Groupe Ariel S.A.: Parity Conditions And Cross-Border Valuation

On June 23, 2008, a Monday morning, Arnaud Martin arrived at his office in Groupe Ariel’s
corporate headquarters in Mulhouse, France. The previous week, Martin had requested additional
financial information about an investment proposal from Ariel-Mexico, a wholly owned subsidiary
that operated a manufacturing facility and a regional sales office in Monterrey, Mexico. The
information hadarrived late Friday—too late for Martin to analyze—and was waiting for him
Monday morning. As a financial analyst for a global manufacturer of printing and imaging
equipment, Martin examined many cross-border projects, particularly since Ariel had accelerated its
move into emerging markets several years earlier.
The Mexican investment proposal called for the purchase and installation of newautomated
machinery to recycle and remanufacture toner- and printer cartridges. Cartridge recycling had
become an important part of Ariel’s business in many markets and promised continued growth.
Many office product retailers operated formal toner cartridge recycling programs, for both the
environmental benefits of keeping materials out of landfills and demonstrated cost savings for theircustomers. Writing in a leading trade journal, one analyst predicted, “We are going to see more and
more refined approaches to recycling and remanufacturing [cartridges] in the coming months and
years … Both corporate and individual consumers are becoming habituated to it. They have simply
come to expect recycling as an option, even for smaller cartridges at lower price points.”
Ariel-Mexico’sMonterrey plant began its cartridge recycling program in 2005. The plant’s
recycling process consisted of a sequence of operations carried out almost entirely by hand, with the
help of hand tools and a simple machine. The investment proposal called for replacing this process
with new automated machinery from Germany that cost an estimated 3.5 million pesos
(approximately €220,000) fullyinstalled. As described in the project summary, Ariel-Mexico
expected to realize substantial savings in labor and materials almost immediately. Though the
proposed expenditure was relatively small, Ariel required a discounted cash flow analysis for all
such investments in its newer foreign markets and a review by corporate headquarters in Mulhouse.
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4194 | Groupe Ariel S.A.:Parity Conditions and Cross-Border Valuation
Martin was assigned to perform an analysis of the investment proposal and make an “up or down”
recommendation to his superior by Wednesday morning.
Groupe Ariel S.A.
Groupe Ariel was a global manufacturer of printers, copiers, fax machines, and other document
production equipment. The company also provided consulting and document outsourcingservices,
with after-sales service contracts constituting about 18% of overall revenue. Company sales for 2008
were projected to be €3.35 billion, down from 2007 due to a global recession. Operating profit was
expected to be €61.2 million in 2008, and the company projected a small net loss for the year.
Exhibit 1 presents selected consolidated financial data for Groupe Ariel.
Ariel’s lowprofitability was typical of the industry in 2008; all of its competitors were similarly
affected by the recession. One bright spot in the company’s outlook, however, was its growth in
several emerging markets, including the so-called BRIC economies of Brazil, Russia, India, and
China. Ariel had been a global firm for years, but did not move aggressively into emerging markets
until 2003–2004. Thiswas later than some of its competitors. On one hand, this meant Ariel’s market
share lagged in some markets. On the other hand, Ariel avoided some of its competitors’ earlier
mistakes.
The company’s international operations were conducted primarily through a large network of
subsidiaries, which operated mostly medium-sized regional factories in which printers, copiers and
other products...