Groupe-Ariel-S.A.-Cross-Boarder-Acquisitions-[Brie

________________________________________________________________________________________________________________HBSProfessorTimothyA.LuehrmanandwriterJamesQuinnpreparedthiscasesolelyasabasisforclassdiscussionandnotasanendorsement,asourceofprimarydata,oranillustrationofeffectiveorineffectivemanagement.Thiscase,thoughbasedonrealevents,isfictionalized,andanyresemblancetoactualpersonsorentitiesiscoincidental.Thereareoccasionalreferencestoactualcompaniesinthenarration.Copyright©2010PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessPublishing,Boston,MA02163,orgoto:ParityConditionsandCross-BorderValuationOnJune23,2008,aMondaymorning,ArnaudMartinarrivedathisofficeinGroupeAriel’scorporateheadquartersinMulhouse,France.Thepreviousweek,MartinhadrequestedadditionalfinancialinformationaboutaninvestmentproposalfromAriel-Mexico,awhollyownedsubsidiarythatoperatedamanufacturingfacilityandaregionalsalesofficeinMonterrey,Mexico.TheinformationhadarrivedlateFriday—toolateforMartintoanalyze—andwaswaitingforhimMondaymorning.Asafinancialanalystforaglobalmanufacturerofprintingandimagingequipment,Martinexaminedmanycross-borderprojects,particularlysinceArielhadaccelerateditsmoveintoemergingmarketsseveralyearsearlier.TheMexicaninvestmentproposalcalledforthepurchaseandinstallationofnewautomatedmachinerytorecycleandremanufacturetoner-andprintercartridges.CartridgerecyclinghadbecomeanimportantpartofAriel’sbusinessinmanymarketsandpromisedcontinuedgrowth.Manyofficeproductretailersoperatedformaltonercartridgerecyclingprograms,forboththeenvironmentalbenefitsofkeepingmaterialsoutoflandfillsanddemonstratedcostsavingsfortheircustomers.Writinginaleadingtradejournal,oneanalystpredicted,“Wearegoingtoseemoreandmorerefinedapproachestorecyclingandremanufacturing[cartridges]inthecomingmonthsandyears…Bothcorporateandindividualconsumersarebecominghabituatedtoit.Theyhavesimplycometoexpectrecyclingasanoption,evenforsmallercartridgesatlowerpricepoints.”Ariel-Mexico’sMonterreyplantbeganitscartridgerecyclingprogramin2005.Theplant’srecyclingprocessconsistedofasequenceofoperationscarriedoutalmostentirelybyhand,withthehelpofhandtoolsandasimplemachine.TheinvestmentproposalcalledforreplacingthisprocesswithnewautomatedmachineryfromGermanythatcostanestimated3.5millionpesos(approximately€220,000)fullyinstalled.Asdescribedintheprojectsummary,Ariel-Mexicoexpectedtorealizesubstantialsavingsinlaborandmaterialsalmostimmediately.Thoughtheproposedexpenditurewasrelativelysmall,ArielrequiredadiscountedcashflowanalysisforallsuchinvestmentsinitsnewerforeignmarketsandareviewbycorporateheadquartersinMulhouse.4194APRIL19,20104194|GroupeArielS.A.:ParityConditionsandCross-BorderValuation2BRIEFCASES|HARVARDBUSINESSSCHOOLMartinwasassignedtoperformananalysisoftheinvestmentproposalandmakean“upordown”recommendationtohissuperiorbyWednesdaymorning.GroupeArielS.A.GroupeArielwasaglobalmanufacturerofprinters,copiers,faxmachines,andotherdocumentproductionequipment.Thecompanyalsoprovidedconsultinganddocumentoutsourcingservices,withafter-salesservicecontractsconstitutingabout18%ofoverallrevenue.Companysalesfor2008wereprojectedtobe€3.35billion,downfrom2007duetoaglobalrecession.Operatingprofitwasexpectedtobe€61.2millionin2008,andthecompanyprojectedasmallnetlossfortheyear.Exhibit1presentsselectedconsolidatedfinancialdataforGroupeAriel.Ariel’slowprofitabilitywastypicaloftheindustryin2008;allofitscompetitorsweresimilarlyaffectedbytherecession.Onebrightspotinthecompany’soutlook,however,wasitsgrowthinseveralemergingmarkets,includingtheso-calledBRICeconomiesofBrazil,Russia,India,andChina.Arielhadbeenaglobalfirmforyears,butdidnotmoveaggressivelyintoemergingmarketsuntil2003–2004.Thiswaslaterthansomeofitscompetitors.Ononehand,thismeantAriel’smarketsharelaggedinsomemarkets.Ontheotherhand,Arielavoidedsomeofitscompetitors’earliermistakes.Thecompany’sinternationaloperationswereconductedprimarilythroughalargenetworkofsubsidiaries,whichoperatedmostlymedium-sizedregionalfactoriesinwhichprinters,copiersandotherproductsweremanufacturedtosuitlocaltastes.Arielconductedbusinessin28countriesaroundtheworld,withoperationsconsistingofmanufacturingfacilities,smallresearchlabs,aswellassalesandmarketingsubsidiaries.In2008,subsidiariesoutsidetheEuropeanUnionrecordedabouthalfofAriel’ssalesandgeneratedslightlylessthan40%ofpretaxincome.Arielcompetedinarelativelymaturemarket,anditschiefcompetitorswerebothestablishedmultinationalcompanies—someofwhichhaddevelopedtheirconsultingandotherafter-salesservicesbusinessestoahigherlevelthanhadAriel—aswellassmallerplayersservingnichemarkets.WhileArielmarketedandsolditsproductsacrossthefullspectrumofindustries,ithadenjoyedparticularsuccessinfinancialservices,healthcare,andgovernmentsectors.OperationsinMonterrey:Ariel-