 20,739,273,445 109,143,006,987 110,869,827,088 + Cost 45,499,794,321 46,305,492,002 53,092,776,438 145,615,592,349 151,826,178,542 (24,885,387,245) (28,290,190,564) (32,353,502,993) (36,472,585,362) (40,956,351,454) + Accumulated depreciation 2. Finance leases assets + Cost + Accumulated depreciation Merge and Acquisition and Valuation – The case of Comeco 82 3. Intangible fixed assets 11,697,048,222 11,439,556,542 11,182,064,862 20,367,220,797 19,834,700,541 + Cost 12,874,584,020 12,874,584,020 12,874,584,020 22,500,584,020 22,500,584,020 + Accumulated amortization (1,177,535,798) (1,435,027,478) (1,692,519,158) (2,133,363,223) (2,665,883,479) 4. Construction in progress 60,923,849,794 69,098,145,103 90,782,885,890 65,177,492,086 84,231,634,458 V. Other long-term assets 4,158,000,000 3,402,000,000 1. Long-term prepaid assets 4,158,000,000 3,402,000,000 III. Investment property + Cost + Accumulated depreciation IV. Long-term investments 1. Investments in subsidiaries 2. Investments in associates, joint- ventures 3. Other long term investments 4. Provision for long-term investments Merge and Acquisition and Valuation – The case of Comeco 83 2. Deferred income tax assets 3. Other long-term assets TOTAL ASSETS RESOURCES 332,380,383,580 2007 330,015,397,369 2008 470,582,111,764 2009 464,326,900,661 2010 448,555,228,764 2011 A. LIABILITIES 47,453,361,859 39,378,071,435 124,296,610,761 107,101,332,751 90,719,710,045 I. Current liabilities 40,301,073,485 32,912,170,377 118,877,802,559 101,427,192,400 85,709,554,775 59,000,000,000 24,700,000,000 34,000,000,000 1. Short-term debts and loans 2. Trade payables 1,400,000,000 17,839,372,130 18,756,018,816 19,225,643,027 48,673,532,920 8,118,940,993 3. Advances from customers 9,557,080,266 727,723,176 1,790,437,982 1,334,018,464 15,439,539,145 4. Statutory obligations 1,624,177,255 3,950,994,620 14,696,922,641 4,413,086,967 3,397,520,548 5. Payable to employees 4,319,240,449 3,447,656,388 15,527,235,995 13,735,319,998 7,876,649,652 484,455,540 178,570,000 55,401,755 55,401,755 55,401,755 55,401,755 55,401,755 6. Accruals 7. Inter-company payables Merge and Acquisition and Valuation – The case of Comeco 84 8. Construction contractor payables based on agreed progress billings 9. Other payables 5,021,346,090 5,795,805,622 8,582,161,159 4,455,810,949 11,528,187,073 4,060,021,347 5,293,315,609 5,674,140,351 5,010,155,270 1,302,425,005 1,685,532,780 10. Short-term provision 11. Reward and welfare funds II. Long-term liabilities 7,152,288,374 6,465,901,058 5,418,808,202 1. Long-term trade payables 2. Inter-company long-term payables 3. Other long-term payables 4. Long-term loans and debts 7,152,288,374 6,105,195,518 5,058,102,662 4,011,009,806 2,963,916,950 360,705,540 360,705,540 360,705,540 360,705,540 5. Deferred income tax payables 6. Provision for unemployment funds 7. Long-term provision 8. Unrealized revenue 9. Scientific and technological development fund Merge and Acquisition and Valuation – The case of Comeco 85 B. OWNERS' EQUITY 284,927,021,721 290,637,325,934 346,285,501,003 357,225,567,910 357,835,518,719 I. Equity 283,642,136,495 288,893,505,153 343,004,391,681 357,225,567,910 357,835,518,719 79,999,170,000 86,120,000,000 87,840,000,000 141,206,280,000 141,206,280,000 155,512,347,670 158,037,574,134 159,069,574,134 138,228,344,134 138,228,344,134 3. Other contributed capital 14,097,992,895 15,145,085,751 16,184,342,487 17,231,435,343 18,278,528,199 4. Treasury shares (4,667,198,100) (11,342,703,700) (18,001,078,300) (14,946,154,700) (14,946,154,700) 23,837,348,085 28,594,611,280 28,594,611,280 34,916,995,280 38,608,862,280 2,633,645,750 3,393,141,750 4,365,811,750 5,630,287,750 7,476,221,750 12,228,830,195 8,945,795,938 64,951,130,330 34,958,380,103 28,983,437,056 1. Contributed legal capital (Share capital) 2. Capital surplus 5. Asset revaluation surplus 6. Foreign exchange difference 7. Investment and development fund 8. Financial reserve fund 9. Other funds within owners‟ equity 10. Undistributed earnings 11. Capital expenditure fund 12. Enterprise reoganization support fund Merge and Acquisition and Valuation – The case of Comeco 86 II. Other capital, funds 1,284,885,226 1,743,820,781 3,281,109,322 1. Reward and welfare funds 1,284,885,226 1,743,820,781 3,281,109,322 332,380,383,580 330,015,397,369 470,582,111,764 1. Subsidy funds 2. Funds invested in fixed assets TOTAL RESOURCES 464,326,900,661 448,555,228,764 Merge and Acquisition and Valuation – The case of Comeco  87 INCOME STATEMENT: Materials- Petroleum Joint Stock Company Oil INCOME STATEMENT 1. Revenue FY 2007 2008 2009 2010 2011 2,087,941,306,742 3,071,594,898,848 2,821,219,829,270 3,616,801,420,380 4,732,648,392,681 3. Net revenue 2,087,941,306,742 3,071,594,898,848 2,821,219,829,270 3,616,801,420,380 4,732,648,392,681 4. Cost of sales 2,015,793,743,705 2,958,247,829,488 2,658,098,188,270 3,469,540,156,193 4,600,725,559,266 5. Gross profit 72,147,563,037 113,347,069,360 163,121,641,000 147,261,264,187 131,922,833,415 649,444,192 10,976,864,688 9,979,055,025 7,570,787,859 4,887,779,752 7. Financial expenses 3,658,512,118 18,178,361,822 (9,658,757,378) 3,212,424,030 13,328,637,724 In which, interest expense 3,658,512,118 6,257,222 1,473,635,622 1,456,802,537 6,658,946,569 43,992,577,974 73,628,942,534 101,269,566,858 90,682,717,327 73,229,151,815 8,039,818,445 6,439,161,891 12,377,906,957 12,316,929,991 9,136,319,650 2. Deductions 6. Financial income 8. Selling expenses 9. General and administration expenses Merge and Acquisition and Valuation – The case of Comeco 10. 88 Operating 17,106,098,692 26,077,467,801 69,111,979,588 48,619,980,698 41,116,503,978 545,492,929 59,423,636 18,039,999,800 2,278,989,720 2,853,791,747 521,835,974 1,757,153,746 profit/(loss) 11. Other income 12. Other expense 13. Net other 545,492,929 59,423,636 15,186,208,053 17,651,591,621 26,136,891,437 84,298,187,641 48,619,980,698 42,873,657,724 2,461,680,426 6,683,495,499 21,074,350,749 11,701,305,425 9,602,035,471 15,189,911,195 19,453,395,938 63,223,836,892 36,918,675,273 33,271,622,253 3,275 2,343 4,625 2,697 2,420 income/(loss) 14. Accounting profit before tax 15. Current corporate income tax expense 16. Deferred income tax expense 17. Net profit/(loss) after tax 18. Earnings per share Merge and Acquisition and Valuation – The case of Comeco 89 Merge and Acquisition and Valuation – The case of Comeco  90 CASH FLOW STATEMENT CASH FLOW STATEMENT 2007 2008 2009 2010 2011 CASH FLOWS FROM OPERATING ACTIVITIES Profits before tax adjustments: 17,651,591,621 26,136,891,437 84,298,187,641 48,619,980,698 42,873,657,724 Depreciation of fixed assets 2,989,238,780 3,662,294,999 4,848,145,406 4,559,926,434 5,335,701,856 Provisions (300,000,000) 18,077,233,917 (11,787,575,883) 1,755,217,400 6,376,048,340 Gain/(loss) from investing activities (649,444,192) (11,016,007,224) (27,923,810,032) (7,559,282,136) (5,875,699,215) Loan interest expenses 3,658,512,118 6,257,222 1,473,635,622 1,456,802,537 6,658,946,569 23,349,898,327 36,866,670,351 50,908,582,754 48,832,644,933 55,368,655,274 (27,003,670,841) 15,918,643,861 (31,714,884,505) (24,961,134,585) 8,231,736,549 12,359,251,830 (29,207,713,626) (122,475,252,015) 91,532,751,016 41,482,663,141 Operating profit/(loss) before changes of working capital Increase/(decrease) of account receivable Increase/(decrease) of inventories Merge and Acquisition and Valuation – The case of Comeco Increase/(decrease) of account payable 91 21,173,092,192 (8,729,474,465) 14,193,364,123 20,934,372,964 (26,513,998,726) 118,382,460 (189,891,149) 11,617,946 (3,869,999,426) 76,110,464 Loan interest already paid (3,658,512,118) (6,257,222) (1,473,635,622) (1,456,802,537) (6,658,946,569) Corporate income tax already paid (2,296,579,701) (6,252,444,354) (12,434,168,706) (19,846,309,895) (10,386,061,488) 7,946,878,506 1,302,425,005 383,107,775 Increase/(decrease) of prepaid expenses Other cash receipts from operating 2,706,733,663 activities Other cash disbursements from operating (2,305,685,261) (6,870,153,349) (6,404,334,159) (4,201,796,975) (2,353,147,882) 24,442,910,551 1,529,380,047 (101,441,831,678) 108,266,150,500 59,630,118,538 (44,393,264,850) (8,979,992,990) (28,472,025,223) (76,543,422,107) (26,118,771,202) activities Net cash flow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase in fixed assets and other longterm assets Proceeds from disposals of fixed assets 18,039,999,800 Loans to other entities and payments for (2,604,320,000) 1,548,571,080 Merge and Acquisition and Valuation – The case of Comeco 92 purchase of debt instruments of other entities Repayments from borrowers and proceeds from sales of debts instruments of other 2,604,320,000 entities Investments in other entities (3,202,820,000) (4,940,395,000) Proceeds from sales of investments in 20,791,809,609 other entities Interest and dividends received 10,966,340,810 9,671,935,025 5,867,472,527 4,861,755,264 (44,393,264,850) 1,986,347,820 (760,090,398) (53,086,959,971) (24,648,839,858) Capital contribution 197,117,887,670 8,646,056,464 2,752,000,000 Captital redemption (31,489,720,000) (20,043,320,600) (34,994,174,600) Net cash from/(used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES (106,076,400) Merge and Acquisition and Valuation – The case of Comeco Borrowings 93 857,000,000,000 Loan repayment 426,000,000,000 218,500,000,000 905,277,500,000 (897,575,000,000) (1,400,000,000) (367,000,000,000) (252,800,000,000) (895,977,500,000) (6,909,181,000) (10,011,600,000) (2,442,304,500) (17,447,806,500) (29,075,229,300) 118,143,986,670 (22,808,864,136) 24,315,520,900 (51,853,882,900) (19,775,229,300) 98,193,632,371 (19,293,136,269) (77,886,401,176) 3,325,307,629 15,206,049,380 18,596,818,569 116,790,450,940 97,497,314,671 19,610,913,495 22,936,221,124 116,790,450,940 97,497,314,671 19,610,913,495 22,936,221,124 38,142,270,504 Finance lease principal paid Dividends paid Net cash from/(used in) financing activities Net increase/(decrease) in cash Cash and cash equivalents at beginning of year/(period) Impact of exchange rate fluctuation Cash and cash equivalents at end of year/(period) Merge and Acquisition and Valuation – The case of Comeco  94 BETA BY COMECO LISTED ON HOSE: SUMMARY OUTPUT Regression Statistics Multiple R 0.276635171 R Square 0.076527018 Adjusted R Square 0.075849488 Standard Error 0.030963622 Observations 1365 ANOVA Significance Regression df SS MS F F 1 0.108290404 0.108290404 112.9500567 2.11609E-25 Merge and Acquisition and Valuation – The case of Comeco Residual 1363 1.30677067 Total 1364 1.415061075 95 0.000958746 Standard Coefficients Error t Stat P-value Lower 95% - Upper 95% Lower Upper 95.0% 95.0% - Intercept 0.000794797 0.000838148 0.948277495 0.3431563 0.000849403 0.002438998 0.000849403 0.002438998 X Variable 1 0.454708474 0.042784831 10.62779642 2.11609E-25 0.370777217 0.538639731 0.370777217 0.538639731 Merge and Acquisition and Valuation – The case of Comeco  96 FORECAST INCOME STATEMENT: Materials- Petroleum Joint Stock Company Oil INCOME STATEMENT 2012F 2013F 2014F 2015F 2016F 5,463,361,601,62 6,228,232,225,85 7,100,184,737,47 7,810,203,211,22 8,591,223,532,34 1. Revenue 8 6 6 4 6 2. Deductions 5,463,361,601,62 6,228,232,225,85 7,100,184,737,47 7,810,203,211,22 8,591,223,532,34 3. Net revenue 8 6 6 4 6 5,244,827,137,56 5,979,102,936,82 6,816,177,347,97 7,497,795,082,77 8,247,574,591,05 4. Cost of sales 3 2 7 5 2 5. Gross profit 218,534,464,065 249,129,289,034 284,007,389,499 312,408,128,449 343,648,941,294 6. Financial income 7. Financial expenses in which, interest expense Merge and Acquisition and Valuation – The case of Comeco 8. Selling expenses 97 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 expenses 16,936,420,965 19,307,519,900 22,010,572,686 24,211,629,955 26,632,792,950 10. Operating profit/(loss) 70,477,364,661 80,344,195,714 91,592,383,113 100,751,621,425 110,826,783,567 70,477,364,661 80,344,195,714 91,592,383,113 100,751,621,425 110,826,783,567 17,619,341,165 20,086,048,928 22,898,095,778 25,187,905,356 27,706,695,892 52,858,023,496 60,258,146,785 68,694,287,335 75,563,716,069 83,120,087,675 9. General and administration 11. Other income 12. Other expense 13. Net other income/(loss) 14. Accounting profit before tax 15. Current corporate income tax expense 16. Deferred income tax expense 17. Net profit/(loss) after tax Materials- Petroleum Joint Stock Company Oil Merge and Acquisition and Valuation – The case of Comeco INCOME STATEMENT 2017F 98 2018F 2019F 2020F 2021F 10,395,380,474,13 11,227,010,912,07 12,125,171,785,03 13,095,185,527,83 9 0 6 9 10,395,380,474,13 11,227,010,912,07 12,125,171,785,03 13,095,185,527,83 9 0 6 9 10,777,930,475,58 11,640,164,913,63 12,571,378,106,72 7 4 5 415,815,218,966 449,080,436,483 485,006,871,401 523,807,421,114 249,489,131,379 269,448,261,890 291,004,122,841 314,284,452,668 9,450,345,885,581 1. Revenue 2. Deductions 3. Net revenue 9,450,345,885,581 9,072,332,050,158 9,979,565,255,173 4. Cost of sales 5. Gross profit 378,013,835,423 6. Financial income 7. Financial expenses in which, interest expense 226,808,301,254 8. Selling expenses 9. General and administration 29,296,072,245 Merge and Acquisition and Valuation – The case of Comeco expenses 10. Operating profit/(loss) 99 32,225,679,470 34,803,733,827 37,588,032,534 40,595,075,136 121,909,461,924 134,100,408,116 144,828,440,766 156,414,716,027 168,927,893,309 121,909,461,924 134,100,408,116 144,828,440,766 156,414,716,027 168,927,893,309 30,477,365,481 33,525,102,029 36,207,110,191 39,103,679,007 42,231,973,327 91,432,096,443 100,575,306,087 108,621,330,574 117,311,037,020 126,695,919,982 11. Other income 12. Other expense 13. Net other income/(loss) 14. Accounting profit before tax 15. Current corporate income tax expense 16. Deferred income tax expense 17. Net profit/(loss) after tax  FORECAST BALANCE SHEET: ASSETS A. CURRENT ASSETS 2012F 2013F 2014F 2015F 2016F 295,021,526,488 343,175,595,645 397,610,345,299 437,371,379,829 481,108,517,811 I. Cash and cash equivalent 43,706,892,813 56,676,913,255 71,001,847,375 78,102,032,112 85,912,235,323 1. Cash 43,706,892,813 56,676,913,255 71,001,847,375 78,102,032,112 85,912,235,323 Merge and Acquisition and Valuation – The case of Comeco 100 2. Cash equivalent II. Short-term investments 1. Short-term investments 2. Provision for the diminution in value of short-term securities III. Accounts receivable 109,267,232,033 124,564,644,517 142,003,694,750 156,204,064,224 171,824,470,647 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 1. Trade receivables 2. Advances to suppliers 3. Receivables from related parties 4. Other receivables 5. Provision for doubtful debts IV. Inventories 1. Inventories 2. Provision for decline in inventory Merge and Acquisition and Valuation – The case of Comeco V. Other current assets 101 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 225,269,891,982 236,744,285,598 249,481,172,113 255,965,200,054 265,402,672,045 1. Prepaid expenses 2. VAT deductible 3. Tax receivables and other receivable from the State 4. Other current assets B. NON-CURRENT ASSETS I. Long-term receivables 1. Long-term trade receivables 2. Equity capital alloted to subsidiaries 3. Long-term receivables from related parties Merge and Acquisition and Valuation – The case of Comeco 102 4. Other long-term receivables 5. Provision for doubtful long-term receivables II. Fixed assets 225,269,891,982 236,744,285,598 249,481,172,113 255,965,200,054 265,402,672,045 1. Tangible fixed assets 112,388,088,873 114,027,811,602 115,798,712,148 110,060,994,377 104,093,767,896 + Cost 163,972,272,825 177,090,054,651 191,257,259,024 198,907,549,384 206,863,851,360 (51,584,183,952) (63,062,243,050) (75,458,546,875) (88,846,555,007) (102,770,083,464 + Accumulated depreciation ) 2. Finance leases assets + Cost + Accumulated depreciation 3. Intangible fixed assets 19,384,688,861 18,934,677,180 18,484,665,500 18,034,653,819 23,209,788,144 + Cost 22,500,584,020 22,500,584,020 22,500,584,020 22,500,584,020 28,125,730,025 + Accumulated amortization (3,115,895,159) (3,565,906,840) (4,015,918,520) (4,465,930,201) (4,915,941,881) 4. Construction in progress 93,497,114,248 103,781,796,816 115,197,794,465 127,869,551,857 138,099,116,005 Merge and Acquisition and Valuation – The case of Comeco 103 III. Investment property + Cost + Accumulated depreciation IV. Long-term investments 1. Investments in subsidiaries 2. Investments in associates, jointventures 3. Other long term investments 4. Provision for long-term investments V. Other long-term assets 1. Long-term prepaid assets 2. Deferred income tax assets 3. Other long-term assets TOTAL ASSETS 520,291,418,470 579,919,881,242 647,091,517,412 693,336,579,882 746,511,189,856 Merge and Acquisition and Valuation – The case of Comeco ASSETS A. CURRENT ASSETS 2017F 104 2018F 2019F 2020F 2021F 529,219,369,593 582,141,306,552 628,712,611,076 679,009,619,962 733,330,389,559 I. Cash and cash equivalent 94,503,458,856 103,953,804,741 112,270,109,121 121,251,717,850 130,951,855,278 1. Cash 94,503,458,856 103,953,804,741 112,270,109,121 121,251,717,850 130,951,855,278 189,006,917,712 207,907,609,483 224,540,218,241 242,503,435,701 261,903,710,557 2. Cash equivalent II. Short-term investments 1. Short-term investments 2. Provision for the diminution in value of short-term securities III. Accounts receivable 1. Trade receivables 2. Advances to suppliers 3. Receivables from related parties Merge and Acquisition and Valuation – The case of Comeco 105 4. Other receivables 5. Provision for doubtful debts IV. Inventories 226,808,301,254 249,489,131,379 269,448,261,890 291,004,122,841 314,284,452,668 18,900,691,771 20,790,760,948 22,454,021,824 24,250,343,570 26,190,371,056 269,682,171,184 274,597,268,044 280,208,739,907 286,582,623,418 293,790,651,216 1. Inventories 2. Provision for decline in inventory V. Other current assets 1. Prepaid expenses 2. VAT deductible 3. Tax receivables and other receivable from the State 4. Other current assets B. NON-CURRENT ASSETS I. Long-term receivables Merge and Acquisition and Valuation – The case of Comeco 106 1. Long-term trade receivables 2. Equity capital alloted to subsidiaries 3. Long-term receivables from related parties 4. Other long-term receivables 5. Provision for doubtful long-term receivables II. Fixed assets 1. Tangible fixed assets + Cost + Accumulated depreciation 269,682,171,184 274,597,268,044 280,208,739,907 286,582,623,418 293,790,651,216 97,887,852,355 91,433,700,193 84,721,381,944 77,740,570,965 70,480,527,547 215,138,405,414 223,743,941,631 232,693,699,296 242,001,447,268 251,681,505,159 (117,250,553,059) (132,310,241,438) (147,972,317,352) (164,260,876,303) (181,200,977,612) 2. Finance leases assets + Cost + Accumulated depreciation 3. Intangible fixed assets 22,647,273,544 22,084,758,943 21,522,244,343 20,959,729,742 20,397,215,142 Merge and Acquisition and Valuation – The case of Comeco 107 + Cost 28,125,730,025 28,125,730,025 28,125,730,025 28,125,730,025 28,125,730,025 + Accumulated amortization (5,478,456,482) (6,040,971,082) (6,603,485,683) (7,166,000,283) (7,728,514,884) 149,147,045,286 161,078,808,908 173,965,113,621 187,882,322,711 202,912,908,528 4. Construction in progress III. Investment property + Cost + Accumulated depreciation IV. Long-term investments 1. Investments in subsidiaries 2. Investments in associates, joint- ventures 3. Other long term investments 4. Provision for long-term investments V. Other long-term assets 1. Long-term prepaid assets 2. Deferred income tax assets Merge and Acquisition and Valuation – The case of Comeco 108 3. Other long-term assets TOTAL ASSETS RESOURCES 798,901,540,777 2012F 856,738,574,596 2013F 908,921,350,983 2014F 965,592,243,380 1,027,121,040,775 2015F 2016F A. LIABILITIES 143,053,415,092 163,080,893,205 185,912,218,254 204,503,440,079 224,953,784,087 I. Current liabilities 132,126,691,889 150,624,428,754 171,711,848,779 188,883,033,657 207,771,337,023 1. Short-term debts and loans 39,249,544,661 2. Trade payables 92,877,147,228 105,879,947,840 120,703,140,537 132,773,454,591 146,050,800,050 3. Advances from customers 4. Statutory obligations 5. Payable to employees 6. Accruals 7. Inter-company payables 8. Construction contractor payables based on agreed progress billings 44,744,480,914 51,008,708,242 56,109,579,066 61,720,536,973 Merge and Acquisition and Valuation – The case of Comeco 109 9. Other payables 10. Short-term provision 11. Reward and welfare funds II. Long-term liabilities 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 1. Long-term trade payables 2. Inter-company long-term payables 3. Other long-term payables 4. Long-term loans and debts 5. Deferred income tax payables 6. Provision for unemployment funds 7. Long-term provision 8. Unrealized revenue B. OWNERS' EQUITY I. Equity 1. Contributed legal capital (Share capital) 377,238,003,378 416,838,988,037 461,179,299,158 488,833,139,803 521,557,405,769 Merge and Acquisition and Valuation – The case of Comeco 2. Capital surplus 3. Other contributed capital 4. Treasury shares 5. Asset revaluation surplus 6. Foreign exchange difference 7. Investment and development fund 8. Financial reserve fund 9. Other funds within owners‟ equity 10. Undistributed earnings 11. Capital expenditure fund 12. Enterprise reoganization support fund II. Other capital, funds 1. Reward and welfare funds 1. Subsidy funds 2. Funds invested in fixed assets 110 Merge and Acquisition and Valuation – The case of Comeco TOTAL RESOURCES 111 520,291,418,470 579,919,881,242 647,091,517,412 693,336,579,882 746,511,189,856 RESOURCES 2017F 2018F 2019F 2020F 2021F A. LIABILITIES 228,548,470,725 251,403,317,797 271,515,583,221 293,236,829,879 316,695,776,269 I. Current liabilities 228,548,470,725 251,403,317,797 271,515,583,221 293,236,829,879 316,695,776,269 67,892,590,670 74,681,849,737 80,656,397,716 87,108,909,533 94,077,622,296 160,655,880,055 176,721,468,060 190,859,185,505 206,127,920,346 222,618,153,973 1. Short-term debts and loans 2. Trade payables 3. Advances from customers 4. Statutory obligations 5. Payable to employees 6. Accruals 7. Inter-company payables 8. Construction contractor payables based on agreed progress Merge and Acquisition and Valuation – The case of Comeco 112 billings 9. Other payables 10. Short-term provision 11. Reward and welfare funds II. Long-term liabilities 1. Long-term trade payables 2. Inter-company long-term payables 3. Other long-term payables 4. Long-term loans and debts 5. Deferred income tax payables 6. Provision for unemployment funds 7. Long-term provision 8. Unrealized revenue 18,900,691,771 20,790,760,948 22,454,021,824 24,250,343,570 26,190,371,056 Merge and Acquisition and Valuation – The case of Comeco B. OWNERS' EQUITY I. Equity 1. Contributed legal capital (Share capital) 2. Capital surplus 3. Other contributed capital 4. Treasury shares 5. Asset revaluation surplus 6. Foreign exchange difference 7. Investment and development fund 8. Financial reserve fund 9. Other funds within owners‟ equity 10. Undistributed earnings 570,353,070,052 605,335,256,798 113 637,405,767,762 672,355,413,501 710,425,264,506 Merge and Acquisition and Valuation – The case of Comeco 114 11. Capital expenditure fund 12. Enterprise reoganization support fund II. Other capital, funds 1. Reward and welfare funds 1. Subsidy funds 2. Funds invested in fixed assets TOTAL RESOURCES  798,901,540,777 856,738,574,596 908,921,350,983 965,592,243,380 1,027,121,040,775 MERGED-FIRM:  DIFFERENT ASSUMPTION BETWEEN STAND-ALONE FIRM AND MERGED-FIRM:  Stand-Alone Firm: Stand-Alone SE / Revenue Selling Expenses 2012F 2013F 2.40% 2.40% 2014F 2015F 2016F 2.40% 2.40% 2.40% 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 Merge and Acquisition and Valuation – The case of Comeco AE / Sale Administrative expense 0.31% 0.31% 0.31% 0.31% 0.31% 16,936,420,965 19,307,519,900 22,010,572,686 24,211,629,955 26,632,792,950 2.4% 2.4% 2.4% 2.4% 2.4% 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 Inventory / Revenue Inventory 2017F  115 2018F 2019F 2020F 2021F 2.40% 2.40% 2.40% 2.40% 2.40% 226,808,301,254 249,489,131,379 269,448,261,890 2.91004E+11 314,284,452,668 0.31% 0.31% 0.31% 0.31% 0.31% 29,296,072,245 32,225,679,470 34,803,733,827 37,588,032,534 40,595,075,136 2.4% 2.4% 2.4% 2.4% 2.4% 226,808,301,254 249,489,131,379 269,448,261,890 291,004,122,841 314,284,452,668 Merged-Firm: Merged-Firm 2012F 2013F 2014F 2015F 2016F Merge and Acquisition and Valuation – The case of Comeco SE / Revenue Selling Expenses AE / Sale Administrative expense Inventory / Revenue Inventory 2.0% 116 2.0% 2.0% 2.0% 2.0% 109,267,232,033 124,564,644,517 142,003,694,750 156,204,064,224 171,824,470,647 0.25% 0.25% 0.25% 0.25% 0.25% 13,658,404,004 15,570,580,565 17,750,461,844 19,525,508,028 21,478,058,831 2.0% 2.0% 2.0% 2.0% 2.0% 109,267,232,033 124,564,644,517 142,003,694,750 156,204,064,224 171,824,470,647 Merge and Acquisition and Valuation – The case of Comeco 2017F 2018F 117 2019F 2020F 2021F 2.0% 2.0% 2.0% 2.0% 2.0% 189,006,917,712 207,907,609,483 224,540,218,241 2.42503E+11 261,903,710,557 0.25% 0.25% 0.25% 0.25% 0.25% 23,625,864,714 25,988,451,185 28,067,527,280 30,312,929,463 32,737,963,820 2.0% 2.0% 2.0% 2.0% 2.0% 189,006,917,712 207,907,609,483 224,540,218,241 242,503,435,701 261,903,710,557 Merge and Acquisition and Valuation – The case of Comeco 118  FORECAST INCOME STATEMENT: Materials- Petroleum Joint Stock Company Oil INCOME STATEMENT 1. Revenue 2012F 2013F 2014F 2015F 2016F 5,463,361,601,628 6,228,232,225,856 7,100,184,737,476 7,810,203,211,224 8,591,223,532,346 3. Net revenue 5,463,361,601,628 6,228,232,225,856 7,100,184,737,476 7,810,203,211,224 8,591,223,532,346 4. Cost of sales 5,244,827,137,563 5,979,102,936,822 6,816,177,347,977 7,497,795,082,775 8,247,574,591,052 5. Gross profit 218,534,464,065 249,129,289,034 284,007,389,499 312,408,128,449 343,648,941,294 109,267,232,033 124,564,644,517 142,003,694,750 156,204,064,224 171,824,470,647 13,658,404,004 15,570,580,565 17,750,461,844 19,525,508,028 21,478,058,831 95,608,828,028 108,994,063,952 124,253,232,906 136,678,556,196 150,346,411,816 2. Deductions 6. Financial income 7. Financial expenses in which, interest expense 8. Selling expenses 9. General and administration expenses 10. Operating profit/(loss) 11. Other income 12. Other expense Merge and Acquisition and Valuation – The case of Comeco 119 13. Net other income/(loss) 14. Accounting profit before tax 95,608,828,028 108,994,063,952 124,253,232,906 136,678,556,196 150,346,411,816 23,902,207,007 27,248,515,988 31,063,308,226 34,169,639,049 37,586,602,954 71,706,621,021 81,745,547,964 93,189,924,679 102,508,917,147 112,759,808,862 15. Current corporate income tax expense 16. Deferred income tax expense 17. Net profit/(loss) after tax Materials- Petroleum Joint Stock Company Oil INCOME STATEMENT 1. Revenue 2017F 2018F 2019F 2020F 2021F 9,450,345,885,581 10,395,380,474,139 11,227,010,912,070 12,125,171,785,036 13,095,185,527,839 3. Net revenue 9,450,345,885,581 10,395,380,474,139 11,227,010,912,070 12,125,171,785,036 13,095,185,527,839 4. Cost of sales 9,072,332,050,158 9,979,565,255,173 10,777,930,475,587 11,640,164,913,634 12,571,378,106,725 5. Gross profit 378,013,835,423 415,815,218,966 449,080,436,483 485,006,871,401 523,807,421,114 2. Deductions 6. Financial income 7. Financial expenses Merge and Acquisition and Valuation – The case of Comeco 120 in which, interest expense 8. Selling expenses 9. General and administration expenses 10. Operating profit/(loss) 189,006,917,712 207,907,609,483 224,540,218,241 242,503,435,701 261,903,710,557 23,625,864,714 25,988,451,185 28,067,527,280 30,312,929,463 32,737,963,820 165,381,052,998 181,919,158,297 196,472,690,961 212,190,506,238 229,165,746,737 165,381,052,998 181,919,158,297 196,472,690,961 212,190,506,238 229,165,746,737 41,345,263,249 45,479,789,574 49,118,172,740 53,047,626,560 57,291,436,684 124,035,789,748 136,439,368,723 147,354,518,221 159,142,879,679 171,874,310,053 11. Other income 12. Other expense 13. Net other income/(loss) 14. Accounting profit before tax 15. Current corporate income tax expense 16. Deferred income tax expense 17. Net profit/(loss) after tax Merge and Acquisition and Valuation – The case of Comeco  121 FORECAST BALANCE SHEET: Materials- Petroleum Joint Stock Company Oil ASSETS A. CURRENT ASSETS YTD 2012 2013F 2014F 2015F 2016F 273,168,080,081 318,262,666,741 369,209,606,349 406,130,566,984 446,743,623,682 I. Cash and cash equivalent 43,706,892,813 56,676,913,255 71,001,847,375 78,102,032,112 85,912,235,323 1. Cash 43,706,892,813 56,676,913,255 71,001,847,375 78,102,032,112 85,912,235,323 109,267,232,033 124,564,644,517 142,003,694,750 156,204,064,224 171,824,470,647 2. Cash equivalent II. Short-term investments 1. Short-term investments 2. Provision for the diminution in value of short-term securities III. Accounts receivable 1. Trade receivables 2. Advances to suppliers 3. Receivables from related parties 4. Other receivables Merge and Acquisition and Valuation – The case of Comeco 122 5. Provision for doubtful debts IV. Inventories 109,267,232,033 124,564,644,517 142,003,694,750 156,204,064,224 171,824,470,647 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 225,269,891,982 236,744,285,598 249,481,172,113 255,965,200,054 265,402,672,045 1. Inventories 2. Provision for decline in inventory V. Other current assets 1. Prepaid expenses 2. VAT deductible 3. Tax receivables and other receivable from the State 4. Other current assets B. NON-CURRENT ASSETS I. Long-term receivables 1. Long-term trade receivables 2. Equity capital alloted to subsidiaries 3. Long-term receivables from related parties 4. Other long-term receivables 5. Provision for doubtful long-term receivables Merge and Acquisition and Valuation – The case of Comeco 123 II. Fixed assets 225,269,891,982 236,744,285,598 249,481,172,113 255,965,200,054 265,402,672,045 1. Tangible fixed assets 112,388,088,873 114,027,811,602 115,798,712,148 110,060,994,377 104,093,767,896 + Cost 163,972,272,825 177,090,054,651 191,257,259,024 198,907,549,384 206,863,851,360 + Accumulated depreciation (51,584,183,952) (63,062,243,050) (75,458,546,875) (88,846,555,007) (102,770,083,464) 3. Intangible fixed assets 19,384,688,861 18,934,677,180 18,484,665,500 18,034,653,819 23,209,788,144 + Cost 22,500,584,020 22,500,584,020 22,500,584,020 22,500,584,020 28,125,730,025 + Accumulated amortization (3,115,895,159) (3,565,906,840) (4,015,918,520) (4,465,930,201) (4,915,941,881) 4. Construction in progress 93,497,114,248 103,781,796,816 115,197,794,465 127,869,551,857 138,099,116,005 2. Finance leases assets + Cost + Accumulated depreciation III. Investment property + Cost + Accumulated depreciation IV. Long-term investments 1. Investments in subsidiaries 2. Investments in associates, joint-ventures 3. Other long term investments Merge and Acquisition and Valuation – The case of Comeco 124 4. Provision for long-term investments V. Other long-term assets 1. Long-term prepaid assets 2. Deferred income tax assets 3. Other long-term assets TOTAL ASSETS 498,437,972,064 555,006,952,339 618,690,778,462 662,095,767,037 712,146,295,727 Materials- Petroleum Joint Stock Company Oil ASSETS A. CURRENT ASSETS 2017F 2018F 2019F 2020F 2021F 491,417,986,050 540,559,784,655 583,804,567,428 630,508,932,822 680,949,647,448 I. Cash and cash equivalent 94,503,458,856 103,953,804,741 112,270,109,121 121,251,717,850 130,951,855,278 1. Cash 94,503,458,856 103,953,804,741 112,270,109,121 121,251,717,850 130,951,855,278 189,006,917,712 207,907,609,483 224,540,218,241 242,503,435,701 261,903,710,557 2. Cash equivalent II. Short-term investments 1. Short-term investments 2. Provision for the diminution in value of short-term securities III. Accounts receivable Merge and Acquisition and Valuation – The case of Comeco 125 1. Trade receivables 2. Advances to suppliers 3. Receivables from related parties 4. Other receivables 5. Provision for doubtful debts IV. Inventories 189,006,917,712 207,907,609,483 224,540,218,241 242,503,435,701 261,903,710,557 18,900,691,771 20,790,760,948 22,454,021,824 24,250,343,570 26,190,371,056 269,682,171,184 274,597,268,044 280,208,739,907 286,582,623,418 293,790,651,216 1. Inventories 2. Provision for decline in inventory V. Other current assets 1. Prepaid expenses 2. VAT deductible 3. Tax receivables and other receivable from the State 4. Other current assets B. NON-CURRENT ASSETS I. Long-term receivables 1. Long-term trade receivables Merge and Acquisition and Valuation – The case of Comeco 126 2. Equity capital alloted to subsidiaries 3. Long-term receivables from related parties 4. Other long-term receivables 5. Provision for doubtful long-term receivables II. Fixed assets 269,682,171,184 274,597,268,044 280,208,739,907 286,582,623,418 293,790,651,216 97,887,852,355 91,433,700,193 84,721,381,944 77,740,570,965 70,480,527,547 215,138,405,414 223,743,941,631 232,693,699,296 242,001,447,268 251,681,505,159 (117,250,553,059) (132,310,241,438) (147,972,317,352) (164,260,876,303) (181,200,977,612) 3. Intangible fixed assets 22,647,273,544 22,084,758,943 21,522,244,343 20,959,729,742 20,397,215,142 + Cost 28,125,730,025 28,125,730,025 28,125,730,025 28,125,730,025 28,125,730,025 + Accumulated amortization (5,478,456,482) (6,040,971,082) (6,603,485,683) (7,166,000,283) (7,728,514,884) 149,147,045,286 161,078,808,908 173,965,113,621 187,882,322,711 202,912,908,528 1. Tangible fixed assets + Cost + Accumulated depreciation 2. Finance leases assets + Cost + Accumulated depreciation 4. Construction in progress III. Investment property + Cost + Accumulated depreciation Merge and Acquisition and Valuation – The case of Comeco 127 IV. Long-term investments 1. Investments in subsidiaries 2. Investments in associates, joint-ventures 3. Other long term investments 4. Provision for long-term investments V. Other long-term assets 1. Long-term prepaid assets 2. Deferred income tax assets 3. Other long-term assets TOTAL ASSETS 761,100,157,234 RESOURCES 815,157,052,699 2012F 864,013,307,335 2013F 2014F 917,091,556,240 2015F 974,740,298,664 2016F A. LIABILITIES 142,047,401,642 161,934,037,872 184,604,803,174 203,065,283,492 223,371,811,841 I. Current liabilities 131,120,678,439 149,477,573,421 170,404,433,699 187,444,877,069 206,189,364,776 1. Short-term debts and loans 38,243,531,211 2. Trade payables 92,877,147,228 105,879,947,840 120,703,140,537 132,773,454,591 146,050,800,050 3. Advances from customers 43,597,625,581 49,701,293,162 54,671,422,479 60,138,564,726 Merge and Acquisition and Valuation – The case of Comeco 128 4. Statutory obligations 5. Payable to employees 6. Accruals 7. Inter-company payables 8. Construction contractor payables based on agreed progress billings 9. Other payables 10. Short-term provision 11. Reward and welfare funds II. Long-term liabilities 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 10,926,723,203 12,456,464,452 14,200,369,475 15,620,406,422 17,182,447,065 1. Long-term trade payables 2. Inter-company long-term payables 3. Other long-term payables 4. Long-term loans and debts 5. Deferred income tax payables Merge and Acquisition and Valuation – The case of Comeco 129 6. Provision for unemployment funds 7. Long-term provision 8. Unrealized revenue 9. Scientific and technological development fund B. OWNERS' EQUITY I. Equity 1. Contributed legal capital (Share capital) 2. Capital surplus 3. Other contributed capital 4. Treasury shares 5. Asset revaluation surplus 6. Foreign exchange difference 7. Investment and development fund 8. Financial reserve fund 9. Other funds within owners‟ equity 356,390,570,421 393,072,914,467 434,085,975,288 459,030,483,545 488,774,483,886 Merge and Acquisition and Valuation – The case of Comeco 130 10. Undistributed earnings 11. Capital expenditure fund 12. Enterprise reoganization support fund II. Other capital, funds 1. Reward and welfare funds 1. Subsidy funds 2. Funds invested in fixed assets TOTAL RESOURCES RESOURCES 498,437,972,064 555,006,952,339 618,690,778,462 662,095,767,037 712,146,295,727 2017F 2018F 2019F 2020F 2021F A. LIABILITIES 245,708,993,025 270,279,892,328 291,902,283,714 315,254,466,411 340,474,823,724 I. Current liabilities 226,808,301,254 249,489,131,379 269,448,261,890 291,004,122,841 314,284,452,668 1. Short-term debts and loans 2. Trade payables 3. Advances from customers 66,152,421,199 72,767,663,319 160,655,880,055 176,721,468,060 78,589,076,384 84,876,202,495 91,666,298,695 190,859,185,505 206,127,920,346 222,618,153,973 Merge and Acquisition and Valuation – The case of Comeco 131 4. Statutory obligations 5. Payable to employees 6. Accruals 7. Inter-company payables 8. Construction contractor payables based on agreed progress billings 9. Other payables 10. Short-term provision 11. Reward and welfare funds II. Long-term liabilities 18,900,691,771 20,790,760,948 22,454,021,824 24,250,343,570 26,190,371,056 18,900,691,771 20,790,760,948 22,454,021,824 24,250,343,570 26,190,371,056 1. Long-term trade payables 2. Inter-company long-term payables 3. Other long-term payables 4. Long-term loans and debts 5. Deferred income tax payables Merge and Acquisition and Valuation – The case of Comeco 132 6. Provision for unemployment funds 7. Long-term provision 8. Unrealized revenue 9. Scientific and technological development fund B. OWNERS' EQUITY I. Equity 1. Contributed legal capital (Share capital) 2. Capital surplus 3. Other contributed capital 4. Treasury shares 5. Asset revaluation surplus 6. Foreign exchange difference 7. Investment and development fund 515,391,164,209 544,877,160,372 572,111,023,621 601,837,089,829 634,265,474,940 Merge and Acquisition and Valuation – The case of Comeco 133 8. Financial reserve fund 9. Other funds within owners‟ equity 10. Undistributed earnings 11. Capital expenditure fund 12. Enterprise reoganization support fund II. Other capital, funds 1. Reward and welfare funds 1. Subsidy funds 2. Funds invested in fixed assets TOTAL RESOURCES VND 761,100,157,234 815,157,052,699 2012F 2013F 864,013,307,335 917,091,556,240 2014F 2015F 974,740,298,664 2016F NOPAT or EBIT*(1-t) 95,608,828,028 108,994,063,952 124,253,232,906 136,678,556,196 150,346,411,816 less: Tax 71,706,621,021 81,745,547,964 93,189,924,679 102,508,917,147 112,759,808,862 Add: Depreciation 11,077,844,178 11,928,070,778 12,846,315,506 13,838,019,812 14,373,540,137 Merge and Acquisition and Valuation – The case of Comeco 134 21,411,574,074 23,402,464,393 25,583,202,022 20,322,047,752 23,811,012,129 Less: Change in working capital 1,783,420,952 32,091,786,048 36,123,746,910 24,850,646,581 27,335,711,239 Free Cash Flow To Firm (FCFF) 59,589,470,174 38,179,368,301 44,329,291,254 71,174,242,626 75,986,625,631 16.5% 16.5% 16.5% 16.5% 16.5% 51,129,292,026 28,107,954,954 28,002,161,327 38,576,593,548 35,337,712,657 2019F 2020F 2021F Less:Capital Expenditure WACC (Direct method) Present value 2017F 2018F 165,381,052,998 181,919,158,297 196,472,690,961 212,190,506,238 229,165,746,737 124,035,789,748 136,439,368,723 147,354,518,221 159,142,879,679 171,874,310,053 15,042,984,196 15,622,202,979 16,224,590,515 16,851,073,551 17,502,615,909 19,322,483,335 20,537,299,839 21,836,062,378 23,224,957,062 24,710,643,708 30,069,282,363 33,076,210,600 29,107,065,328 31,435,630,554 33,950,480,998 89,687,008,246 98,448,061,264 112,635,981,030 121,333,365,614 130,715,801,256 16.5% 16.5% 16.5% 16.5% 16.5% 35,787,475,882 33,706,134,882 33,088,660,592 30,583,172,987 28,270,314,590 Merged-Firm (FCFF) WACC ( Indirect method) 16.5% Long-term growth rate 6% Present value of the next 10 years cash flow Terminal value 342,589,473,445 1,313,771,912,187 Present value of terminal value 284,133,554,628 Total company present value 626,723,028,074 Less: Net Debt 36,963,916,950 Add: Non-operating assets 62,315,031,000 Construction Progress 59,000,000,000 Value of equity 711,074,142,123.741 Outstanding numbers of shares 13,750,875 Present stock price (VND) 51,711 126  BETA BY INDUSTRY SECTOR IN U.S. From Damodaran Online, strived at December 2012 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.ht ml Industry Name Unlevered Beta corrected for cash Advertising 1.75 Aerospace/Defense 1.03 Air Transport 1.10 Apparel 1.22 Auto Parts 1.59 Automotive 0.96 Bank 0.38 Bank (Midwest) 0.73 Beverage 0.77 Biotechnology 1.16 Building Materials 0.89 Cable TV 0.98 Chemical (Basic) 1.24 Chemical (Diversified) 1.39 Chemical (Specialty) 1.15 Coal 1.32 Computer Software 1.18 Computers/Peripherals 1.33 127 Diversified Co. 0.71 Drug 1.08 E-Commerce 1.08 Educational Services 0.92 Electric Util. (Central) 0.48 Electric Utility (East) 0.49 Electric Utility (West) 0.49 Electrical Equipment 1.35 Electronics 1.08 Engineering & Const 1.39 Entertainment 1.31 Entertainment Tech 1.48 Environmental 0.60 Financial Svcs. (Div.) 0.50 Food Processing 0.77 Foreign Electronics 1.24 Funeral Services 0.85 Furn/Home Furnishings 1.65 Healthcare Information 1.20 Heavy Truck & Equip 1.48 Homebuilding 1.02 Hotel/Gaming 1.28 Household Products 0.95 Human Resources 1.40 128 Industrial Services 0.81 Information Services 0.89 Insurance (Life) 1.54 Insurance (Prop/Cas.) 1.01 Internet 1.24 IT Services 1.14 Machinery 1.14 Maritime 0.58 Med Supp Invasive 0.80 Med Supp Non-Invasive 1.07 Medical Services 0.78 Metal Fabricating 1.63 Metals & Mining (Div.) 1.28 Natural Gas (Div.) 1.06 Natural Gas Utility 0.46 Newspaper 1.42 Office Equip/Supplies 1.04 Oil/Gas Distribution 0.65 Oilfield Svcs/Equip. 1.39 Packaging & Container 0.88 Paper/Forest Products 0.96 Petroleum (Integrated) 1.12 Petroleum (Producing) 1.13 Pharmacy Services 1.00 129 Pipeline MLPs 0.72 Power 0.65 Precious Metals 1.14 Precision Instrument 1.33 Property Management 0.59 Public/Private Equity 1.62 Publishing 0.89 R.E.I.T. 1.15 Railroad 1.24 Recreation 1.11 Reinsurance 1.05 Restaurant 1.19 Retail (Hardlines) 1.65 Retail (Softlines) 1.57 Retail Automotive 1.12 Retail Building Supply 0.97 Retail Store 1.14 Retail/Wholesale Food 0.64 Securities Brokerage 0.43 Semiconductor 1.69 Semiconductor Equip 2.42 Shoe 1.38 Steel 1.40 Telecom. Equipment 1.28 130 Telecom. Services 0.82 Telecom. Utility 0.54 Thrift 0.75 Tobacco 0.78 Toiletries/Cosmetics 1.20 Trucking 1.08 Utility (Foreign) 0.48 Water Utility 0.43 Wireless Networking 1.12 Total Market 0.92 131  COUNTRY RISK PREMIUM: Estimating Country Risk Premiums From Damodaran Online, strived at November 2012 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html Long-Term Country Region Rating Adj. Default Spread Total Risk Country Risk Premium Premium Albania Eastern Europe & Russia B1 400 11.00% 6.00% Angola Africa B1 400 11.00% 6.00% Argentina Central and South America B3 600 14.00% 9.00% Armenia Eastern Europe & Russia Ba2 275 9.13% 4.13% Australia Australia & New Zealand Aaa 0 5.00% 0.00% Austria [1] Western Europe Aaa 0 5.00% 0.00% Azerbaijan Eastern Europe & Russia Ba1 240 8.60% 3.60% Bahamas Caribbean A3 115 6.73% 1.73% Bahrain Middle East A3 115 6.73% 1.73% 131 Bangladesh Asia Ba3 325 9.88% 4.88% Barbados Caribbean Baa2 175 7.63% 2.63% Belarus Eastern Europe & Russia B1 400 11.00% 6.00% Belgium [1] Western Europe Aa1 25 5.38% 0.38% Belize Central and South America B3 600 14.00% 9.00% Bermuda Caribbean Aa2 50 5.75% 0.75% Bolivia Central and South America B1 400 11.00% 6.00% Herzegovina Eastern Europe & Russia B2 500 12.50% 7.50% Botswana Africa A2 100 6.50% 1.50% Brazil Central and South America Baa3 200 8.00% 3.00% Bulgaria Eastern Europe & Russia Baa3 200 8.00% 3.00% Cambodia Asia B2 500 12.50% 7.50% Canada North America Aaa 0 5.00% 0.00% Cayman Islands Caribbean Aa3 70 6.05% 1.05% Bosnia and 132 Chile Central and South America Aa3 70 6.05% 1.05% China Asia Aa3 70 6.05% 1.05% Colombia Central and South America Baa3 200 8.00% 3.00% Costa Rica Central and South America Baa3 200 8.00% 3.00% Croatia Eastern Europe & Russia Baa3 200 8.00% 3.00% Cuba Caribbean Caa1 700 15.50% 10.50% Cyprus [1] Western Europe Aa3 70 6.05% 1.05% Czech Republic Eastern Europe & Russia A1 85 6.28% 1.28% Denmark Western Europe Aaa 0 5.00% 0.00% Republic Caribbean B1 400 11.00% 6.00% Ecuador Central and South America Caa3 1000 20.00% 15.00% Egypt Africa Ba1 240 8.60% 3.60% El Salvador Central and South America WR 1000 20.00% 15.00% Estonia Eastern Europe & Russia A1 85 6.28% 1.28% Dominican 133 Fiji Islands Asia B1 400 11.00% 6.00% Finland [1] Western Europe Aaa 0 5.00% 0.00% France [1] Western Europe Aaa 0 5.00% 0.00% Georgia Western Europe Ba3 325 9.88% 4.88% Germany [1] Western Europe Aaa 0 5.00% 0.00% Greece [1] Western Europe Ba1 240 8.60% 3.60% Guatemala Central and South America Ba1 240 8.60% 3.60% Honduras Central and South America B2 500 12.50% 7.50% Hong Kong Asia Aa1 25 5.38% 0.38% Hungary Eastern Europe & Russia Baa3 200 8.00% 3.00% Iceland Western Europe Baa3 200 8.00% 3.00% India Asia Ba1 240 8.60% 3.60% Indonesia Asia Ba2 275 9.13% 4.13% Ireland [1] Western Europe Baa1 150 7.25% 2.25% Isle of Man Financial Center Aaa 0 5.00% 0.00% 134 Israel Middle East A1 85 6.28% 1.28% Italy [1] Western Europe Aa2 50 5.75% 0.75% Jamaica Caribbean B3 600 14.00% 9.00% Japan Asia Aa2 50 5.75% 0.75% Jordan Middle East Baa3 200 8.00% 3.00% Kazakhstan Eastern Europe & Russia Baa2 175 7.63% 2.63% Korea Asia A1 85 6.28% 1.28% Kuwait Middle East Aa2 50 5.75% 0.75% Latvia Eastern Europe & Russia Baa3 200 8.00% 3.00% Lebanon Middle East B1 400 11.00% 6.00% Lithuania Eastern Europe & Russia Baa1 150 7.25% 2.25% Luxembourg [1] Financial Center Aaa 0 5.00% 0.00% Macao Asia Aa3 70 6.05% 1.05% Malaysia Asia A3 115 6.73% 1.73% Malta [1] Western Europe A1 85 6.28% 1.28% 135 Mauritius Africa Baa2 175 7.63% 2.63% Mexico Central and South America Baa1 150 7.25% 2.25% Moldova Eastern Europe & Russia B3 600 14.00% 9.00% Mongolia Asia B1 400 11.00% 6.00% Montenegro Eastern Europe & Russia Ba3 325 9.88% 4.88% Morocco Africa Ba1 240 8.60% 3.60% Netherlands [1] Western Europe Aaa 0 5.00% 0.00% New Zealand Australia & New Zealand Aaa 0 5.00% 0.00% Nicaragua Central and South America B3 600 14.00% 9.00% Norway Western Europe Aaa 0 5.00% 0.00% Oman Middle East A1 85 6.28% 1.28% Pakistan Asia B3 600 14.00% 9.00% Panama Central and South America Baa3 200 8.00% 3.00% Papua New Guinea Asia B1 400 11.00% 6.00% Paraguay Central and South America B1 400 11.00% 6.00% 136 Peru Central and South America Baa3 200 8.00% 3.00% Philippines Asia Ba3 325 9.88% 4.88% Poland Eastern Europe & Russia A2 100 6.50% 1.50% Portugal [1] Western Europe A1 85 6.28% 1.28% Qatar Middle East Aa2 50 5.75% 0.75% Romania Eastern Europe & Russia Baa3 200 8.00% 3.00% Russia Eastern Europe & Russia Baa1 150 7.25% 2.25% Saudi Arabia Middle East Aa3 70 6.05% 1.05% Singapore Asia Aaa 0 5.00% 0.00% Slovakia Eastern Europe & Russia A1 85 6.28% 1.28% Slovenia [1] Eastern Europe & Russia Aa2 50 5.75% 0.75% South Africa Africa A3 115 6.73% 1.73% Spain [1] Western Europe Aa1 25 5.38% 0.38% Sri Lanka Asia B1 400 11.00% 6.00% St. Vincent & the Caribbean B1 400 11.00% 6.00% 137 Grenadines Suriname Caribbean Ba3 325 9.88% 4.88% Sweden Western Europe Aaa 0 5.00% 0.00% Switzerland Western Europe Aaa 0 5.00% 0.00% Taiwan Asia Aa3 70 6.05% 1.05% Thailand Asia Baa1 150 7.25% 2.25% Tobago Caribbean Baa1 150 7.25% 2.25% Tunisia Africa Baa2 175 7.63% 2.63% Turkey Asia Ba2 275 9.13% 4.13% Ukraine Eastern Europe & Russia B2 500 12.50% 7.50% Emirates Middle East Aa2 50 5.75% 0.75% United Kingdom Western Europe Aaa 0 5.00% 0.00% United States of North America Aaa 0 5.00% 0.00% Trinidad United and Arab 138 America Uruguay Central and South America Ba1 240 8.60% 3.60% Venezuela Central and South America B1 400 11.00% 6.00% Vietnam Asia B1 400 11.00% 6.00% 139 Questionnaire of Acquisition Questionnaire for Interviews Based on the common theories of motivation of merger and acquisition activities, the author interviewed the key person in PVOIL (with hidden names per interviewees' requests) for approximately one hour. In the interview, author raised questions regarding to identification and valuation of synergies such as economic motives, strategic realignment, asymmetrical market and other motives group. The following lists of questions were asked: 1. What types of synergies are expected by PVOIL from the acquisition of COMECO? 2. Specifically, do you think Economic Motives, Strategic Realignment, Asymmetrical Market, or Other Motives could be the motivations for the transaction? 3. It is possible to recognize the types of the synergies to be achieved through the transaction? 4. What synergies value has the PVOIL realized?-This question starts to find out the expected outcome of acquisition as well as the PVOIL's intention to maintain competing against SGP in acquiring COMECO. 5. What was the rationale of the acquisition? This question provides the underlying motivation and reasoning of the deal. The answer to the above questions was summarized and embedded into the body of the thesis. 148 Minutes of Interview Topic: The Acquisition of COM by PVOIL Date of interview: 3 Mar 2013 Name of person(s) interviewed: Hidden upon interviewees' requests Position: PVOIL / "Acquisition of COM by PVOIL" Project Department The researcher introduced about the objectives of the research and the purpose of the interview. Generally, there are two main questions to be asked: 1. What are the major motivations of the acquisition of COM by PVOIL? 2. What are the main benefits realized by PVOIL from acquiring the COM? Firstly, the interviewee was asked to tick on a list of merger and acquisition motivation he believes to be the major motivations of the acquisition of COM by PVOIL. The list after being answered by the interviewed was as follow. Strongly A. Economic Motives Strongly Neutr al Agree Disagree Disagre e 1 2 3 4 1. Valued Synergy X 2. Market Power X Agree B. Strategic Realignment 1. Technological Change 2. Regulatory and Political Change X 149 5 C. Asymmetrical Market 1. Market timing 2. Q-Ration D. Other Motives 1. Diversification 2. Hubris of Management 3. Agency Problem 4. Taxes Motives Based on the above answer, the interviewee was then asked to give answer to the following specific questions: 1. Based on the motivations you specified about the acquisition of COM by PVOIL, what was the rationale for the acquisition? 2. What types of synergies are expected by PVOIL from the acquisition of COMECO?Is it possible to recognize the types of the synergies to be achieved through the transaction? 3. If you mentioned so, specifically, why do you think Economic Motives, Strategic Realignment, Asymmetrical Market, or Other Motives could be the motivations for the transaction? 4. Could you measure the value that could be realized from the acquisition, especially in the view of the competitive bid of COM by SGP?-This question aims to find out the expected outcome of 150 acquisition as well as the PVOIL's intention to maintain competing position against SGP in acquiring COMECO. During the one hour of discussing about the above questions, followings are the summary of the answers: PVOIL is in progress to opening the market in Viet Nam to compete with state-own company as Petrolimex, currently holding more than 60% percent market share. In addition, PVOIL only control the petroleum product of Crude oil and Dung Quat refinery, in purchasing huge amount of quantity to other distributors and commercial customs. The trading activities only bring the small gap profit to PVOIL, which is very risky because of the fluctuation of world crude oil. In order to keep the business developing stable, company will concentrate to the retail market, which bring highest profit through original import-price, using the available facilities such as huge warehouses distribution channel alongside Viet Nam, international terminal, etc. When PVOIL can develop the retail distribution through petrol station, the firm will not only has potential profit, but also provide namely in market share. In Ho Chi Minh City, there are more than 400 petrol stations (according to MOF), and there is a planning to limit new stations and withdraw nearly 100 stations in 2015-2020. COM currently holds near 40 petrol stations with estimated stable consumption about 10,000-15,000 metric tons and continue opening more by having much convenience location in Ho Chi Minh City. In addition, now there are 10 exclusive importers to ensure in order to ensure energy supply security for the domestic demand, and gradually issue more licenses for importer. 1. Petrolimex 2. PV Oil (Petro Vietnam) 3. Petec 151 4. Saigon Petro 5. Military Petroleum Company 6. Thanh Le Import-Export Co. 7. Vinapco 8. Hiep Phuoc Electricity 9. Hong Ha 10. Nam Viet Oil In general, most of importer who have own advantage and disadvantage in this market share. Both PVOIL and SGP have own refineries, which is very active in up-stream sector. By opening the market share, it will bring more profit for the company in the way of saving operating cost such as depreciation machines, fix cost. Furthermore, both companies easily to access capital through bank, fund, bond, etc which cause the competition by PVOIL and SGP more hostile. In addition, the structures of share holder in COM which both share profit not only to two competitors, but also for the target firm when the competitors are trying to purchasing more stocks and cause the high price of COM. The target is easy to use the available source of two competitors like products, capital for take more profit in running business. Meanwhile, PVOIL and SGP through the retail channel of COM to develop their business, brand name, especially to bring their own product like lubricant, gas, LPG to customs by using the stations, instead of investing in new store. 152 Reference 1. Administration, U. E. (2012, May 9). Coutry Analysis Briefs-Viet Nam. 2. BP Statistical Review of World Energy (June 2012). 3. Business Monitor International (2011).Vietnam Oil & Gas Report Includes BMI‟s Forecasts. 4. Berkovitch, E., & Narayanan, M. P. (1993). Motives for Takeovers: An Empirical Investigation. Journal of Financial and Quantitative Analysis, 28(3), 347362.doi: 10.2307/2331418. 5. Cafef (Information on business and entrepreneurs) 2012a. Comeco giua van co thau tom (The case of acquisition of Comeco) http://cafef.vn/2012062702121687CA36/comeco-giua-van-co-thau-tom.chn 6. Damodaran, A. Investment Valuation,Second Edition. Investment Valuation,Second Edition. 7. Edward Halibozek, G. L. (2005). Mergers and Acquisitions Security: Corporate Restructuring and Security. Oxford. 8. Economist Intelligence Unit (July 2012).Country Report Vietnam. 9. Energy Information Administration.2012. Viet Nam Country Analysis Briefs. Last Updated: May 9 2012. 10. Energy Sector Management Assistance Programme (ESMAP) (January 2010). Vietnam Gas Sector Development Framwork. 11. Gaughan, P. (2007). Mergers, Acquisitions, And Corporate Restructurings Fourth Edition. University Edition. 153 12. Hien & Other authors. Motivation, benefit and cost of Merger acquisition activities in Viet Nam, Research report, Viet Nam national University – Ho Chi Minh City. 13. KPMG. (2011, May 31). The Seventh Wave of M&A . 14. KPMG.(2012). M&A.Yearbook-2012 Edition. 15. M.DePamphilis, D. (2012). Mergers, Acquisitions, and Other Restructuring Activities. The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1GB, UK. 16. Stoxckplus. (2012). Viet Nam M&A Research Report,Opportunities in Distressed Companies and increase increase deal flow from Japan. 17. Stoxplus. (2011). Viet Nam Deals Review 2011, High Capital Inflow from Japanese Corporations. 18. P.Halibozek, Edward, L.Kovacich, Gerald, Mergers And Acquisitions Security Corporate Restructuring and Security Management 2005 19. P.Baker, George (1992). Beatrice: A Study in Creation and Destruction of Value. The Journal of Finance, Vol. 47, No. 3, Papers and Proceedings of the Fifty-Second Annual Meeting of the American Finance Association, New Orleans, Louisiana January 3-5,1992 (Jul., 1992), pp. 1081-1119 20. PricewaterhouseCoopers (PwC). 2009. Viet Nam M&A activity review 2009. Ho Chi Minh: PricewaterhouseCoopers (VietNam) 21. PricewaterhouseCoopers (PwC). 2010. Viet Nam M&A activity review 2010. Ho Chi Minh: PricewaterhouseCoopers (VietNam) 22. S.Ruback, Richard (1983). The Cities Service Takeover: A Case Study, The Journal of Finance, Vol.38, No2, Papers and Proceedings Forty-First Annual Meeting American Finance Association New York, N.Y.December 28-30,1982 (May, 1983),pp.319-330. 154 23. Vuong, Quan-Hoang,Tran, Tri Dung& Nguyen, Thi Chau Ha. (Oct 2009-March 2010) No 1.Ecoomic Policy and Research. Mergers & Acquisitions Market in Vietnam‟s Transition Economy. 24. WJL Knight LLB, Solicitor Partner Simons & Simons "The Acquisition of Private Companies", Longman, Sixth Edition (1992). 25. Van Arkadie, B & Mallon, R.2003. Viet Nam- A trasistion tiger? Canberra: Asia Pacific Press. 26. Viet Nam Investment Review (VIR).2012. M&A Viet Nam Forum a major of success. 27. http://www.vir.com.vn/news/coverage/m_a-vietnam-forum-a-major-success.html 28. WorldBank.2012. Data by country – Viet Nam. http://data.worldbank.org/coutry/vietnam 29. Leigh, R. and North, D.J. (1978). "Regional aspects of acquisition activity in british manufacturing industry." Regional Studies, 12(2): 227-245.. 155 [...]... Acquisition and Valuation – The case of Comeco  17 Analyze the motivations behind the acquisition of COMECO on the point of views of PVOIL and verify whether the acquisition is a good decision  Perform business analysis and valuation of COMECO to come up with a reasonable price on the point of views of PVOIL 1.4 Scope of the research: The scope of research is to study be the decision to acquire COMECO. .. power of the combined firms (Depamphilis 2012, page 12) Furthermore, Market power mentions the ability of firm when taking over, the possibility of rapid growth, extend more powerful on current geographical and environment, the firm could take more control the quality, price and supply of its products because of the profit on the economic scale Merge and Acquisition and Valuation – The case of Comeco. .. name and the firm Merge and Acquisition and Valuation – The case of Comeco 20 whose shares are being replaced by the acquiring firm usually called the target firm ) According to KPMG‟s report4, six periods of high merger activity, often called merger waves, have taken in the history of the world by categorizing types of M&A‟s The First Wave (1893-1904) was known as major horizontal mergers in the manufacturing... raising from the public but was not allowed to lend meanwhile Lien Viet Bank was a young bank and wanted to invest and develop their 4 KPMG ;The Seventh Wave of M&A (2011) Merge and Acquisition and Valuation – The case of Comeco 21 branches and transaction office network The merge had saved a huge amount of money of Lien Viet Bank by using nearly 10,000 outlets of the postal company to expand its banking... about the acquisition decision between PVOIL and COMECO Several models and methods are applied in order to find the intrinsic value of COMECO as a stand-alone firm and as a merged firm Being merged into PVOIL, COMECO may receive potential additional value from the acquisition by PVOIL The analysis and valuation based mainly on the data and information sources given by the valuation process and the interviews... reduced.(Ayers, Lefanowicz, and Robinson (2003) cited by Depamphilis 2011) Merge and Acquisition and Valuation – The case of Comeco 29 Academic Meaning List of Theories Researches Synergies are gained when the sum of the Jensen and Ruback parts is more productive and valuable than the (1983), Houston, sum of individual components The value James and +Theory of created by the combination may result from... of decentralization and autonomy of the acquired (Gaughan,2007) Merge and Acquisition and Valuation – The case of Comeco 23 2.2 Motivation Of Merger And Acquisitions Activities: The motivation of M&A activities have been discussed for many years and numerous theories to classify M&A motives into economic scope and scale, efficiency improvement and cost reduction or based on types of M&A activities such... by the transfer of property of all, to one of them, which continues is existence, the others being swallowed or merged therein Acquisition: The act of becoming the owner of a certain property Divestiture: to deprive; to take away; to withdraw Merge can be defined as an arrangement the assets of two or more firms become one, or under the control of a company In other words, merge is the combination of. .. Stoxplus 2011 Merge and Acquisition and Valuation – The case of Comeco 22 of business, market share and especially the competitiveness The activities include not only the purchasing firm in cash, shares or combination of both, but also by buying all the assets of the purchased company An acquisition may be friendly or hostile In case of hostile, the two companies‟ proceed negotiations, but the target... point, the deal premium coming from synergy of acquisition will be recommended for both investors and target firm Merge and Acquisition and Valuation – The case of Comeco 19 Chapter II: Literature Review 2.1 M&A Definition: Mergers and acquisitions (M&As) and corporate restructuring have become the most popular methods of growth companies in corporate finance world Merger refers the combination of two ... decentralization and autonomy of the acquired (Gaughan,2007) Merge and Acquisition and Valuation – The case of Comeco 23 2.2 Motivation Of Merger And Acquisitions Activities: The motivation of M&A activities... geographical and environment, the firm could take more control the quality, price and supply of its products because of the profit on the economic scale Merge and Acquisition and Valuation – The case of. .. also Merge and Acquisition and Valuation – The case of Comeco 43 applies collecting primary data by contacting the investors who understand the business performance of COMECO Merge and Acquisition