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FINA3303 Lecture 21 Post.pdf - LECTURE 21 Alminas Žaldokas...

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LECTURE 21AlminasŽaldokas[email protected]
WHERE ARE WE?2F I N A 3 3 0 3 / L E C T U R E 2 1Valuation ToolsNPV, capital budgeting (L2)Cost of equity (L4)Equity valuation (L3, L5-6)Capital structure, WACC (L7-11)Key frictions (L15)Valuation ApplicationsRaising debt (L16)Raising public equity (L17-19)Raising private equity (L22)Integrating (L20-21)Returning equity (L23)Putting Theory into PracticeReuters training (L14)Mid-term case (L12-13)Group project presentations (L24-25)Exam review (L26)
PLANOldTownValuing M&A GainsTakeover PremiaMethods of Payment3F I N A 3 3 0 3 / L E C T U R E 2 1
4F I N A 3 3 0 3 / L E C T U R E 2 1
VALUATION5F I N A 3 3 0 3 / L E C T U R E 2 1Start with the target’s stand-alone market valueand concentrate on the changes in cash flowthat would result from the mergerForecast synergies separately as part of DCF(merger model) orAssume a certain premium (similar to multiples)Synergies = VABVA+ VBTakeover premium = Cash paid − VBNPV = Synergies − Takeover premium
TAKEOVER PREMIUM6F I N A 3 3 0 3 / L E C T U R E 2 1In most cases, the acquiring firm offers to buythe target’sshares at asubstantial premiumover the target’s prevailing stock priceSynergies are captured by the targetshareholdersPremiums higher:Strategic mergers as they involve synergiesPresence of other biddersStrength of target’s antitakeover defensesWhy share synergies with target shareholders?
FREE RIDER PROBLEMOldTown’sshare price is RM2.88, but value willimprove to, say, RM3.49 afterJDE’s acquisitionJDE offers RM3.18However, if I am holding on to a share and I knowthat all other shareholders are going to tender,then I should not tender at RM3.18, since thevalue will be RM3.49 after the acquisitionEveryone else thinks the sameDeals do not happen unless RM3.49 offeredAcquirer not interested to offer RM3.497F I N A 3 3 0 3 / L E C T U R E 2 1
FREE RIDER PROBLEMIf the value is likely to improve after the takeoverbecause of better management or synergies,then for a small shareholder whose tenderingdecision does not affect the outcome, it isbetterto hold on to the share until the value improvesrather than tender at a lower price now8F I N A 3 3 0 3 / L E C T U R E 2 1

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