Boeing Acquisition of Embraer

Mergers, Acquisition and Corporate Restructuring

Deal Proposal
Group 7
Sr.No Name Roll No
1 RAHUL ABUJAM PGP/23/103
2 BUDDHADEO JIGAR JAYESH PGP/23/134
3 NIKHIL RONAK CHOKSI PGP/23/151
4 TUSHAR MAHESHWARI PGP/23/303
5 HIMANSHU YADAV PGP/23/393
6 MEHTA TANAY AATUR PGP/23/450
 About the companies
Boeing:

Boeing is a Premier manufacturer of commercial jetliners for decades with more than 10,000 jetliners
in service worldwide. It is present in the defense, space and security and provides leading solutions
for design, production, modification, service and support of military rotorcraft, satellites, UAVs etc. It
is a global provider of financing solutions for Boeing customers and ensures finances for the purchase
of Boeing products. A very important aspect is that it provides cost competitive solutions for
commercial, defence and space customers regardless of OEMs.

William E. Boeing incorporated his airplane manufacturing business as "Pacific Aero Products Co” in
1916. On April 26, 1917, Boeing changed the name to the "Boeing Airplane Company” and
reincorporated it in Delaware. The company supports airlines and U.S. and allied government
customers in more than 150 countries. It employs more than 160,000 people across the geographies.

The key competitors of Boeing include:

Commercial Aircrafts
1. Airbus
2. Embraer
3. Irkut
4. COMAC
5. Mitsuibishi Aircraft

Defence, Space & Security

1. Lockheed Martin
2. Northrop Grumman
3. Raytheon Company
4. General Dynamics
5. SpaceX
6. BAE Systems

The key products of Boeing have a seating capacity ranging from 126 to 426. and the key customers
and suppliers are listed below:

Biggest Customers (2019)

1. Emirates – 30 orders
2. Korean Air – 20 orders
3. Lufthansa – 20 orders
4. British Airways – 18 orders
5. BDS USAF Tanker Program – 15 orders

Key Suppliers
1. Lockheed Martin
2. Northrop Grumman
3. Raytheon Company
4. General Dynamics
5. SpaceX
6. BAE Systems
Embraer

Embraer is the largest manufacturer of sub 150 commercial jets and more than 8000 aircraft have
been supplied by the company which transports more than 145,000,000 passengers a year. It is also
present in the defense and security segment and is a major supplier of the products in Latin America
and has presence in 60 countries. A key part of their business is executive aviation where it has
reached the milestone of 250 business jets delivery and it boasts products in light and large categories.

A key milestone in their business is the agricultural aviation where Ipanema has proven to be a big hit
and is the only airplane in the world to run on ethanol.

Embraer was created in 1969 as a government owned corporation to develop the domestic aircraft
industry in Brazil. It started the process of privatization in 1994 and got listed on NYSE and BM&F
Bovespa in 2008. The company maintains industrial units, service and parts distribution centers across
major continents and employs 19116 people across the world.

The key competitors of Embraer include:

Commercial Airplanes
1. Airbus
2. Boeing
3. Bombardier
4. Dassault Aviation
5. Mitsuibishi Aircraft

Defence, Space & Security

1. Lockheed Martin
2. Northrop Grumman
3. Raytheon Company
4. General Dynamics
5. SpaceX
6. BAE Systems

The key products of Embraer have a seating capacity ranging from 4 to 130. and the key customers
and suppliers are listed below:

Biggest Customers
1. Republic Airlines- USA
2. Skywest Airlines-USA
3. Air Canada -Canada
4. Azul -Brazil
5. Aercap-Ireland

Key Suppliers
1. Safran SA
2. General Electric Company
3. Rolls-Royce
4. Raytheon Technologies Corp.
5. Howmet Aerospace
 Ownership Structure
Below is the ownership Structure for both the companies:

Embraer:
Holder Name % Share Recent Change
1 Brandes Investment 15.14
2 BNDES Participacoes 5.37
3 BlackRock Inc 2.49 57259
4 Vangaurd Inc 2.49 -224878
5 Teachers Insurance 1.65 -531
6 Tempo Cpital 1.1 133000
7 Morgan Stanley 1.1 -33539172
8 GRUPO BANCO DO BRASIL 0.98 416430
9 Prudential PLC 0.82 -17594
10 Norges Bank 0.8 0
11 Itau Unibanco Holding 0.74 -1810161
12 TOBAM SAS 0.64 0
13 Embrarer SA 0.58 0
14 Government Pension 0.53 0
15 Charles Schwab 0.51 98500
16 Garde AM 0.5 -256400
17 Dimensional Fund Advisor 0.5 8974
18 Leblon Equities 0.38 696445
19 Schroder Investment 0.35 1383813
20 State Street Corp. 0.3 113800

Boeing:
Type Current Recent Change
1 Investment Advisor 78.83 -0.11
2 Government 13.38 0.1
3 Soverign Wealth Fund 3.37 0.02
4 Brokerage 2.14 -0.03
5 Corporation 1.44 0.01
6 Pension Fund 0.39 0.01
7 Other 0.35 0.01
8 Endowment 0.06 0
9 Bank 0.02 0
 Necessity of the deal
1. Establishment of Airbus in the NA Market with A220 through Delta Airways: The north
American market which is the stronghold of Boeing is being penetrated by Airbus through
A220 regional aircraft. The change in loyalty could be seen at Southwest Airlines as well who
have recently stated that they might acquire A220 to replace their erstwhile Boeing 737 fleet.
This can be seen as a major threat as airlines could then switch their loyalty to Airbus for
further fleet expansion through the A330 and A350 models. This makes it imperative for
Boeing to conduct a deal with Embraer to have an aircraft catering to the 100-150 seater
market which is growing immensely owing to COVID-19 and change in passenger preferences
as well as airlines who seek to transport passengers from point to point rather than a hub and
spoke model
2. Loyal Regional carriers to Embraer: The E-Jet series has a lot of loyal carriers in the NA market.
These carrier on expansion of their fleet would look towards Embraer, both when increasing
the existing number and when acquiring larger aircrafts. This would allow Boeing to take their
orders through cross-selling which is currently being done at Airbus through their A220 series
and the larger A330/A350 series.
3. Supplier side synergy: The suppliers are same and therefore we can expect Boeing’s market
power to be able to allow for reduced costs on the aircrafts and thereby make them attractive
as compared to the expensive A220 series which is currently the best 100-150 seater aircraft
in the market.
4. Improved dispatch reliability: Inspite of Boeing’s 787 fiasco of having lower dispatch reliability,
it is fair to state that the overall dispatch rate is higher at Boeing than at Embraer, owing to
stringent norms in the NA market as compared to the SA market. Thereby they would profit
from the higher reliability of their aircraft for their carriers.

Synergies Expected
Cost Synergy:
Both companies have similar suppliers hence there can be a significant discounts and savings on the
same. developing aircraft on production lines and personal with similar expertise allow it to achieve
significant cost savings through trimming of workforce.

Product Synergy:
Both companies function in the aviation segment and have complementary products which can enable
greater sales for both companies especially in times where the sales are stressed.

Boeing is weak in the business jet market with hardly any offerings. This is in line with none of its
products catering to below 150 seater market. Embraer doesn’t have any widebody aircraft or one
that could cross the Atlantic with its range.

The defence sector catered by Embraer is towards mainly transportation with its latest C-390 plane
being received graciously by the market. The ageing Globemaster could be replaced through it
Access to new markets:
Embraer’s market is based on regional airlines and smaller airlines whereas Boeing focusses on larger
airlines. This would allow Boeing new markets that were previously unexplored by it due to lack of
offerings. Few of them are SkyWest, Republic Airways, Mesa Airlines, KLM Cityhopper. Further, airlines
such as KLM, Envoy, Republic have entire Embraer fleets. This allows them an advantage when they
further expand. This also gives them much need market image with regards to reliability and loyalty.

Time Saving:
The time difference between developing a new aircraft and getting it flight worthy against modifying
an existing flight worthy aircraft according to its requirements is huge which allows Boeing a head
start in this market.

Valuing the synergies

Costs:
Given the average cost for a narrow body jet development was $1-1.18 bn for Boeing’s own 737 MAX
which further rose to $3 bn with engine costs, it is prudent to assume a cost of $1.5-2 bn to develop a
plane either using the 737 frame or a grounds up design with smaller engines either from 737 line up
or through existing off-market PW/Honeywell engines. The details of Development Costs for selected
aircrafts have been given below to give an idea of the costs

It is worthy to not hear that if we bring the future value of development costs from the 2004 cost
which has been given in the above table, it will be significantly higher and nearly more than a double.

Time Duration:
The average time to development and get an aircraft airworthy is 6-8 years. This is with the assumption
that there are no hurdles in development. The 737 MAX program took 6.5 years to develop and launch
considering they re-engineered the frame and engines.
Competition:
Given the Airbus acquisition of Bombardier’s C series program that competes head on with the
Embraer E2 Jet program, it is would give Boeing’s primary competitor a major advantage in the market.
This would be bolstered by Airbus’s massive cash balance and technology agreement with major
suppliers.

Analysis:
Considering the above major factors, it seems prudent to assume that a trade-off worth $2bn in
money terms with a time lag of 6-8 years in comparison to the Embraer acquisition is worse.

Discounts that can be expected

Additional
Suppliers Boeing Embraer SA Total Additional % Savings
Discounts

Raytheon
Technologies $ 750.93 $ 36.12 $ 787.05 4.81% 0.80% $ 6.31
Corp.

General Electric
$ 772.52 $ 32.80 $ 805.32 4.25% 0.71% $ 5.70
Co.

Rolls-Royce
$ 156.75 $ 34.37 $ 191.12 21.93% 3.65% $ 6.98
Holding PLC

Safran SA $ 495.62 $ 38.94 $ 534.56 7.86% 1.31% $ 7.00

Howmet Aerospec
$ 112.77 $ 13.93 $ 126.70 12.35% 2.06% $ 2.61
Inc

Honeywell
$ 305.96 $ 5.41 $ 311.37 1.77% 0.29% $ 0.92
International Inc

Leonardo SPA $ 190.33 $ 2.55 $ 192.88 1.34% 0.22% $ 0.43

Kawasaki Heavy
$ 171.43 $ 7.05 $ 178.48 4.11% 0.69% $ 1.22
Industries Ltd

Triumph Group
$ 188.14 $ 1.12 $ 189.26 0.60% 0.10% $ 0.19
Inc

Hexcel Corp. $ 147.23 $ 1.59 $ 148.82 1.08% 0.18% $ 0.27

Spirit Aerosystem
$ 370.00 $ 2.51 $ 372.51 0.68% 0.11% $ 0.42
Holdings Inc

Total $ 32.05
In the above table, it has been assumed that because of the additional quantity which will be
demanded from the same set of suppliers, we will be getting a minimal additional discount. The
Discount that will be received is on account of the bulk orders and the increased demand as a result
of the revenue synergies. It is worthy it to note here that the additional discounts will be on the full
purchase and not only the additional purchase.

Revenue Synergies:

If the production unit shifts entirely to the United States, the savings in taxes would be as below

Firm Order
Aircraft Type Firm Orders Options Delivers Backlog Potential Price

E170 191 191

E175 798 291 639 159 450 45

E190 568 564 4 4 50.5

E195 172 172

190-E2 25 63 14 11 74 53.5

195-E2 148 47 8 140 187 60.5

Total 1902 401 314

Potential Revenue 35724.5

Over 5
year
Taxes Saved 1857.67 period

Per
Taxes Saved 371.53 year

PV on Savings 3122.14

Capex 500.00

PV of Synergy 2622.14
 Structuring the Transaction
Proposal – Non-Cash Transaction

1. Comparatively Overvalued Share

We can see from the above chart that Embraer has depreciated much more then Boeing on
account of COVID. and hence we can consider that the share price of Embraer is comparatively
undervalued as compared to Boeing.

2. Borrowing Capacity
Boeing has recently borrowed more than 20 billion US dollars and it has a credit rating of BBB
and a negative outlook. Hence, any new borrowings will lead to a higher interest rate for
Boeing and a degraded credit rating.

3. Cash for Contingencies

Recent borrowings have been utilised to the extent of 30% and with unpredictable demand
and the rebounds of COVID leading to more lockdown and travel restrictions, it is essential to
have cash for future contingencies.

4. Target Valuation
The overall market has been uncertain and the prices have plummeted very sharply with
minimal recovery. It is very difficult to get accurate forecasts and value the company.
5. Growth Prospects
There are significant growth prospects for both companies as an improvement in the portfolio
will enable them to cross sell their products and offer synergies to themselves as well as their
customers.

6. Treasury Shares
The company already has Treasury shares which have been purchased at an average place
lower than the current market price. it is worthy to note that the current market price is after
the COVID shock and still the average price of purchase for Treasury shares is lower than the
current market price. On account of the same , it is very easy for going to issue the shares and
also book profit for the same.

Deal Financing

Failed Deal:
It is worthy to note that there was a failed deal where Boeing tried to acquire Embraer at a
valuation of 5.31 billion US dollars and try to acquire 80% of the company for 4.25 billion US
dollars.

Current Valuation
After COVID there's been a significant decline in valuation and the target company is now
valued at 790 Million US dollars. Also it can be seen that some of the investors are ready to
sell their stake with Morgan Stanley recently selling 80% of the stake in Embraer.

Proposed Deal
The dealers proposed at a premium of 100% and valuation of 1.58 billion US dollars. 80% of
the stake shall be proposed to be bought as was proposed in the failed deal. Hence the
investment will be 1.264 billion US dollars.

Mode of Payment:
As discussed before cash is required for contingencies and Treasury stock is available to make
payment to the sellers. considering the emperor share price of 1.06 and the Boeing share price
of 149.89 and the expected premium, exchange ratio shall be one share of Boeing for every
71 shares of Embraer.

Comparable Transaction

The comparable transaction in this case is very similar to the transaction which is being
proposed. Airbus acquired Bombardier’s C-series program for 591 million US dollars with an
upfront payment of $531 mn to Bombardier and $60 mn in installments through 2021. This
was in response to USA’s tariff on Airbus aircraft sales in USA which Boeing claimed were being
dumped and hence taxed at 299.25%.

Airbus would hold 75% stake in the company with Quebec government holding 25% which
could be bought out by Airbus through 2026
 Relative Valuation

In relative valuation because of the current scenario and the continuing losses of the
companies, We have considered the EV by sales and the EV by gross profits.

On the basis of the same the share value of Embraer is coming out to be 1.224 billion US
dollars.

Enterprise Net Income

Million USD Market Cap Revenue Gross Profit EBITDA
Value
Embraer 779.5 2748.1 2548.1 322.3 -180.3 -771.2

Boeing 83629.4 117740.4 60765 -794 -4880 -5295.4

Airbus 56180.9 55959.6 61015.2 7932.0 6101.52 -2291.6

Bombardier 596.5 11903.5 14320 763 234 -19.7

EV/Sales EV/GP
Embraer 1.08 8.53
Boeing 1.94
Airbus 0.92 7.05
Bombardier 0.83 15.60
Median 1.00 8.53
Average 1.19 10.39

Embraer Boeing

Enterprise Value 3192.57 72378.97

Value 1224.0 38268.0

 Synergy and Consideration Value:

Synergy Value
Each Year Value (USD in Millions)
Synergy through Cost
Savings 32.05 269.33
Synergy in Revenue 2622.14
Total Synergy 2891.47

WACC 11.90%

Boeing Embraer Synergy

Value 38268.0 1224.0 2891.47 USD Million
No. of Shares 564.5 185.1 Million

Optimal ER
ER Max 0.3279 ER Optimal 0.2050 ER Min 0.0907

a 0.9029 a 0.9370 a 0.9711

t 0.0971 t 0.0630 t 0.0289

A_NPV 0 A_NPV 1445.7 A_NPV 2891.5

T_NPV 2891.5 T_NPV 1445.7 T_NPV 0

Consideration 4115.4 Consideration 2669.7 Consideration 1224.0

Issues and Risks in the Deal

1. Failed Acquisition
The previous acquisition of 80% for $4.2 Bn was called off and hence there would be issues
related to ego, valuation post covid when it comes to acquiring Embraer

2. Labor Force
Generally US based acquisition would result in production being transferred to US Sites for tax
purposes as well as to ensure that government supports Boeing owning to their ability to
increase employment for US Citizens

3. Anti-Trust Law issues

Previous standoffs with Airbus over subsidization of products would resurface as Boeing seeks
to integrate Embraer into its market. The previous rulings also found Boeing violating it and
hence would involve global scrutiny over the deal
4. Long time to integrate
Owning to the complex nature of ownership of both companies, it could take a long time to fully
integrate the companies. Further, the cultural differences between Southern and Northern
American continents can surface.

Post-Acquisition Integration:
1. Shifting to USA
The production lines at Orlando would be added to allow for E Jet manufacture alongisde the
business jets

2. Labor Force
The labor force reduction would take place as sales and marketing synergies would entail a
smaller workforce for the same amount of aircrafts

3. Strengthening of B/S
The existing BS could be made stronger with Embraer order book and allows for a better credit
rating for Boeing and subsequent cheaper interest rates. Although a lot of debt will be added
on account of the acquisition, Government backing and the expected future cash flows and
synergies can make up and create adequate cash flows for the company. it is worthy to note
that Boeing has recently taken up debt and has a significant amount of cash on hand because
of which there is a little requirement for additional debt in the near future. Hence, even if there
is a downgrade, the coupon payments would not change significantly and the increased cash
flows can be used to pay up the coupons as well as the debt.

4. Creation of a US Based entity

The Brazil entity could be spun off that caters to only local players and a new US based entity
would cater to American players. This would allow for lower costs in form of lower taxes

Considering the 10 phases

Phase 1: Business Plan

Industry and market is well defined for both the companies and the external environment
demands strategic relationship between these 2 companies because of the Airbus Bombardier
deal.
Merger will be the best way to go about getting the Synergies and building the business.

Phase 2: Acquisition Plan

The initial offer price has been determined with 100% premium over the current market price.
if you consider the optimal deal it is not an optimality but it is above the minimum practical limit
and hence can be the initial offer price.

Phase 3: Search
The search here is fairly simple because of the industry and the size of the companies.

Phase 4: Screen
Market segment, product line, profitability, degree of leverage, market share and the cultural
compatibility Have been considered in the above plan.
Phase 5: First Contact
An initial contact has already been established and an additional contact has to be done now to
restart the failed deal.

Phase 6: Negotiation
Considering that a deal was proposed in the past, one level of due diligence would already have
been completed. Considering the optimal value, we are offering lower than that particular
amount and we have established the higher limit for the purchase where we need to walk away
from the deal.

To justify the higher limit, it can be said that it is still lower than the initial failed bid and the time
to build a small aircraft is significantly high and justifies a higher price if the situation arises.

Phase 7: Integration Plan

The post-acquisition integration has been discussed in the above plan.

Phase 8: Closing
Phase 9: Integration
Phase 10: Evaluation

Above 3 will come into picture if the deal is accepted and then they can go ahead planning for
the close, integration and evaluation.