DANCEST 805 Lecture Notes - Lecture 9: Net Present Value, Real Options Valuation, Discounted Cash Flow

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2 Oct 2020

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Hotel industry is said to have stagnated its innovations and there is a new scope to create more values for the customers which are travelling often. There are different challenges and the opportunities of competing in the hotel industry. Hotel industry has changed over time in various ways. Meeting needs of various different groups of. Hotel industries are fast growing industries & customers are present. Understanding the culture, ethics of customers from different regions are major challenges to satisfy customers demand. Investing in different luxurious infrastructure & accommodation facilities can bring loss at times. Online customers are to be handled carefully & accommodation facilities can bring loss at times. Online customers are to be handled carefully & confirmation to be made getting the right information provide scope for new employment & profit. Customers if satisfied with the services of any hotel will encourage new customers to visit & build better businesses.

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Adapted from Bayer-Monsanto: the challenges of a Mega-merger. Case #9B17M182 and Teaching Note #8B17M182 Ivey Publishing

In 2016, the German multinational Bayer AG and the U.S.-based Monsanto Company agreed to merge, potentially creating the world's largest integrated pesticide and seeds company.

The agrochemicals and pharmaceuticals industries have several attributes in common. Both have large markets and high growth potential. Both industries also have strong technological roots in chemistry and biology. Too, the R&D intensity is high in both industries. Monsanto, for example, spends over 10% of its revenues on R&D whereas the average pharmaceutical firm spends 13%. Both industries are also subject to strict government regulation. For example, safety reviews of new products are commonplace in pharmaceuticals while genetically modified organisms are forbidden in Europe.

Nevertheless, there were some differences. For example, while the pharmaceutical industry is rather fragmented, agrochemicals were not - 6 companies controlled 2/3 of the seed business and 3/4 of the pesticide market. Moreover, the pharmaceutical industry is characterized by long product life cycles (e.g., 12 years) and heavy up-front investments in R&D to discover new products. To compound this risk, Bayer had a relatively limited portfolio in pharmaceuticals (15 products accounted for 80% of its 2015 pharmaceutical revenues).

Table 1: Revenue Distribution of Pharmaceutical companies in 2015, millions of Euros
Company	Pharmaceutical Revenues	Other Revenues
GlaxoSmithKline	21.4	14.6
AstraZeneca	34.0	0.0
Sanofi	29.8	4.7
Merck	32.2	3.4
Pfizer	44.0	0.0
Novartis	27.4	17.1
Roche	35.3	9.8
Bayer	12.6	29.8*
Johnson & Johnson	28.3	34.8
*9.1M Consumer health, 10.4M Crop Science, 12.0M Polymers, Coatings, and Adhesives. Source: Bayer 2015 annual report

Other factors favored the merger. For example, while Monsanto had a strong presence in America (53% of its sales), Bayer's geographical presence was stronger in Europe. Too, it was anticipated that knowledge from Bayer's pharmaceuticals and crop science research could be shared across Monsanto's animal health business. Both sides also anticipated additional benefits from the overlap in customers farmers - and from bundling seeds and pesticides in an exclusive package. Also, though Bayer had traditionally been weak in seeds they represented only 12% of crop science division sales - Monsanto's expertise in this area was thought to be a good complement. In fact, Monsanto's seeds had been engineered to be resistant to its Roundup herbicide. Furthermore, Bayer's new CEO, Werner Baumann, had previously managed the strategy and portfolio department at Bayer and, consequently, had a good deal of M&A experience. And finally, both companies were focusing on big dataâ to provide new services and more precision for farmers. The possibility of a huge data bank created by the convergence of the data from both sides promised further productivity improvements.

Nevertheless, although agrochemicals could be considered an oligarchic industry dominated by firms such as DuPont, Syngenta, Monsanto, and Bayer, even the leading players had been struggling recently with a new wave of mergers and acquisitions. For example, after Monsanto had made three unsuccessful attempts to acquire Syngenta in 2014-2015, Dow and Dupont merged in December 2015 and Syngenta merged with ChemChina in February 2016.

Table 2: 2015 Revenues by business segment, $B
	Crop protection & seeds	Other	Other divisions
DuPont	9.8	15.2	Electronics (2.1B), Ind'l. Biosciences (1.1B), Nutrition & Health (3.2B), Perf. Materials (5.3B), Safety & Protection (3.5B)
Dow	7.3	50.5	Perf. Plastics (22.4B), Perf. Mat'ls and Chem. (15.1), Infrastructure Solns. (8.4), Customer Solutions (4.6)
Syngenta	13.0	0.0
Chem China	n.a	n.a.	Agrochemicals, Basic Chemicals, Specialty Chemicals, Tire & Rubber, Chemical Equipment, Oil Processing
Monsanto	15.0	0.0
Sources: 2015 Annual Reports

Furthermore, Bayer and Monsanto would need to obtain approval from regulators in over 30 countries to close the deal. U.S. regulators had opposed the merger but the ascension of Donald Trump to the presidency (he argued that agriculture had needed more innovation) boded well for approval of the combination in the U.S. The European Union, on the other hand, had opposed Monsanto, especially its genetically-modified organisms (GMO).

Diana L. Moss, president of the American Antitrust Institute, also pointed out that

The United States Department of Agriculture (USDA) notes that the price of farm inputs, led by crop seed, generally have risen faster over the last twenty years than the prices farmers have received for their commodities. Moreover, seed prices have outpaced yield increases over time. And finally, the USDA has determined that increasing levels of concentration in agricultural input markets (including crop seeds) are no longer generally associated with higher R&D or a permanent rise in R&D intensity.

Therefore, we might conclude that this consolidation would negatively pressure consumers and farmers.

Questions:

The preceding discussion documents Bayer's attempt to further diversify its portfolio of businesses.

1. What weaknesses were Bayer trying to address via its diversification strategy?

2. What opportunities in its environment (e.g., synergies created by merging with Monsanto) is Bayer trying to exploit via its diversification strategy? Is this a case of related or unrelated product/market diversification?

3. Finally, according to the resource-based view, firms may differ in the number of synergies they possess vis-a-vis target firms. Those with greater synergies may be able to profit more from the acquisition than their competitors. They may either (1) win the bid at a lower price, thereby earning above-normal profits, or (2) withdraw from the bidding if the target price becomes too high, allowing the winning bidder to earn below-normal profits.

What attributes does Bayer bring to the bidding for Monsanto that suggests it might have had different (possibly more) synergies with Monsanto than other potential bidders (e.g., Dow or ChemChina)?

chocolatepug721

Entrepreneurship

1. Discuss what steps Craig took to develop and grow his business. (7 marks)

2. Illustrate the role Craig played in contributing towards the economy (8 marks)

clearrisk | craig rowe

Business is risky, but that is Craig Roweâs business - risk management to be precise. Craig,

the President of ClearRisk Inc., becomes animated and energized as he explains his line of

work. âRisk,â he says, âis not negative. It is when there is opportunity for a downside or an

upside.â Risk management is about formalizing the decision making process. People are

constantly assessing risks, whether it is instinctively in crossing the street or deliberately in

weighing the pros and cons of buying a car. âBusiness people,â he says, âengage in the same

process whether in deciding where to build a head office or whether to buy another company.â

the entrepreneur

Craig spent almost 20 years in the insurance industry, where he started right out of high

school. Over the years, he attained various insurance designations and completed many

business courses and ample on-the-job training. Craig is naturally entrepreneurial and also

operated his own consulting company and became involved in several insurance industry

associations. This allowed him to develop a large network of connections.

Craig found himself thinking and talking more and more about risk management. He realized

that if businesses did some basic things to manage risk they would save money. In 2001 he

wrote a book on the topic and later adapted the ideas in to a workshop which he presented

throughout Canada and the United States. Insurance industry professionals and other business

people noticed Craig and saw the logic in his message. Soon he was being invited to speak to

various associations and was asked to assist in writing material on risk management. When

dealing with clients of his consulting business, he noticed the same set of steps and questions

could be applied to different realities in different types of companies. He was sure that there

was something that could be packaged and sold to assist these companies.

He went in search of risk management software. He found some, but none applicable to small

and mid-sized companies and organizations. So he decided to build it. He teamed with David

dâEntremont who had the background provide technical expertise. Together they founded

ClearRisk. They developed a business plan which became their roadmap, even though it was

constantly being adapted to take into account new realities, circumstances and goals. Craig estimates they are on version 30 by now!

Craig decided to leave his job and pursue ClearRisk full-time. It was not an easy decision to

make as Craig had a young family at the time. He had to engage in his own risk management

process and weigh his options. He had almost 20 years of solid insurance industry experience.

He had an extensive network of contacts. He had entrepreneurial experience through his

consulting business. He knew the market. He knew what his customers needed and he knew

that he could develop a product to meet that need. He found a solid business partner to

complement his skills. So the timing was right and after 10 years of thinking, dreaming and

percolating ideas, Craig made the leap in 2006.

Craig says that the biggest challenge facing ClearRisk and any business, whether it is in

starting, sustaining or growing the business, is cash. ClearRisk needed capital to develop its

product. For any business to have credibility with lenders and investors, that initial money has

to come from the business owner. Craig and David secured an operating line of credit from the

bank based on personal guarantees.

Step 2 was to seek more financing to start implementing the business. Craig says that it is

important to look for money before you need it because you are building relationships and

confidence and convincing people that you are creditworthy. A business plan is a necessity but

âeveryone invests in people.â This applies to accessing financing from Business Development

Bank of Canada (BDC), Atlantic Canada Opportunities Agency (ACOA), or any government

organization, as well as private lenders and investors. It is necessary to raise private money to

leverage government money.

Another important factor in developing ClearRisk was being accepted by Memorial Universityâs

Genesis Centre, a facility which provides business and technical support to new and emerging

technology businesses. This added to their credibility and attracted the attention of angel

investors. Angel investors are business people with financial resources available to invest in

new promising businesses.

Technological businesses are expensive to grow and ClearRiskâs growth has been made

possible by private investors and organizations such as Growth Works (a venture capital

company). Ownership of the company is now shared with these investors and ClearRisk is a

corporation with multiple shareholders. One of the tradeoffs in taking money from investors is

that ownership becomes shared. Craig says, âYou can have a big piece of something small or

a small piece of something big.â He chose the latter.

Craigâs idea has grown immensely. He keeps the numbers to himself, but says sales have

grown exponentially. His primary market is North America and the ClearRisk software has been

launched in French and Spanish. Customers do not pay an upfront fee; instead, they pay an

annual fee for the software and support. ClearRisk is constantly improving its products. The

team is always enhancing features and improving functionality. Currently, they offer three

programs to consumers: ClearRiskâ¢ Manager, which enables an organization to build and

implement a risk management plan; ClearRiskâ¢ Tracker, which facilitates tracking insurance

claims; and ClearRiskâ¢ Trainer, an online instructional program which increases awareness of

risk and its management. The latter two products are offered in partnership with other

organizations.

ClearRiskâs web-based business is global; however, Craig is cautious about expanding beyond

North America. The insurance industries in the USA and Canada are relatively interconnected

and homogeneous. It would be very difficult to provide support to countries with different

regulations and different languages. ClearRisk offers a web-based software service so they

use web-based marketing, rarely using traditional media. They access all forms of social media

such as Facebook, Twitter, MySpace, and blogs and find the approach cost effective and high

impact. Social media facilitates the use of in-bound marketing.

In addition to web-based marketing, ClearRisk is now getting calls from referrals. Clients are

spreading the word to other businesses seeking a similar product. The demand for ClearRiskâs

product is expanding but Craig resists growing the team too quickly. Craig prefers a small team

and likes the dynamics of small groups. However, more sales people are needed and they will co-op

and computer science students to his company. He likes to hire young people. It is

rewarding to see them take shape and become leaders.

Craig speaks favorably about starting a new business in Newfoundland and Labrador. He

says that the provincial climate is positive. In addition to the practical and financial support

available, the provincial government has done a lot to assist business in recent years, including

reducing taxes and red tape and increasing funding.

When Craig reflects on the path his career has taken, he gives special acknowledgement to

Paul Johnson of Johnson Insurance as a business icon and an inspiration. Mr. Johnson

inherited his fatherâs small insurance office and built it into an innovative, billion-dollar

Company. Not only was Mr. Johnson a great businessman, he was a community-minded

Philanthropist. This is evident today throughout the capital city in the parks, trail ways, and the

Johnson Geo on Signal Hill. Mr. Johnson has influenced Craigâs professional and

Community life. In addition to Craigâs entrepreneurial success he is firmly rooted in his

Community; he currently serves as Chair of the YM/YWCA.

Craig has advice for young people who dream of starting their own businesses. He says to be

Informed, to go in with open eyes and to seek honest opinions from knowledgeable people. He

advises that an entrepreneur should realize that âthe odds are against you, but you need the

tenacity and perseverance to stick with it. It is important to understand your industry, to

understand the need for your product or service and ultimately to understand the risks before

you make the leap.â In business, managing risk is everyoneâs business!

1. Discuss what steps Craig took to develop and grow his business.

2. Illustrate the role Craig played in contributing towards the economy

browntoad1

DANCEST 805 Lecture Notes - Lecture 9: Net Present Value, Real Options Valuation, Discounted Cash Flow

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