Case Analysis

ADECCO & OLSTEN MERGER

Overview of Case Analysis

Adecco SA, one of the worlds prominent staffing companies, was looking forward to
acquire the staffing of Olsten Corporation. Adecco was a global leader in a staffing
industry, and acquisition of Olsten is vital for Adeccos strategy i.e. targeted market
leadership. Negotiations had been taking place between the board members of
these companies regarding the acquisition. These talks between Adecco and Olsten
took a turn for the worse with the rise on the scene of a Dutch staffing company,
Vedior. Vedior also showed interest in acquiring the staffing business of Olsten. In
the beginning of July, 1999, Adecco and Vedior submitted competing offers for the
acquisition of Olstens business.
1. How has Adecco been able to outperform its rivals in the staffing
industry? What is the strategic and economic rationale for its acquisition
of Olsten?
Adecco is an emerging global firm in the employment services industry, have a
focused strategy aimed at being the employer and supplier of choice. This is
accomplished by rapid growth, and shareholders find this company an attractive
investment destination. The Planners at Adecco knew that their clients preferred to
deal with one company globally in order to realize consistent service. Much of
Adeccos revenue came in the form of general staffing (88%) however, they enjoyed
higher margins on specialized offering such as financial and IT which also keep them
separated from their competitors.
Adecco had a goal to become number one or two staffing service firm in the world.
They worked to accomplish this goal very quickly through acquisitions and internal
growth. Adding Olsten to the Adecco portfolio would increase their market share by
6-10% effectively making Adecco the number one staffing firm in the United States.

2. Evaluate Olstens strategic and financial conditions as of mid-1999, in

particular its funding needs and resources.
Olstens long term debt and subsequent EBDITA ratio as of mid-1999 was -18.2
(Note 1) and has been declining exponentially over the past two years. Decline in
net income and growing liabilities and long-term debt was the main reason for the
decline. This would appear to be arise due to the steady decline in reduced
reimbursements for its home health services,
The increased price of its strategic buyouts, and its recent payouts due to legal
issues. It seems that Olsten had too much aggressive in its plan for growth by way
of acquisitions and the overall firm couldnt handle the implications.
Due to the excess debt contents in its Capital structure, Olstens Interest Expenses
also continued to rise, along with the debt but with its negative EBIT level Olstens
EBIT to Interest Expense ratio prevail at -2.05 (Excel working) as of mid-1999.
The long-term debt of $746 million included a revolving credit line agreement with a
consortium of 11 banks, of which Olsten has drawn down $344 million of the $400
million credit line and classified as long-term debt. The agreement was subject to a
number of covenants both negative and affirmatives such as restriction on sale of
assets and issuing further debts. Further covenants with Olstens Bankers requiring
specific levels for some key ratios viz: Long Term Debt/EBDITA must be kept below
3.75, and EBIT/Interest Expense must be kept above 2.0; Olsten was in violation of
both of these, and by huge margins. This violation of the covenants meant an event
of default likely be arise in default of its debt. Banks are unwilling to increase
Olstens credit lines and it is evident that the existing obligations could be met
through internal cash flow generations.
3. What is your estimate of total enterprise value? For this calculation,
make the following assumptions:
a. valuation has been evaluated from the perspective of Adecco US.
b. Assumed that acquisition was completed on January 1, 2000.
Further following assumptions has been made to arrive at the conclusions.
i.

Long-term capital structure of Olsten, at 20% debt and 80% equity.

ii.

The EBIT was assumed to be the value of EBITA because the amortization and
goodwill was not subtracted from this value.

iii.

Olstens US rivals (i.e., Kelly and Manpower) had a debt beta of 0.10. So it is
assumed that Olsten will have the same debt beta at its target capital
structure.

iv.

Market Risk Premium = 7.2%.

v.

Adecco would assume $750 million of Olsten debts.

vi.

Weighted Average Cost of Capital

For calculating WACC, firstly cost of equity is calculated by adding the risk free rate
to the multiplied value of beta with risk premium. The cost of capital is calculated by
(Interest of Debt * Debt share *(1 Tax)) + (Equity share * Cost of equity) = WACC
vii.

Total Enterprise Value

The free cash flow is discounted at WACC. Then the terminal value is added to it
in order to calculate the enterprise value. The enterprise value is the real value
or worth of the equity which is being acquired.

viii.

Payments made by Adecco to minority shareholders, and tax benefits due to

Adecco US royalties.

Adecco arrived at a debt portion of WACC equal to .96% and an equity portion of
9.31% resulting in an overall WACC of 10.27%.
This was calculated utilizing a beta of equity considering a beta of debt and assets
of 0.2 and 0.48 respectively.
Utilizing the free cash flow over the course of the last 10 years, Adecco arrived at an
NPV for 2000 of $6.023 million dividing the NPV by the total shares issued and
outstanding of 81.309 arrived at a total per share value of $7.41.

5. As Adecco, how much would you bid for Olsten? Why? How would you
convince the Olsten board to accept your offer? How might the Olsten
familys perspective differ from that of the other board members?
As Adecco, it would be advisable to continue with the plan to bid $11 per share for
the enterprise if there is no minority payout or debt assumption. This is $3.59 per
share higher than what the firm is valued at for an overall total of $8.93 million. The
justification for this bid looks promising from the prospective of synergy gains to the
conglomerate that would be emerge with the acquisition of Olsten by Adecco as
well as the additional value realized from financing and taxes.
Currently Olsten is in need of capital due to poor strategic planning regarding
acquisitions and a decreasing home health reimbursement plan from the
government. The time would be right for Olsten considering this vulnerable position
to take advantage of the offer from Adecco considering the bid
The Olsten family owned 16% of the firm but controlled 66% of the vote, The Olsten
family members have been integral part of many previous acquisitions and growth
however, and there are US litigations and lawsuits over their home health services.
The Board has also observed that Olsten leveraging 50-100 million dollars for more
European buyouts and the banks inability to extend more credit past their 750
million dollar debt. The Board is seeing massive debt from moves from the Olsten
family, so they would look at this acquisition completely different than the
emotional

ties

that

Olsten

would

have,

the

Board

sees

debt,

and

an

underperforming company with a stock price that is decreasing every month.

6. The case describes a method whereby Adecco US could make royalty
payments

to

Adecco

SA.

What

is

the

valuation

impact

of

this

imperfection?
Imperfections such as Taxes, cost of bankruptcy and financial distress, Transaction
costs etc. This has effect on the optimal debt policy. Thus by increase in its
expenses, its annual tax savings will also increase per annum.
Annual Tax savings ( annual tax shield) = amount of expenses * tax rate