Case Overview
In the Electrolux and GE Appliances scenario, General Electric (GE) sought to divest its Appliances business, a largely U.S.-based entity struggling with stagnant growth and profitability. GE Appliances, headquartered in Louisville, Kentucky, manufactures products including refrigerators, ice makers, freezers, cooking appliances, dishwashers, washers, dryers, air conditioners, water filtration systems, and water heaters (Moffett, 2016). Facing increased competition and changing market dynamics, GE decided to explore a sale.
Electrolux, a Swedish company and the second-largest appliance maker globally, emerged as a potential buyer. Electrolux aimed to acquire GE Appliances to strengthen its presence in the mid-price segment of the market, particularly in North America (Moffett, 2016). The valuation team at Electrolux, based in Stockholm, faced the challenge of assessing the value of GE Appliances both as a standalone business and in combination with Electrolux (Moffett, 2016). They considered factors such as GE Appliances’ historical performance, potential synergies, and the overall appliance market landscape.
Key valuation components included analyzing GE Appliances’ financials and projections, and estimating cost synergies arising from integration with Electrolux’s operations (Moffett, 2016). The team also considered the potential impact on Electrolux’s sales and market share in different global regions (Moffett, 2016). The deal was time-sensitive, as other companies, including Haier and Mabe, were rumored to be interested in acquiring GE Appliances(Moffett, 2016). The valuation team had to finalize their assessment and bidding strategy in a competitive environment.
The potential acquisition represented a strategic move for Electrolux to enhance its market position and benefit from synergies (Moffett, 2016). However, challenges included uncertainties about consumer response, potential cannibalization of sales, and the realization of promised synergies post-acquisition (Moffett, 2016). The valuation team aimed to balance these factors and present a compelling bid for GE Appliances.
Total Value of GE Appliances and Electrolux
Range of Values for GE Appliances
Terminal Values and Their Effect
The decision to support the merger depends on the terminal values and the associated financial metrics. Looking at the numbers in the exhibit, the scenario without Terminal Value (TV), Capital Expenditures (CAPEX), and Net Working Capital (NWC) over seven years shows the lowest values, indicating a conservative approach. The scenario with NWC but no TV or CAPEX shows an increase in values. In contrast, the scenario with Terminal Value, CAPEX, and NWC over seven years exhibits significantly higher values, reflecting a more optimistic view. Considering the long-term growth and profitability, the scenario with Terminal Value, CAPEX, and NWC suggests a more favorable perspective for the merger.
Most important Figure
If presenting to senior management, a chosen final valuation could be derived from the “Terminal Value, CAPEX, NWC (7 years)” scenario with 3.00% revenue growth, resulting in a valuation of $6,958 million. This number balances conservative and optimistic assumptions by using a moderate, realistic revenue growth projection. Including Terminal Value, CAPEX, and NWC provides a holistic view of the business’s long-term potential. However, the final valuation may vary based on the company’s risk tolerance, strategic goals, and financial policies. Sensitivity analyses and scenario testing should be conducted to assess the impact of different assumptions on the valuation.
Outcome
The merger between Electrolux and GE Appliances faced a setback when General Electric decided not to sell its appliances division to Electrolux (Gibbs, 2016). The Chief Executive Officer of Electrolux, Keith McLoughlin, expressed understanding despite GE’s eleventh-hour withdrawal, citing the subsequent sale to Haier for $5.4 billion as a factor (Gibbs, 2016). McLoughlin acknowledged the inherent risks in the deal but emphasized the importance of taking prudent risks for transformative returns. The termination of the $3.3 billion deal in December 2015, months after the Department of Justice raised antitrust concerns, led Electrolux to incur an operating loss of 202 million Swedish crowns in the final quarter of 2015 (Gibbs, 2016). Despite the setback, McLoughlin maintained confidence in Electrolux’s strength in the U.S. market and expressed the company’s commitment to continued growth and investment (Gibbs, 2016).
The failed acquisition did not deter Electrolux from pursuing future M&A. McLoughlin affirmed that the company remained actively engaged in its M&A processes (Gibbs, 2016). Although the deal’s fallout impacted Electrolux’s financials, McLoughlin characterized the subsequent quarter as healthy, highlighting strong performances in Europe and North America and exceptional cash flow (Gibbs, 2016). The company maintained its positive outlook despite the challenges posed by the failed GE Appliances acquisition.
References
Gibbs, A. (2016). Understand why GE pulled out of deal: Electrolux CEO. CNBC.
Moffett, M. (2016). Electrolux and GE Appliances. Harvard Business Publishing.