Goodyear Tire & Rubber: M&A Synergies

  • Reference: IVEY-W32285-E

  • Year: 2020

  • Number of pages: 15

  • Geographic Setting: United States

  • Publication Date: Jun 14, 2023

  • Source: Ivey Business School (Canada)

  • Type of Document: Case

  • Industry Setting: Manufacturing

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Description

In late 2020, The Goodyear Tire & Rubber Company (Goodyear)’s chief executive officer, Richard Kramer, told Cooper Tire & Rubber Company (Cooper)’s chief executive officer, Bradley Hughes, that Goodyear would submit an acquisition proposal by the end of the year. Goodyear had spent the last two years enduring global weakness in the automotive industry and the onset of the worldwide COVID-19 pandemic, which contributed to Goodyear’s stock falling 70 per cent below its high of $35 in 2018. Kramer attributed the stock’s decline to an “industry downcycle,” and one analyst speculated that a merger could provide much needed cost and revenue synergies. Goodyear had used mergers and acquisitions (M&As) to achieve scale and fuel its growth in the past, and Kramer’s team needed to decide if a merger with Cooper could help them weather the downturn and emerge stronger. Kramer and his team identified several cost synergies, totalling $165 million per year. They also expected efficiency and tax synergies with a present value of at least $700 million as well as revenue synergies. Goodyear was considering using a combination of debt, stock, and cash to finance the transaction. To avoid earnings per share dilution from issuing too many shares as merger consideration, they were working with financial advisor J.P. Morgan to secure up to $2.314 billion of new debt financing. Kramer told Hughes that his team would work over the year-end holidays to provide “a revised proposal or other update” in January 2021.

Learning Objective

The case is suitable for core corporate finance courses at the master of business administration level to illustrate firm valuation methods and adding value through merger & acquisition (M&A). The case applies the following core concepts: increasing shareholders’ value, determining incremental free cash flows, estimating cost of capital, discounted cash flow (DCF) analysis, and scenario analysis. The case can also be suited for courses in M&A, valuation, advanced corporate finance, and financial modelling at the graduate or undergraduate level. The case provides several learning objectives, after completing the case discussion and assignment, students will be able to explain the benefits of M&A from the target’s and acquirer’s perspective; identify different types of synergies that can justify paying a premium in an M&A transaction; develop a DCF valuation model for a target firm in a merger; incorporate projected cost, revenue, efficiency, and tax synergies into a DCF analysis; use comparable company valuation multiples in a valuation analysis; and perform an accretion dilution analysis for different deal structures and understand any implications.

Keywords

discounted cash flow DCF EPS dilution Investment banking mergers and acquisitions M&A Synergy Valuation valuation multiples