Examine relevant data from the published accounts to help decide whether the price Lafarge paid for Orascom based on profitability performance and growth expectations was good value.

Question

What will be an ideal response?

Answer 1

The financial merits of the acquisition can be assessed in various ways, conclusions largely depending on
the assumptions made and the timeframe over which the acquisition is to be judged. At the time of the
decision, the 2007 Lafarge accounts indicate €17.6 billion of actual revenues from €22.8 billion net
assets. The prospective €2.6 billion increase in Lafarge’s sales revenue (+15%) relates to an investment
of around €10 billion. The obvious conclusion has to be that Lafarge paid a high price for the gain in
revenues, albeit said to be disproportionately profitable sales. Beyond this, one has to consider the
strategic logic of entering (presumably) fast-growth emerging economies without the need for investment
in new plant, staff recruitment and training etc. However, there is a need for due diligence of Orascom’s
accounts to ensure confidence in its growth projections and financial probity. Future potential risks must
exist in operating in newly industrialising economies of which Lafarge may not have great knowledge.