Barclays Bank Acquisition of Admiral Group

This assignment analyzes the potential acquisition of Admiral Insurance Group by Barclays Bank. It compares the financial performance of both companies, examining profitability ratios, liquidity, and valuation metrics. The analysis aims to determine whether the acquisition would be beneficial for Barclays, considering factors such as Admiral's strong performance in the insurance industry and its potential to positively impact Barclays' overall financial health.

INTERNATIONAL
FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Financial ratios of FTSE 100 company............................................................................1
TASK 2............................................................................................................................................4
A) Advantages and disadvantages of three valuation methods..............................................4
B) Different valuation methods..............................................................................................5
C) How valuation method help a firm....................................................................................6
D) Risk Exposures..................................................................................................................7
E) Impacts of acquisition on selection of valuation method..................................................7
TASK 3............................................................................................................................................8
3.1 Recommendation to Barclays bank on the basis of the financial position of Admiral
insurance group Plc................................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance is very important component of business, without this business can not exist in
the market. In present case the Barclays bank wants to acquire the FTSE 100 company on the
basis of financial performance. For this the Admiral insurance group is selected which is listed in
FTSE 100 constituent of London Stock Exchange Group. In the report on the basis of ratio
analysis answer of the question is identified whether the Barclays bank should acquire the
targeting firm or not.
TASK 1
1.1 Financial ratios of FTSE 100 company
FTSE 100 is a component of London Stock Exchange Group. For this report the Admiral
Insurance group is selected which is UK based company and operating in the financial service
industry. Main product of the company is insurance where it provides all insurance to the
consumers (Frisari and Stadelmann, 2015). Under this report the Barclays bank wants to acquire
FTSE 100 company on the basis of financial performance.
Table 1: Financial ratios of Barclays bank & Admiral insurance group
Ratios Formula
Barclays
Bank Plc
Admiral insurance
group Plc
Profitability Ratios
Net sales 17201 904
Gross profit 12558 525
Net profit 623 300
Operating profit 4777 380
Gross profit ratio GP/ net sales * 100 73.01% 58.08%
Net profit ratio Net profit / net sales * 100 4.96% 33.19%
Operating profit ratio Operating profit / net sales*100 27.77% 42.04%
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Liquidity ratios
Current ratio current assets / current liabilities 1.24 0.46
Quick ratio
Current assets – (stock + prepaid
expenses) / current liabilities 1.24 0.46
Efficiency ratio
Fixed asset turnover 7.35 26.93
Asset turnover ratio 0.02 0.22
Profitability Ratios: Profitability ratios indicates that company is up to which extent performing
better in terms of profit (Shim and Constas, 2016). It includes different ratios some of them are
calculated here to analyse about company's performance such as net profit ratio, operating profit
ratio and gross profit ratio. Gross Profit Ratio: Gross profit is company's net sales minus cost of goods sold. Other
expenses are not considers at this profit. In above case in the financial year 2015, the
gross profit ratio of Barclays bank is 73.01% and the ratio of Admiral group is 58.08%.
From this it can be interpreted that cost of goods sold is high of admiral group in
comparison to Barclays bank. Net Profit Ratio: Net profit shows company's profit after deducting all direct and indirect
expenses. It is the profit available in company after all expenses, interests and taxes
(Porter and Williams, 2016). In the year 2015 the net profit ratio of Barclays bank and
Admiral group is 4.96% and 33.19% respectively. It shows that the insurance company is
generating more profit and manage expense level of production effectively and
efficiently. Operating Profit Ratio: Operating profit indicates company operating expenses are in
which order managed. In above case the Barclays bank is not performing better in
comparison to another relevant firm. So, it can be said that operating expenses to produce
the product are high in Barclays bank and low in the insurance company.
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Liquidity Ratios: Liquidity ratios measures company's ability to meet the short term and long
term obligations with help of current assets. These ratios are calculated by current assets and
liabilities. Liquidity ratios are current and quick ratio which given as below: Current Ratio: Current ratio shows company's ability to meet long term obligations
(Black, 2016). In the financial year 2015, the current ratios of Barclays bank and
insurance company are 1.24 and 0.46 respectively. The ideal ratio of current ratio is 2:1
that means company must have 2 current assets to meet 1 long term obligation. The
admiral company's performance is lesser than another firm. Quick Ratio: It shows company's ability to meet short term obligations. From above
analysis in accounting year 2015, the Barclays bank is performing better in comparison to
FTSE 100 company, because previous firm is able to fulfil short term obligations
according the ideal ratio. Ideal ratio of quick ratio is 0.5:1. Hence, it can be said that
insurance company is not able to meet the short term obligation from its current assets.
Efficiency Ratios: Efficiency ratios measures company's efficiency to generate the revenue or
sales. It shows that company is how much efficient to generate sales with help of different
elements. Interpretation of efficiency ratios are as below: Fixed Asset Turnover Ratio: It shows that company is how much efficient to generate
sales from its fixed assets (Mügge and Stellinga, 2015). In this case from the above
analysis of financial ratios it can be seen that the ratio is higher in the insurance company
in comparison to the Barclays bank. It shows that the insurance company is more
efficient to generate the revenue with help of its fixed assets such as equipments, property
and machinery etc. It indicates that the insurance company is know that how to utilize the
fixed assets in better way.
 Asset Turnover Ratio: The asset turnover ratio measure that company is up to which
level generates revenue in order to using total assets. From the above mentioned analysis
the ratio is lower in Barclays bank and the ratio is higher in another mentioned firm. That
means the later company is generating more revenue in comparison to previous company.
Thus, it can be said that the admiral insurance company is utilizing its fixed assets as well
as current assets to generate more sales in comparison to the another firm Barclays bank.
Hence, the insurance firm is better performing.
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TASK 2
A) Advantages and disadvantages of three valuation methods
1. Net Asset Value: The net assets value shows that the company is how much able to
increase the value of business in order to net assets and outstanding shares. In this total
assets and current liabilities can be control because this are internal elements but the
share price can not be control as this considers as an external factor. The net asset value is
one of the important valuation method to derive the value of business. The net asset value
is fluctuated in very short period due to it considers outstanding equity shares price.
Advantage of the net asset value method is that it gives the fair value of the assets in
order to evaluation of business. The method is beneficial in case of merger or takeover of two or
more companies, if the merger process is done by the net asset value (Robinson and Broihahn,
2015). The method is suitable for companies with the heavy tangible investments such as
property, equipment etc.
Disadvantage of the method is that it is not suitable for long period in order to derive the
value of business. The investors are can not take the decision for long term investment in the
company, because it considers the share value. The share price is fluctuated on daily basis so the
value is also fluctuated. Thus, it can be said that in context to limitations that it gives the decision
for very short period.
2. Price Earning Ratio: The price earning ratio is another method of business valuation
which gives an idea to investors that the particular company is suitable for investment or
not. The price earning ratio is derives on the basis of stock price and earning per share of
the company. It shows that the company is over valued or under valued. The ratio is used
to determine worth of the business entity with the help of existing conditions such as
company held equity currently and the share price. It shows the business conditions
clearly by which the more number of customers attract for investment in the company.
Advantages of the price earning ratio is that the ratio gives the clear and transparent
conditions of the business and it attracts more number of customers (Hoberg and Maksimovic,
2015). The another benefit is that it gives the fair value of the business in market. The ratio is
gives and idea to the customers that the company is performing over or less or the company is
over valued or under valued in the industry. With help of this the company can control existing
business positions with highlighting weaknesses of the company.
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Disadvantage of the ratio is that it is not used for long term due to it considers the stock
price. Stock price is daily fluctuates and the earning price per share is also fluctuated quarterly
basis so it can not give the decision to make investment for long term. Another disadvantage is
that if in market there is inflation than also the price earning ratio change.
3. Dividend Valuation Method: Dividend valuation method is another method of business
valuation. Dividend is one of the important factor to attract the customers for make
investment. It is based on the sales and revenue of the company in financial year. Here
the business is valued on the basis of next year dividend, market price per share and
expected growth rate of the business. There are various methods to derive the business
value on in order to dividend valuation method (Ward, 2016). The below mentioned
dividend is derived with help of Gordon's growth model.
Advantage of dividend valuation method is that it is easy to calculate and interpret as
well as it is most commonly used model. It is easier to compare between different companies and
different industries.
Disadvantage of the method is that it not considers all the data of the company so it is not
able to give fair value of company. It based on the expected values and it is not compulsory that
the actual value will be same of expected value.
B) Different valuation methods
Table 2: Valuation of Admiral insurance group
Valuation Formula 2015
Net assets 615
Outstanding equity shares 284.35
Net assets value Net assets / outstanding equity shares 2.16
Stock price 5.58
Earning per share 1.08
Price/Earnings ratio Stock price / Earning per share 5.16
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Next year dividend 33.6
MPS 5.58
G 0.0366
Dividend Value D1/P0+G 60.25
1. Net Asset Value: The value considers net assets value and number of outstanding shares
of the company. In this preference shares and another shares are not considers to measure
the value of the firm. High value is better for the company. In this case the insurance
company's net asset value not good that means it's performance is poor.
2. Price Earning Ratio: The ratio used to measure whether stock price have a fair value or
not. The ratio considers two values i.e. stock price and earning price per share to evaluate
value of the organization. A stock's price earning ratio tells that how many investors are
willing to pay per GBP of earnings. In year 2015, the insurance company's PE ratio is
greater than net asset value.
3. Dividend Valuation Method: The ratio is a method of valuing stock of the company in
order to its future dividend payments as well as discounted back to their present value. To
calculate the ratio the expected dividend, market price per share and expected growth rate
is considered. In this the dividend value is the higher value in comparison to another both
values.
C) How valuation method help a firm
The valuation methods are helpful for the business to derive the value of business. On the
basis of the business value the investors are make an investment in the firm. The valuation
method defines the internal strengths of business to fulfil its future objectives. The valuation
method is important for the every company by which it can know that how it is performing in
market and according to that what strategies it has to used to meet future goal. Valuation
methods helps to business which are given as below: Asset Based Approach: The approach is helpful to business to derive the fair value of its
asset. From this approach company can attract to the customers (Valickova, Havranek
and Horvath, 2015). The objective of an organization to increase the capabilities of
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revenue generate with its assets so by this it can know that in which order assets are to be
use. Income Based Approach: It identified the fair value of business in order to stock price
and income level of the firm. In this there are different variables and considerations by
which the value is derived. So the price earning ratio is also helpful to the firm.
 Market Based Approach: The approach is help to the company in order to derive value
on the basis of market situation and stock price. The dividend value is based upon the
capabilities of company's profit generation.
D) Risk Exposures
Various risk exposures which facing by the FTSE 100 company. These are as follows: Market Factor: The market fluctuation is affects to the company in order to derive the
value as well as to the profit from its stock (Kazlauskiene and Christauskas, 2015). The
company is listed in FTSE 100 constituent so it will affect to the company. Legal Factor: The legal factors such taxation policies, rules and regulations of the
government in order to export import are affects to the company.
 Foreign Exchange: Foreign exchange is main part to international companies, hence the
exchange rate and other laws and regulations of foreign are also affects to the overall
business entity.
E) Impacts of acquisition on selection of valuation method
Acquisition is the term which affects to the business. In present report acquisition is in
order to acquire a strong firm by a weak firm. Here a strong firm is Admiral insurance group and
a weak firm is Barclays bank plc. There are various circumstances which take place in the firm
as impact of acquisition.
The management structure will affect the acquisition because both companies are follows
different management structure (Black, 2016). In order to that company need to change the
management. Current trading system of resulting firm will also impact by the acquisition because
targeting firm may have different current trading system. The assets which are hold for a greater
return are also different in both companies which affects acquisition. By this all choice of
valuation also differs.
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TASK 3
3.1 Recommendation to Barclays bank on the basis of the financial position of Admiral
insurance group Plc
From above calculation it can be recommended to Barclays bank that it should acquire
the Admiral insurance group on the basis of profitability ratios. In same period 2015, the
insurance company generate more profit compare to another firm. Liquidity position is less in
admiral but it is too much efficient to generate sales and revenue from the fixed and total assets
so it will give positive impact to the Barclays bank after acquiring. On the basis of valuation the
admiral group is better and dividend valuation is sufficiently higher. Hence, it can be
recommended that the bank should acquire the insurance group of FTSE 100 constituent.
CONCLUSION
From the above analysis it can be summarized that the Barclays bank is performing poor
and Admiral insurance group is performing well in the relevant industry. It can be concluded on
the basis of financial performance Barclays bank should acquire Admiral group. Here the
Barclays is a weak firm and Admiral firm is a strong firm. Hence, the acquisition will be
beneficial for the Barclays bank.
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REFERENCES
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Review of Financial Studies. 28(5). pp.1312-1352.
Kazlauskiene V. and Christauskas C., 2015. Business valuation model based on the analysis of
business value drivers. Engineering Economics. 57(2).
Mügge D. and Stellinga B., 2015. The unstable core of global finance: Contingent valuation and
governance of international accounting standards. Regulation & Governance. 9(1). pp.47-
62.
Porter T. and Williams R., 2016. States, markets and regimes in global finance. Springer.
Robinson and Broihahn M.A., 2015. International financial statement analysis. John Wiley &
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Shim J.K. and Constas M., 2016. Encyclopedic dictionary of international finance and banking.
CRC Press.
Valickova P., Havranek T. and Horvath R., 2015. Financial Development and Economic
Growth: A Meta‐Analysis. Journal of Economic Surveys. 29(3). pp.506-526.
Online
Ward S., 2016. 3 Business Valuation Methods. [Online]. Available through:
<https://www.thebalance.com/business-valuation-methods-2948478> [Accessed on 2nd
December 2016].
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