Jcrew M&a

M&A Final Exam: JCREW case

1. INTRINSIC VALUE There are two main analysis two evaluate the intrinsic value of a company: the third Party Bid (what someone else offered) and the Discounted Cash Flow analysis. We know already the offer of $43.5 per share for Jcrew equity and we want to assess if the offer is fair, low or high. We start with the DCF technique. We first need to estimate the FCF. To do that we used the 5 years projections provided and we assumed a revenues growth rate of 7% after the period of projections. The 7% growth rate, even if significantly over the average GDP rate of 2%-4% is our best estimate for two reasons. First, the market seems to attribute similar growth rate to all the players in the industry. Second, according to our past experience during the corporate finance course of Mr. Hite, a similar growth rate is used when 5 years revenues growth exceeds annual 10%. Pic.1: FCF of Jcrew. Source: management projections

Then we need to pick an ideal capital structure. To do that we used the technique of worst case scenario “h” which we chose being 2. Indeed we judged medium variability and medium vulnerability (Picture 2).

Pic 2.: Jcrew capital structure

Then we had to estimate the WACC. In order to do that, we used 3 different sets of comparable. First, we chose a set based on similar debt structure (a), as suggested by Donna. Second, we took a set based on similar amount of stores or similar operations (b). Finally we used the average of all comps proposed (c). As we can observe in picture 3 the WACC changes significantly according to the set of comps chosen and choosing 3 different sets we wanted to highlight the sensitivity of this assumption. Pic 3.: Estimating a WACC for JCREW.

Finally we did the actual valuation, starting with classical perpetuity and competitive methods as done during the Corporate Finance course. From picture 4 we can appreciate how the final result is very sensitive to the growth rate chosen. As said, we...