Bayer has been considering the offer of acquiring Monsanto Corporation. Bayer is a company that operates in the field of life science and it has had more than 150 years of history in the field of agriculture and healthcare. With the innovative products of the company, it seeks to find solutions to major challenges in the world. The current strategy of Bayer is to increase its investment and is currently considering the acquisition of Monsanto Corporation, a global provider of agricultural products for farmers. The proposed bid for the acquisition is $62 billion. As the Chief Financial Officer of Monsanto Corporation, an analysis should be made to identify whether such Monsanto should accept or reject the acquisition from Bayer. In order to accomplish this, the financial documents and financial analysis of the two company should be analyzed critically to determine whether Monsanto Corporation can go forward with the purchase.
Ascertaining Weighted Average Cost of Capital (WACC)
The weighted average cost of capital for Monsanto is 8%. The WACC provides the rate which a company can averagely pay to security holders in order to finance their assets. The WACC can be used to provide the minimum return that would be acceptable for a company to earn on its existing assets so as to be able to satisfy providers of capital, owners of the company, and other obligations to creditors. The analysis of the WACC is important for a business as it provides the level of risk faced by the business. Even though the WACC provides an average estimated value, it can be used to calculate the Net Present Value of projects and to show projects that have higher risks. For the given scenario, Monsanto has a WACC of 8% which indicates that the risk of accepting the proposal is low.
Delegate your assignment to our experts and they will do the rest.
Importance of WACC and Application of Financial Ratios
The analysis of the WACC and the information from milestone 1 can be used to provide an adequate analysis of whether Monsanto should accept or reject the bid by Bayer. The WACC is used to provide the minimum return that a company could earn on its existent assets base in order to satisfy various stakeholders. The WACC considers various aspects of the capital structure such as debt and equity. A high WACC means that a company has a higher risk associated with its business operations. The WACC of 8% means that the company should pay its investors an average of $0.08 in return for every $1 in additional funding (Frank & Shen, 2016). The WACC of Monsanto can thus be considered low and less risky.
The analysis of financial statements and financial ratios were carried out in milestone one. The analysis showed that the financial status of the company was generally good. The current ratio had increased from 0.69 to 0.71 while the quick ratio had increased from 0.43 to 048 between 2014 and 2015. The asset utilization ratios analyze the way which Monsanto makes use of its assets to realize profit (Monahan, 2018). The asset utilization ratio had declined between the two years due to the announcement of the merger with Bayer. The profitability ratios show the success of the company in making profits (Robinson et al., 2015). The profitability ratios dropped significantly after the merger had been announced. For instance, the ROA had decreased from 12,87% to 10.56% while the ROE had decreased from 34.79% to 33.10%. This presents a critical concern regarding the future growth of the company.
Alternative Proposal
Financing from Debt
Financing from debt would involve Monsanto borrowing money which can be paid later with an interest (Coleman et al., 2016). The extent which Monsanto should take additional debt should it consider an alternative opportunity was established to be as $2,765,000. The debt to asset ratio of Monsanto was found to be 0.68. A good debt-to-asset ratio is 0.4 or lower and would indicate that the financial structure of a company is good (Schnitkey, 2018). However, the debt-to-equity ratio of Monsanto was also high at 2.14 in the year 2015. Based on the two considerations, taking additional debt to finance the growth of the company may be considered a viable option compared to taking on additional equity.
Growth Rate Analysis
The sustainable growth rate and the internal growth rate of Monsanto were calculated in Milestone two. The sustainable growth rate of the company was established at 14.63% while the internal growth rate was established as 11.57%. The sustainable growth rate is used to provide the additional rate of growth that the company could experience financial leverage sources or external financing (“Sustainable Growth Rate”, 2019). Investors consider the sustainable growth rate an important value to establish the potential for the business to grow in case other sources of funding would not be available. From the given analysis, Monsanto would experience a negative growth rate if it does not have external funding. This presents a shaky view of the company’s financial structure.
The internal growth rate of Monsanto was established as 11.57%. This shows that Monsanto had the potential for improving its sales and profits without necessarily taking additional equity and debt (“Internal Growth Rate (IGR) Definition”, 2019). The value provided shows that Monsanto can experience significant growth in profits and sales without having additional lenders and investors in the company. In case Monsanto has a higher growth rate than the internal growth rate, then this would mean that the company should seek external sources of capital such as debt and equity.
The comparison of the sustainable growth rate and the internal growth rate is important to ascertain whether a company has adequate funding. The sustainable growth rate was higher than the internal growth rate as the extent of the additional funding would be in proportion to the capital mix of the company (Brenner & Schimke, 2015). Further analysis of the external financing needed (EFN) showed that Monsanto needed an additional debt of $2,223,288.72. The value was similar to the extent of additional debt required by the company. From the given analysis, Monsanto needs to take significant additional financing in order to realize continual growth.
Recommendation
The analysis of the financial statements and financial analysis showed that Monsanto has a stable financial structure. Monsanto has been experiencing good growth in its finances and the company should continue experience significant growth. The company may thus choose to reject the complete acquisition by Bayer and instead opt for external financing. From the analysis the need for external financing was found to be 2,223,288.72. The company can also consider additional equity by selling its shares to different shareholders.
Conclusion
Bayer seeks to grow its businesses and one of the ways the company can experience growth is to acquire companies in its industry. Monsanto is a company that Bayer finds viable for acquisition. As the chief financial officer of Monsanto, Monsanto should reject the purchase as it has a good financial structure and has been experiencing consistent growth. Instead, there were alternative financing options identified for the company which could involve taking additional debt and additional equity. The company’s board may consider the two options as an alternative for the merger with Bayer.
References
Brenner, T., & Schimke, A. (2015). Growth development paths of firms—A study of smaller businesses. Journal of Small Business Management , 53 (2), 539-557.
Coleman, S., Cotei, C., & Farhat, J. (2016). The debt-equity financing decisions of US startup firms. Journal of Economics and Finance , 40 (1), 105-126.
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of Financial Economics , 119 (2), 300-315.
Internal Growth Rate (IGR) Definition. (2019). Internal Growth Rate (IGR) Definition. Retrieved from https://www.investopedia.com/terms/i/internalgrowthrate.asp
Monahan, S. J. (2018). Financial Statement Analysis and Earnings Forecasting. Foundations and Trends® in Accounting , 12 (2), 105-215.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis . John Wiley & Sons.
Schnitkey, G. (2018). Incidence of High Debt-to-Asset Ratios Grows Over Time. farmdoc daily , 8 .
Sustainable Growth Rate – SGR. (2019). Sustainable Growth Rate – SGR. Retrieved from https://www.investopedia.com/terms/s/sustainablegrowthrate.asp
