hanover gkh merger idea jeff ,
the following provides background information for your call with mel klein at gkh ( ref : the gkh memo you sent to me ) . over the past year , a number of groups / individuals have assessed the merits of acquiring gkh ' s interest in hanover and all have declined due to strategic as well as financial considerations .
please give dick or me a call if you have any further questions .
regards ,
brian
- - - - - - - - - - - - - - - - - - - - - - forwarded by brian redmond / hou / ect on 04 / 09 / 2001 09 : 51 am - - - - - - - - - - - - - - - - - - - - - - - - - - -
richard lydecker @ enron
04 / 06 / 2001 01 : 53 pm
to : brian redmond / hou / ect @ ect
cc :
subject : hanover gkh merger idea
the following is a quick review of the gkh merger analysis and the reasons we do not support it . it is also important to keep in mind that gkh is motivated to create a short - term exit from hanover due to the exigencies of their investment partnership expiration . klein ' s agenda is transparent .
1 . while hanover is a well - managed , growth company , it is not a " turnaround " or " special opportunity " situation for which application of enron ' s business model would promise the extraordinary returns required in order to justify an investment of $ 3 billion .
2 . as enron ' s stock price has declined , the attractiveness of using it as a currency in any acquisition has decreased . the pe decline also tends to make stock deals more dilutive to enron .
3 . the gkh analysis asserts $ 128 million in initial year synergies and cost savings . however , these benefits are largely predicated upon ( a ) use of the enron nol ( which is an asset enron already owns and can be applied to earnings from any acquisition ) - - $ 55 million and ( b ) speculative economies of scale , i . e . higher revenues and margins and significant sg & a reductions - - $ 38 million .
the remaining $ 36 million of cited benefits relates to a proposed decapitalization of hanover from a proposed transfer of assets to a non - recourse trust ( although credit enhancement and operational guarantees would be required ) . achieving these benefits would require obtaining the best possible outcome on a number of accounting , financial and credit issues . however , even if all of these issues were resolved , the economic result is insufficient to justify the transaction . the gkh analysis does not consider transaction , transition or capital costs .
4 . after taking into account the capital expenditures required for hanover to achieve its aggressive growth targets , the company appears to be at best cash flow neutral or slightly cash flow negative for the three years presented in the gkh analysis ( even including all claimed synergies and cost savings ) .
5 . enron and hanover could achieve and share many of the synergistic benefits claimed for the merger in a properly structured joint venture . ( however , this would still require finding an internal enron " sponsor " to assume ownership of the relationship ) .
6 . much of hanover ' s growth in the future is predicated upon an aggressive expansion and expenditure program internationally . given enron ' s domestic opportunities , this international orientation in a non - core business is inconsistent with our present strategy .
7 . like gkh , enron has been a seller of our hanover position . an abrupt reversal of strategies could create significant uncertainties and confusion on the street about enron ' s strategic direction .
additional background to demonstrate the magnitude of the limitations of the gkh analysis with respect to increasing enron ' s eps :
1 . if pooling of interest accounting is available , any acquisition enron makes of any company that has a lower pe ratio than enron is accretive to enron ' s eps . there is nothing " remarkable " about this , it is simple mathematics .
2 . if purchase accounting is required , even if the entire purchase price were accounted as " goodwill " and never amortized , this would only replicate the results of pooling of interest . however , in actuality , a significant proportion of the purchase price would have to be allocated to assets ( tangible and intangible such as contracts ) which would produce additional depreciation and amortization expense not mentioned in the gkh analysis .
3 . the largest single " synergy " by far in the gkh analysis is usage of enron ' s nol to shield hanover ' s taxable earnings . enron can obtain the benefit of its nol by acquiring any profitable company . gm recorded about $ 3 . 4 billion in income tax expense last year which would offer even greater opportunity to utilitize this enron asset .
4 . the gkh analysis is totally silent with respect to the biggest single immediate risk of a transaction , i . e . the potential negative impact on enron ' s own pe .
dick
hanover gkh merger idea
jeff ,
the following provides background information for your call with mel klein at gkh ( ref : the gkh memo you sent to me ) . over the past year , a number of groups / individuals have assessed the merits of acquiring gkh ' s interest in hanover and all have declined due to strategic as well as financial considerations .
please give dick or me a call if you have any further questions .
regards ,
brian
- - - - - - - - - - - - - - - - - - - - - - forwarded by brian redmond / hou / ect on 04 / 09 / 2001 09 : 51 am - - - - - - - - - - - - - - - - - - - - - - - - - - -
richard lydecker @ enron
04 / 06 / 2001 01 : 53 pm
to : brian redmond / hou / ect @ ect
cc :
subject : hanover gkh merger idea
the following is a quick review of the gkh merger analysis and the reasons we do not support it . it is also important to keep in mind that gkh is motivated to create a short - term exit from hanover due to the exigencies of their investment partnership expiration . klein ' s agenda is transparent .
1 . while hanover is a well - managed , growth company , it is not a " turnaround " or " special opportunity " situation for which application of enron ' s business model would promise the extraordinary returns required in order to justify an investment of $ 3 billion .
2 . as enron ' s stock price has declined , the attractiveness of using it as a currency in any acquisition has decreased . the pe decline also tends to make stock deals more dilutive to enron .
3 . the gkh analysis asserts $ 128 million in initial year synergies and cost savings . however , these benefits are largely predicated upon ( a ) use of the enron nol ( which is an asset enron already owns and can be applied to earnings from any acquisition ) - - $ 55 million and ( b ) speculative economies of scale , i . e . higher revenues and margins and significant sg & a reductions - - $ 38 million .
the remaining $ 36 million of cited benefits relates to a proposed decapitalization of hanover from a proposed transfer of assets to a non - recourse trust ( although credit enhancement and operational guarantees would be required ) . achieving these benefits would require obtaining the best possible outcome on a number of accounting , financial and credit issues . however , even if all of these issues were resolved , the economic result is insufficient to justify the transaction . the gkh analysis does not consider transaction , transition or capital costs .
4 . after taking into account the capital expenditures required for hanover to achieve its aggressive growth targets , the company appears to be at best cash flow neutral or slightly cash flow negative for the three years presented in the gkh analysis ( even including all claimed synergies and cost savings ) .
5 . enron and hanover could achieve and share many of the synergistic benefits claimed for the merger in a properly structured joint venture . ( however , this would still require finding an internal enron " sponsor " to assume ownership of the relationship ) .
6 . much of hanover ' s growth in the future is predicated upon an aggressive expansion and expenditure program internationally . given enron ' s domestic opportunities , this international orientation in a non - core business is inconsistent with our present strategy .
7 . like gkh , enron has been a seller of our hanover position . an abrupt reversal of strategies could create significant uncertainties and confusion on the street about enron ' s strategic direction .
additional background to demonstrate the magnitude of the limitations of the gkh analysis with respect to increasing enron ' s eps :
1 . if pooling of interest accounting is available , any acquisition enron makes of any company that has a lower pe ratio than enron is accretive to enron ' s eps . there is nothing " remarkable " about this , it is simple mathematics .
2 . if purchase accounting is required , even if the entire purchase price were accounted as " goodwill " and never amortized , this would only replicate the results of pooling of interest . however , in actuality , a significant proportion of the purchase price would have to be allocated to assets ( tangible and intangible such as contracts ) which would produce additional depreciation and amortization expense not mentioned in the gkh analysis .
3 . the largest single " synergy " by far in the gkh analysis is usage of enron ' s nol to shield hanover ' s taxable earnings . enron can obtain the benefit of its nol by acquiring any profitable company . gm recorded about $ 3 . 4 billion in income tax expense last year which would offer even greater opportunity to utilitize this enron asset .
4 . the gkh analysis is totally silent with respect to the biggest single immediate risk of a transaction , i . e . the potential negative impact on enron ' s own pe .
dick