Financial Analysis Sample

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A share is an amount of money one deposit into a corporation in order to entitle that person’s ownership rights. Price per share is therefore the amount of money a shareholder would pay for a unit share. In the current world, business has taken another dimension. If company realizes that its performance is dwindling, it invites other companies to bid on its shares so that in can surrender its operations to the highest bidder. To the highest bidder, this is a strategic move since it will acquire all the assets belonging to that company including workforce and customers. This paper will therefore discuss the appropriate price per share bid that Air Europe should place on Aer Lingus and the reasons why it is appropriate to do place such a bid. But before discussing the appropriate price per share (PPS) that Air Europe should make to Aer Lingus, it is good have a look at the background information related to Aer Lingus and Air Europe.

On the Irish and London stock exchange, Aer Lingus is among the airlines that is listed under the ticker EIL1 and AERL listings respectively. According to this listing, its current price per share is €2.34. It is important to note that in most cases, most companies find it difficult to sell their shares while in the market, buyers may find it hard to buy shares from other companies. This is because shares are high-risk investments whose past performance cannot be used as a base to determine their future performance. Their prices are subject to fluctuation. As a result, companies are urged to seek professional assistance should it make the decision of making such an investment.

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Air Europe is a Spain airline, owned by a travel and tourism company (Globalia). Currently, the company has a total of 51 in-service aircrafts having placed an order for 42 more aircrafts. It is also planning to expand its network and destination to Madrid and Latin America. Following the harsh economic circumstances in Spain, the airlines are, however facing hard times as far as its management and expansion is concerned. In order to reduce their high operating cost, the company is planning to engage on a restructuring plan that aims at reducing pilots’ salary by 30%. Though this may sound a good move to them, it is highly unacceptable and that is the reason why it should think of placing a price per share to Aer Lingus.

Reports indicate that there exists stiff competition by other airliners to take over the operations and management of this Irish airline. Ryanair for instance, has tried taking over. However, Aer Lingus has considered Ryanair price per share of €2.40, too little as it only values the company at €1.1 billion. The International Airline Group consisting of British Airways, Iberia and Vueling, has also ventured into this field and want to take over Aer Lingus. The report indicates that Aer Lingus is in the process of accepting the IAG bid of €2.55 price per share (RTE. IE 2015). This deal is meant to value Aer Lingus at approximately €1.4 billion.

Statistically and according to the listings of Irish and London stock exchange, the government of Irish owns 25% shares of Aer Lingus valued at €1.34 billion, Ryanair 30% valued at €1.6 billion while the rest is owned by another investor including workers who own around €50000 worth of shares. Totally, Aer Lingus is valued at a 534040090 worth of shares. Out of the above listed shareholders, Air Europe is not among them. This means that if it has to make a bid, then it has to high enough to be successful.

Mathematically, price per share

From the information provide above, the highest bidder so far it IAG, with a bid of €2.55 price per share. This means that the total amount of money IAG is willing to invest in this deal is

If Air Europe has to make a bid therefore, it must quote a price per share that is above €2.55 billion (JOE BEN HOYLE 2012). Considering the fact that Air Europe is the third largest flight in Spain, after Iberia and Vueling, it should make a bid of €2.808 billion.

This bid is appropriate because, it is the highest bid and it is likely to be accepted by Aer Lingus. According to reports, Aer Lingus turned down Ryanair’s bid because the level of this bid “fundamentally undervalued” Aer Lingus. In other words, the value of this bid was too low. Air Europe should therefore offer Aer Lingus a bid that would not “undervalue” the airline. Additionally, bidding at this price per share value will still enable Air Europe to stand financially. It would not be incapacitated in case the bid succeeds. Currently, the company’s revenue from sales is €2.13 billion. If the bid succeeds, it will have to pay Aer Lingus a total sum of approximately €1.5 billion as calculated below (Chron.com 2015):

≈ 1.5 billion

As seen from the above investment, Air Europe will still have a balance of €0.68 billion (2.13 – 1.5) to run its daily operations. Furthermore, this will be an opportunity for Air Europe to expand. It is the third largest airline in Europe, it this deal goes through, it may become the second leading airline in Spain. This is derived from the fact that Aer Lingus has a total fleet of 48 planes while Air Europe has 51. If the bid goes well, Air Europe will have a total of 99 fleets. Though Iberia will still remain to be the number one flight, owing to its large number of fleets (128), this will be a huge advancement for Air Europe. It will therefore have the capability to expand its coverage and make more profit.

On the other hand, Ireland, as a nation is looking forward to increase its services and offer long-haul to destinations like Heathrow. Also, it was also reported that Aer Lingus is would want to sell its shares to a company that will enable them do long-haul flights. However, the current conditions of Aer Lingus cannot allow them to offer such services as an airline. They will therefore accept this deal since, Air Europe, as an airline, has long-haul flights.

Profit-wise, Air Europe won’t directly benefit by making a low bid, but they will benefit from the outcome of the deal. According to reports from BBC News (2015), this new deal though in the short-run, it may lead to loss of employment, it is expected to create approximately 500 more jobs in the next five years, both for Air Europe and Aer Lingus. This is just a conservative figure and an approximating, the actual figure quoted by industry analysts is the creation of around 1000. Additionally, this taking over is also expected to boost tourism sectors. Some parts are not accessible through the planes. However, if the with acquisition of Aer Lingus by Air Europe, traffic within the transatlantic will increase, leading to growth of destinations thus facilitating tourist travel.

Acquisition of Aer Lingus by Air Europe will reduce competition significantly. This is because once the two airlines merge, they will be working as a single entity under the umbrella of Air Europa. Though this move may lead to high fare for passengers, it will enable Air Europe gain high operating margins. Reports also indicate that is planning it increase its frequency of Madrid and San Juan air routes which were left by Iberia. However, it is undergoing the same financial challenges that Iberia underwent. As a result, it has to shoulder this responsibility alone. Making this bid therefore will be important to the company because if it wins in purchasing Aer Lingus, it will have more than enough fleet to cover this Caribbean air route with ease.

Furthermore, the value of this bid, if it wins, is incomparable to Air Europa’s current plans. According to this website Air Europa to add frequencies on the Puerto Rico route (2015), it is has already placed an order for a total of 50 jets: 10 Airbuses and 40 Boeings. This is far much expensive for the firm. A single Boeing B787 cost $200 million, meaning 40 of them will cost $8000 million (200 x 40). On the other hand, one Airbus cost $115 million, 10 will cost $1150 million. This gives a total sum of $9150 million ($8000 + $1150). A rough estimation of this amount is $9.15 billion. Converting this amount into sterling pounds, with the current rate of 1.07, this gives €8.551 billion. If the company was to succeed in the bid, it will only spend €2.08 billion. This means that Air Europa will save €6.471 billion (8.551 – 2.08) besides acquiring 48 Airbuses currently owned by Aer Lingus.

It has been reported in the Reuters UK (2015), that the Irish government is unwilling to allow IAG take over Aer Lingus. According to the government, this taking over will result in economic loss. A larger percentage of employees from Aer Lingus will lose their job yet IAG does not have the capacity to employ them. Additionally, the government alleges that in the past few years, since 2014, Aer Lingus has recorded an 18% increase in profit margin and therefore selling it would be a great loss to Ireland. In other words, what the Irish government wants is a takeover that will make more financial sense than the one IAG is offering.

If Air Europe, therefore places their €2.808 bid, they will be in a position to easily take over Aer Lingus. Moreover, it has been noted that Air Lingus is an airline that is coming up compared to IAG (a merger of three airlines). This means that it as it longs to expand, it will need more workforce on board. A large percentage, if not all, of workers who will lose their jobs, by the virtue of the takeover, may have the opportunity to work for Air Europe. Given the fact that this what the Irish government wants, Air Europe should consider making this price-per-share bid.

It is good to understand that bidding is a game of probabilities and many things may go wrong. Discussed in the subsequent paragraphs and sentences are some of the key areas to watch when bidding for another company. One key thing to watch and avoid is early bidding. A company may be interested in acquiring something and they place a bid as soon as an opportunity arises. This is not recommended at all. This is because, through bidding, a company makes its intentions known to the other companies who will then be attracted to the deal. They will may end up placing higher bids which may eventually win as it happened to Ryanair. They had placed an earlier bid of €2.20 which was later overtaken by IAG’s bid of €2.55. It is therefore good to wait until the time has gone to make a bid (Procurementclassroom.com 2015). This will not only eliminate unnecessary competition, but it may enable the company in question acquire what they want at a lower bid.

Another key area to watch is the level of the bid. In most cases, initial bid quotations are very low. This may tempt and investor who really want to acquire something. This is because they may end up placing a low bid without considering the value of whatever they want to acquire. It is therefore not advisable to quote a low bid for another company may arise and quote a high bid for the same leading to a loss.

Furthermore, a company should do a lot of research before attempting to make any bid. Many are the times companies have acquired something at a high bid yet its value isn’t worth that much. This usually happens when a company lacks prior information about what they are bidding for. Therefore, prior research should be done so that a proper bid is placed. Even if the bid is outbid, it won’t have major impacts since it is better to lose something that is less worth that gain it yet it will never make substantial gains of the company.

Another important thing to watch is escalating bidding. This occurs if the item in question is too popular. In such a scenario, many bidders will be attracted and the level of bidding will continue to rise. Since companies really want to acquire the item, they will continue placing new and higher bids in an attempt to stay ahead of other bidders. The consequences are, a company may end up acquiring something at a higher price than expected. The recommendation is to set a maximum amount that a company is able and willing to bid and no matter what happens, one should stick to this amount even though it calls for loosing. It is better to lose, for this is normal in bidding environments, than pay too much for a bid.

References

02B, (2015). Air Europa to add frequencies on the Puerto Rico route. [Online] Available at: http://www.02b.com/en/notices/2014/01/air_europa_to_add_frequencies_on_the_puerto_rico_route_6411.php [Accessed 10 Apr. 2015].

BBC News, (2015). Aer Lingus ‘to accept’ bid from British Airways owner IAG. [Online] Available at: http://www.bbc.com/news/business-30967346 [Accessed 10 Apr. 2015].

JOE BEN HOYLE, T. (2012). Fundamentals of advanced accounting. [S.l.]: McGraw hill higher educat.

Procurementclassroom.com, (2015). The Bid Security and Its Purpose. [online] Available at: http://www.procurementclassroom.com/the-bid-security-and-its-purpose/ [Accessed 10 Apr. 2015].

RTE.ie, (2015). Aer Lingus board set to recommend IAG takeover bid. [online] Available at: http://www.rte.ie/news/2015/0126/675584-aer-lingus/ [Accessed 9 Apr. 2015].

Small Business – Chron.com, (2015). How to Calculate Market Price Per Share of Common Stock. [online] Available at: http://smallbusiness.chron.com/calculate-market-price-per-share-common-stock-3396.html [Accessed 9 Apr. 2015].

Reuters UK, (2015). Aer Lingus presses Irish government on IAG takeover. [online] Available at: http://uk.reuters.com/article/2015/02/24/uk-aerlingus-results-idUKKBN0LS0IP20150224 [Accessed 10 Apr. 2015].

Finance – Zacks, (2015). Why Do Stock Prices Increase After a Takeover?. [online] Available at: http://finance.zacks.com/stock-prices-increase-after-takeover-6973.html [Accessed 10 Apr. 2015].

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