FINANCIAL ANALYSIS SAMPLE PAPER

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A share is an amount of money one deposit into a corporation in order to entitle thatperson’s ownership rights. Price per share is therefore the amount of money ashareholder would pay for a unit share. In the current world, business has taken anotherdimension. If company realizes that its performance is dwindling, it invites othercompanies to bid on its shares so that in can surrender its operations to the highestbidder. To the highest bidder, this is a strategic move since it will acquire all the assetsbelonging to that company including workforce and customers. This paper will thereforediscuss the appropriate price per share bid that Air Europe should place on Aer Lingusand the reasons why it is appropriate to do place such a bid. But before discussing theappropriate price per share (PPS) that Air Europe should make to Aer Lingus, it is goodhave 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 listedunder the ticker EIL1 and AERL listings respectively. According to this listing, its currentprice per share is €2.34. It is important to note that in most cases, most companies find itdifficult to sell their shares while in the market, buyers may find it hard to buy sharesfrom other companies. This is because shares are high-risk investments whose pastperformance cannot be used as a base to determine their future performance. Theirprices are subject to fluctuation. As a result, companies are urged to seek professionalassistance should it make the decision of making such an investment. 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 moreaircrafts.

FINANCIAL ANALYSIS SAMPLE PAPER

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 facinghard times as far as its management and expansion is concerned. In order to reducetheir high operating cost, the company is planning to engage on a restructuring planthat 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 pershare to Aer Lingus. Reports indicate that there exists stiff competition by other airliners to take over theoperations and management of this Irish airline. Ryanair for instance, has tried takingover. However, Aer Lingus has considered Ryanair price per share of €2.40, too little asit only values the company at €1.1 billion. The International Airline Group consisting ofBritish Airways, Iberia and Vueling, has also ventured into this field and want to takeover Aer Lingus. The report indicates that Aer Lingus is in the process of accepting theIAG bid of €2.55 price per share (RTE. IE 2015). This deal is meant to value Aer Lingus atapproximately €1.4 billion. Statistically and according to the listings of Irish and London stock exchange, thegovernment 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 whoown around €50000 worth of shares. Totally, Aer Lingus is valued at a 534040090 worthof shares. Out of the above listed shareholders, Air Europe is not among them. Thismeans that if it has to make a bid, then it has to high enough to be successful. 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 thirdlargest 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 AerLingus. According to reports, Aer Lingus turned down Ryanair’s bid because the level ofthis bid “fundamentally undervalued” Aer Lingus. In other words, the value of this bid wastoo 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 Europeto 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 payAer Lingus a total sum of approximately €1.5 billion as calculated below (Chron.com2015): ≈ 1.5 billion

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FINANCIAL ANALYSIS SAMPLE PAPER

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 AirEurope to expand. It is the third largest airline in Europe, it this deal goes through, it maybecome the second leading airline in Spain. This is derived from the fact that Aer Lingushas a total fleet of 48 planes while Air Europe has 51. If the bid goes well, Air Europe willhave a total of 99 fleets. Though Iberia will still remain to be the number one flight, owingto its large number of fleets (128), this will be a huge advancement for Air Europe. It willtherefore 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 offerlong-haul to destinations like Heathrow. Also, it was also reported that Aer Lingus iswould 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 servicesas 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 benefitfrom the outcome of the deal. According to reports from BBC News (2015), this new dealthough in the short-run, it may lead to loss of employment, it is expected to createapproximately 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 byindustry analysts is the creation of around 1000. Additionally, this taking over is alsoexpected 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 thetransatlantic will increase, leading to growth of destinations thus facilitating touristtravel. Acquisition of Aer Lingus by Air Europe will reduce competition significantly. This isbecause once the two airlines merge, they will be working as a single entity under theumbrella of Air Europa. Though this move may lead to high fare for passengers, it willenable Air Europe gain high operating margins. Reports also indicate that is planning itincrease 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 aresult, it has to shoulder this responsibility alone. Making this bid therefore will beimportant to the company because if it wins in purchasing Aer Lingus, it will have morethan 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), itis has already placed an order for a total of 50 jets: 10 Airbuses and 40 Boeings.

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FINANCIAL ANALYSIS SAMPLE PAPER

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 Airbuscost $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 thisamount into sterling pounds, with the current rate of 1.07, this gives €8.551 billion. Ifthe company was to succeed in the bid, it will only spend €2.08 billion. This meansthat Air Europa will save €6.471 billion (8.551 – 2.08) besides acquiring 48 Airbusescurrently owned by Aer Lingus. It has been reported in the Reuters UK (2015), that the Irish government is unwilling toallow IAG take over Aer Lingus. According to the government, this taking over willresult in economic loss. A larger percentage of employees from Aer Lingus will losetheir job yet IAG does not have the capacity to employ them. Additionally, thegovernment alleges that in the past few years, since 2014, Aer Lingus has recorded an18% 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 morefinancial sense than the one IAG is offering. If Air Europe, therefore places their €2.808 bid, they will be in a position to easily takeover Aer Lingus. Moreover, it has been noted that Air Lingus is an airline that iscoming up compared to IAG (a merger of three airlines). This means that it as it longsto expand, it will need more workforce on board. A large percentage, if not all, ofworkers who will lose their jobs, by the virtue of the takeover, may have theopportunity to work for Air Europe. Given the fact that this what the Irish governmentwants, 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 maygo wrong. Discussed in the subsequent paragraphs and sentences are some of thekey areas to watch when bidding for another company. One key thing to watch andavoid is early bidding. A company may be interested in acquiring something and theyplace a bid as soon as an opportunity arises. This is not recommended at all. This isbecause, through bidding, a company makes its intentions known to the othercompanies who will then be attracted to the deal. They will may end up placing higherbids which may eventually win as it happened to Ryanair. They had placed an earlierbid of €2.20 which was later overtaken by IAG’s bid of €2.55. It is therefore good towait until the time has gone to make a bid (Procurementclassroom.com 2015). Thiswill not only eliminate unnecessary competition, but it may enable the company inquestion acquire what they want at a lower bid.

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FINANCIAL ANALYSIS SAMPLE PAPER

Another key area to watch is the level of the bid. In most cases, initial bid quotationsare very low. This may tempt and investor who really want to acquire something. Thisis because they may end up placing a low bid without considering the value ofwhatever they want to acquire. It is therefore not advisable to quote a low bid foranother 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 anybid. Many are the times companies have acquired something at a high bid yet its valueisn’t worth that much. This usually happens when a company lacks prior informationabout what they are bidding for. Therefore, prior research should be done so that aproper bid is placed. Even if the bid is outbid, it won’t have major impacts since it isbetter to lose something that is less worth that gain it yet it will never makesubstantial gains of the company. Another important thing to watch is escalating bidding. This occurs if the item inquestion is too popular. In such a scenario, many bidders will be attracted and thelevel 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 otherbidders. The consequences are, a company may end up acquiring something at ahigher price than expected. The recommendation is to set a maximum amount that acompany is able and willing to bid and no matter what happens, one should stick tothis amount even though it calls for loosing. It is better to lose, for this is normal inbidding environments, than pay too much for a bid.

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FINANCIAL ANALYSIS SAMPLE PAPER

REFERENCES 02B, (2015). Air Europa to add frequencies on the Puerto Rico route. [Online] Availableat:https://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: https://www.bbc.com/news/business-30967346 [Accessed 10 Apr.2015]. JOE BEN HOYLE, T. (2012). Fundamentals of advanced accounting. [S.l.]: McGraw hillhigher educat. Procurementclassroom.com, (2015). The Bid Security and Its Purpose. [online]Available at: https://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] Availableat: https://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 ofCommon Stock. [online] Available at: https://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: https://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: https://finance.zacks.com/stock-prices-increase-after-takeover-6973.html [Accessed 10 Apr. 2015].

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