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Financial performance

Carnival’s Key Ratios 1999 2000 2001 2002 2003 Profitability Ratios Return on Assets 13. 28% 10. 66% 8. 66% 8. 50% 6. 48% Return on Equity 20. 41% 16. 37% 14. 85% 14. 53% 11. 51% Gross Margin 46. 7% 45. 5% 45. 6% 47. 1% 43. 2% Operating Margin 27% 25% 20. 6% 23. 9% 20. 6% Financial Health Ratios Current Ratio 0. 56 0. 32 1. 32 0. 70 0. 64 Quick Ratio 0. 42 0. 17 1. 02 0. 48 0. 44 Financial Leverage 1. 40 1. 67 1. 75 1. 66 1. 78 Debt/Equity 0. 18 0. 40 0. 45 0. 43 0. 53 Efficiency Ratios Receivable Turnover 56. 5 47. 8 48. 7 43. 9 26. 3 Inventory Turnover 23. 4 22. 3 25. 7 25. 2 29. 1 Asset Turnover 0. 5 0. 4 0.

4 0. 4 0. 4 Table 1 Carnival’s Key Ratios Available at http://quicktake. morningstar. com/Stock/search Paying attention to the key ratios of Carnival Corporation displayed above, the following assessment can be made, • Company’s ability to produce profit from existing assets is in a declining state of trend. Company’s ability to produce profit from existing asset and equities drop to almost half of the existing percentage, in 5 years since 1999. • Company’s ability to pay its current debt also displays a downward trend. On 2003, more than half of the company’s equity is retrieved from short and long term debt.

Its current ratio even displays current liability’s portion, which is more than half of company’s current assets. • Company’s overall working efficiency is also experiencing a downward shift. Its ability to manage receivables on 2003 drop almost 50 % compared to its previous 5 years performance. However, company’s stock of inventory is decreasing, indicating company’s increased efficiency in managing inventory. III. 2. 2 P&O Princess plc • Market Share POPC was originally a long time British company active in the cruise ships industry since the 19th century. In October 2000, it was unmerged from the P&O Steam Navigation Company.

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Today, the POPC operates under the following brands: Princes Cruises, P&O Cruises, Swan Hellenic, Aida Cruises, Arkona, and A’rosa. P&O Cruises is a British style cruise operator leading the United Kingdom market. Princes Cruises is mainly active in the North American Market, while AIDA and Seetours are active in the German market. The P&O Princess plc has also launched a new brand in 2003, “Ocean Village”, which targeted younger and more informal passengers (‘Commission’, 2002). • Financial Performance Carnival plc Key Ratios 2002 Financial Health Ratio Current Ratio 0. 57 Quick Ratio 0. 48

Financial Leverage 2. 25 Debt/Equity 1. 25 Table 2 Carnival plc Key Ratios Available at http://quicktake. morningstar. com/Stock/search Due to data unavailability, we can only examine the financial health ratios of P&O Princess plc. Relating to the data, we can conclude that the company is having a liquidity problem. Its current ratio, quick ratio and debt/equity ratio describe that company’s current liabilities is about half of the entire current assets, while its total debt is even larger that it’s entire equity. III. 3 Process of Acquisition The acquisition faced a number of problems in the year 2002.

Before discussing some of the problems we will previously assess management motives and the method of acquisition. III. 3. 1 Management Motives The available information displays that one of the motivation of Carnival to pursue the acquisition is to generate stronger liquidity performance and to gain larger share of the market. The company suffered a tremendous lost of market demand due to the September 11 attack, and the storm season hitting Florida (‘Carnival’, 2005). As previously displayed, company’s profitability and financial health declined up to 50% in the 5 years period after 1999.

By the end of 2002, POPC’s financial health ratios also describe the company’s liquidity problem. The company was running on debt and lack of cash flow. The company might have suffered the same effect from the September 11th‘s attack and the hurricane season. Fresh fund from the acquisition would help the company in repairing its financial structure. III. 3. 2 Method of Acquisition The companies are using a dual listing method of acquisition, which mean that the company is combined trough a series of contract and operating under a single management team.

Registered as Dual Listed Companies (DLC) or known as the virtual merger, the two companies share a single senior executive management team; have identical boards of directors and proportionate claims on cash flows, dividends and assets, but retain its identities as two separate enterprises. The Carnival Corporation is currently trading on the New York Exchange while the Carnival plc (formerly known as P&O Princess plc) continues to trade in the London Stock Exchange (Ayer, 2005). A virtual merger has certain benefits compared to regular merger.

Its main benefit is that the virtual merger is more tax-efficient for shareholders. Relating to matters of foreign exchange, Analysts believe that the exchange rate fluctuations can cause investors to want to hold either the US or UK shares. However, exchange rates don’t have as much impact on Carnival plc ADS compare to a pure foreign ADR (Ayer, 2005). Analyst also believes that overall, there is no significant difference between owning shares in both companies. But the exchange rate fluctuations and the fact that Carnival plc is traded less frequently can cause one or the other company to trade at a premium (Ayer, 2005).

III. 3. 3 Tactics of Both parties The acquisition was first rejected by POPC who had previous engagements with the RCCL. Some of the factor which previously encouraged POPC to join the RCCL is the fact that RCCL has a smaller market than Carnival. Being among the largest companies in the industry, there are reasonable concerns that a join with the Carnival Corporation will create a concentration which disturbs the fair market mechanism (‘Commission’, 2002). Some of the board members believed that it might be safer to join with the RCCL.

Despite the consideration, by the year 2002, POPC has agreed to join with Carnival under a DLC method of acquisition. The agreement comes with the decision from The Commission of The European Communities that the acquisition of POPC would not make Carnival to be a market concentration which would cause effective competition in the common market to be disturbed (‘Commission’, 2002). Explanation of the inspection from The Commission of The European Communities will follow. Other factors might be the retirement of Lord Sterling, the chairman of POPC and Carnival’s stock offer to POPC’s executives.

For example, Peter Ratcliffe, Chief Executive of POPC earned 250,000 shares which would not be made available under the deal with RCCL. Peter Ratcliffe is to lead both companies with a salary of ? 500,000 a year with a chance to earn 100% bonus (Macalister, 2003). III. 3. 4 Market Resistance By February 2002, Carnival has announced a public bid on the POPC. Commission of The European Communities was then received complaints against the merger, due to the immense market concentration which will be created if the companies merged.

On April 2002, the commission agreed to initiate proceedings toward the case (‘Commission’, 2002). This has posed a significant threat over the acquisition endeavor. Both Carnival and POPC stated their defense that the cruise product’s market was: 1. Geographically considered an international market Carnival argued that the cruise product’s geographical market cannot be limited to a certain national market. The argument was based at the facts that the ships are not tied to particular regions, that many oceanic cruises are marketed worldwide and consists of mixed nationality of customers.

The Euro and the internet marketing is also an international marketing method applied by many of the cruise operator enterprises (‘Commission’, 2002). 2. Considered a part of the wide range vocational market which includes also land-based holidays. Carnival stated that the appropriate definition of the product is the provision of leisure travel, which includes a wide variety of alternative vacation options such as a stay in a holiday club, a tour of an exotic location, a skiing holiday or other package of holiday services (‘Commission’, 2002).

Relating to the arguments, the commission’s investigation resulted a set of conclusions: 1. The commission was assured by the evidences that the relevant geographical markets are national in nature. The decision came from facts that each cruise enterprises penetrated different states with considerably different presence also. For example, Carnival possessed 50 – 60% Italian cruise market and only 0,4 – 0,5% of United Kingdom’s cruise market, while the POPC had 0 – 5% of Italian market share and 15 – 25% of United Kingdom’s (‘Commission’, 2002). Marketing activities also conducted with differences in several states.

The same cruise service had sometimes sold at different prices on different countries. Some cruise brands are sold in some countries while others are not (‘Commission’, 2002). 2. The committee concluded that cruise market product are distinct and in different nature to other land-based vocations. The committee had conducted several researches that cannot all be elaborated in this paper, but one of the convincing findings is that the interviewed travel agents mentioned that only a few customers who finally booked a cruise vacation previously requested other vocational brochures.

On the contrary, almost all of the customers who actually bought a cruise first requested cruise brochures (‘Commission’, 2002). Among other investigation, the survey indicates that customers do not consider cruise vacation as substitution of other land-based holiday. The customers decided that they wanted a cruise vocation before they even went to the travel agents. The customers see cruise vacation as a distinctive product unmixed with other vocational products (‘Commission’, 2002).

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