Q1: What might be the rationale behind the business decision of LVMH acquiring Tiffany? State two of them!
A1: One of the reasons behind is that the acquisition allows LVMH to secure or even raise its position in the jewelry sector, which performed very well and has huge potential in the coming years. Another reason might be the acquisition helps LVMH to expand its customer base to the millennials and can accumulate potential customers for its many other brands. Other reasons with proper explanation would also be accepted.
Q2: What might be the rationale for Tiffany willing to accept the deal? State one of the reasons.
A2: The reason would be LVMH has the resources, experiences and elites to boost Tiffany into the next level. The acquisition is believed to raise Tiffany’s sales and operating margins. One example for Tiffany to take as reference would be the case of Bulgari, which has its operating margins boosted from 8% to 25% after joining LVMH group. The deal is a favourable one from Tiffany’s perspective. Other reasons with proper explanation would also be accepted.
Q3: What is WACC? How does it work? State one example of its usage.
A3: WACC is the calculation of firm’s cost of capital in which each category of capital (e.g. stocks, bonds, and any other long-term debt) Is proportionately weighted. It can be expressed as % of equity financing × cost of equity + % of debt financing × cost of debt × (1 - corporate tax rate). One application of it is to estimate the profit generated by the company.