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At the same time that Schneider was making overtures to Square D, Square D was
organizing legal defenses against hostile takeovers. In 1989 it moved to Delaware,
where state laws require hostile bidders to have a minimum of 85 percent of the shares
tendered to effect a takeover. In addition, it created poison pill amendments to ¬ght
potential unsolicited bids, including a Common Stock Purchase Plan (see Exhibit 4 for
details).
During November 1990, unusual activity was noticeable in Square D™s stock. Rumors
of a takeover led to a jump in volume and increased the share price from $36.50 on Oc-
tober 22 to $49.75 on November 7 (see Exhibit 5). On November 6, 1990, Stead dis-
cussed the unusual activity in a phone conversation with Pineau-Valencienne, who
expressed an interest in having the opportunity to propose a transaction to Square D if
any other parties were given such an opportunity.
On February 1, 1991, Value Line Investments Survey made the following comments:
432 Prospective Analysis: Valuation Theory and Concepts




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Prospective Analysis: Valuation Theory and Concepts




Square D stock is trading on takeover speculation, as it has for the past three
months. Square D has several attractions (including positions in selected electri-
cal equipment markets), and could well be a tempting takeover target, especially
to a foreign company trying to establish or to enlarge a market presence in the
U.S. An acquirer might be willing to pay $70 a share or more for the company. But
after three months of unusually heavy trading in the stock, during which time all
of its outstanding shares theoretically have changed hands, no evidence of a pend-
ing buyout attempt has appeared. If none is eventually forthcoming, we™d expect




Schneider and Square D
the stock to gradually drift lower, perhaps to the range of $40“$45 a share. At this
juncture, only speculative investors should be holding these shares.


Potential Acquisition of Square D
One option that Pineau-Valencienne was considering was to make a bid for Square D.
After two years of contacts with Square D, he had a number of ideas for synergies and
sources of value that could result from a full combination of the two companies. These
included:
• Rationalizing R&D efforts between the two companies and sharing the benefits of
existing technologies;
• Providing access to larger distribution channels for both companies;
• Rationalizing manufacturing capabilities; and
• Expanding Square D™s product lines by selling products developed by T©l©-
m©canique or Merlin Gerin.
Lazard Frères, the ¬nancial advisor of Schneider, was asked to analyze the stand-
alone value of Square D as well as its value to Schneider. To determine Square D™s
stand-alone value, Lazard Frères prepared a set of base assumptions for the ¬rm™s future
performance as an independent entity. They projected that (a) sales would grow 3.5 per-
cent in 1991 and 7 percent per year thereafter; (b) EBIT would be 15“16 percent of sales;
(c) net working capital would continue to be 11“13 percent of sales; (d) projected capital
expenditures would be 5 percent of sales; and (e) depreciation expenses would remain
at 4 percent of sales between 1991 and 1997, and 4.3 percent thereafter. Based on the
synergies between Schneider and Square D, Lazard Frères estimated that Square D
could save approximately $60 million per year in expenses (after tax) if it were com-
bined with Schneider. In addition, the disposal of some of Square D™s unrelated assets
could generate $150 million in cash. Other data relevant to the valuation of Square D is
presented in Exhibit 6.
One other issue that Pineau-Valencienne was concerned about in a possible acquisi-
tion of Square D was its effect on Schneider™s income. Under French accounting,
Schneider would have to amortize goodwill, regardless of whether the offer was cash or
stock-¬nanced. Lazard Frères estimated that asset and liability revaluations under an ac-
quisition would be minimal, implying that there would be signi¬cant goodwill amorti-
433
Prospective Analysis: Valuation Theory and Concepts




11-29 Part 2 Business Analysis and Valuation Tools




zation charges, even if the maximum period of 40 years was chosen. Pineau-Valencienne
expected that many analysts would react negatively to the resulting dilution of earnings.
Didier Pineau-Valencienne felt he had to make a quick decision. There were rumors
that Square D already had been approached by a number of other companies about a
business combination. Pineau-Valencienne was very concerned that other competitors
could gain control of Square D, leaving Schneider with few opportunities to gain access
to the U.S. market.
Schneider and Square D




QUESTIONS
1. Assess and discuss the strategic fit between Square D and Schneider. What are the
economic pros and cons of a combination?
2. Evaluate the base assumptions Lazard Frères made for valuing Square D.
3. Estimate the value of Square D as an independent company. What is the company
worth to Schneider?
4. What would be the effect of the acquisition on Schneider™s future earnings, assuming
that it was forced to pay the full value of Square D? Should Schneider be concerned
about this effect?
5. If you were Mr. Pineau-Valencienne in late January 1991, what would you do?
Would you offer a bid for Square D? If so, how much would you bid, and would you
make your offer friendly or hostile?
434 Prospective Analysis: Valuation Theory and Concepts




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Prospective Analysis: Valuation Theory and Concepts




EXHIBIT 1
Schneider and Square D Market Shares, U.S. and Europe



U.S. MARKET SHARES




Schneider and Square D
Square D
30%
Schneider

15% 15%

5%
1% 1%
Industrial Residential Industrial
Distribution Distribution Control
SEGMENTS



EUROPEAN MARKET SHARES




40%
Square D
Schneider
25% 25%



2% 2% 1%
Industrial Residential Industrial
Distribution Distribution Control
SEGMENTS
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Prospective Analysis: Valuation Theory and Concepts




11-31 Part 2 Business Analysis and Valuation Tools




EXHIBIT 2
Selected Pages from Square D™s 1990 Annual Report

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF NET EARNINGS

Year Ended December 31
Schneider and Square D




...............................................................
(Amounts in thousands, except per share) 1990 1989 1988
......................................................................................................................................
Net Sales $1,653,319 $1,598,688 $1,497,772
Costs and Expenses:
Cost of products sold 1,088,977 1,027,348 979,591
Selling, administrative and general 385,903 369,726 338,962
Restructuring charge ” 26,320 ”
Operating Earnings 178,439 175,294 179,219
Non-Operating Income 34,740 17,106 17,255
Interest Expense (28,760) (31,438) (22,082)
Earnings from Continuing Operations before
Income Taxes 184,419 160,962 174,392
Provision for Income Taxes 67,773 59,856 63,310
Earnings from Continuing Operations 116,646 101,106 111,082
Discontinued Operations:
(Loss) earnings from operations, net of
income tax (bene¬t) expense: 1990”
$(1,188); 1989”$(1,086); 1988”$3,831 (312) 798 7,852
Gain on disposal, net of other provisions; net
of income taxes of $1,865 4,391 ” ”
Earnings from Discontinued Operations 4,079 798 7,852
Net Earnings 120,725 101,904 118,934
Preferred Dividend, Net of Income Taxes 6,176 3,300 ”
Net Earnings Available for Common
Shareholders $ 114,549 $ 98,604 $ 118,934
Earnings per Common Share:
Primary:
Continuing operations $ 4.76 $ 3.95 $ 4.15
Discontinued operations .18 .03 .29
Net Earnings $ 4.94 $ 3.98 $ 4.44
Fully Diluted:
Continuing operations $ 4.57 $ 3.88 $ 4.13
Discontinued operations .16 .03 .29
Net Earnings $ 4.73 $ 3.91 $ 4.42
Weighted Average Number of Common Shares
Outstanding:
Primary 23,181 24,763 26,776
Fully diluted 25,088 25,809 27,016
......................................................................................................................................
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Prospective Analysis: Valuation Theory and Concepts




CONSOLIDATED BALANCE SHEETS

December 31,
........................................
1990 1989
(Dollars in thousands, except per share)
..................................................................................................................................................

ASSETS
Current Assets:




Schneider and Square D
Cash and short-term investments $ 244,933 $ 66,348
Receivables, less allowances (1990”$23,759; 1989”$18,556) 305,241 314,123
Inventories 159,109 151,316
Prepaid expenses 12,664 15,206
Prepaid income taxes 4,714 ”
Deferred income tax bene¬t 34,988 26,459
Net assets of discontinued operation ” 117,116
Total Current Assets 761,649 690,568
Investment in Leveraged Leases 137,182 133,344
Property, Plant and Equipment:
Land 24,477 22,216
Buildings and improvements 222,105 212,992
Equipment 552,785 501,531
Property, Plant and Equipment”at cost 799,367 736,739
Less accumulated depreciation 349,265 318,261
Property, Plant and Equipment”net 450,102 418,478
Net Assets of Discontinued Operations 36,681 52,949
Excess of Purchase Price Over Net Assets of Businesses Acquired, Less
Amortization (1990”$13,769; 1989” $12,978) 51,391 50,528
Other Assets 22,744 26,718
Total Assets $1,459,749 $1,372,585

LIABILITIES AND COMMON SHAREHOLDERS™ EQUITY

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