Session 1 and 2.pdf - Lecture 1 Objectives • M&A and forms of corporate restructuring • Motives behind M&A Legal Perspective of Mergers and

Session 1 and 2.pdf - Lecture 1 Objectives • M&A and...

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Lecture 1
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Objectives M&A and forms of corporate restructuring Motives behind M&A
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Legal Perspective of Mergers and Consolidation A merger is a combination of two or more firms, often comparable in size or one smaller than the other, in which all but one ceases to exist legally Statutory or direct merger Subsidiary merger
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Economic Perspective Horizontal Conglomerate Vertical Backward Forward
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Other Forms of Corporate Restructuring Acquisition –controlling stake in a firm i.e. stock or subsidiary of firm/assets Divestitures- sale of all/part/product line for cash/securities Spin off- creating new subsidiary independent of parent and can distribute shares of subsidiary to current shareholders Spilt off – subsidiary becoming an independent firm and parent does not generate any cash Equity Carve out Joint Ventures/Strategic Alliances Licensing
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Why M&As?
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Synergy Value realized from incremental cashflows generated by combining two entities
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Operating synergy Economies of scale Economies of scope
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Economies of scale Reduction in average cost for a firm due to decrease in fixed cost as volume increases e.g. Dep, amortization, interest expense, lease expense, customer, vendor contract, taxes, reduction in purchase because of bulk purchase and set up cost Period 1 : Firm A (Pre-merger) Assumptions : Price = Rs 4 per unit of output sold Variable costs = Rs 2.75 per unit of output Fixed costs = Rs1,000,000 Firm A is producing 1,000,000 units of output per year Firm A is producing at 50% of plant capacity Period 2 : Firm A (Post-merger) Assumptions : Firm A acquires Firm B which is producing 500,000 units of the same product per year Firm A closes Firm B’s plant and transfers production to Firm A’s plant Price = Rs 4 per unit of output sold Variable costs = Rs 2.75 per unit of output Fixed costs = Rs 1,000,000
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Period 1 : Firm A (Pre-merger) Assumptions : Price = $4 per unit of output sold Variable costs = $2.75 per unit of output Fixed costs = $1,000,000 Firm A is producing 1,000,000 units of output per year Firm A is producing at 50% of plant capacity Profit = price x quantity – variable costs – fixed costs = $4 x 1,000,000 - $2.75 x 1,000,000 - $1,000,000 = $250,000 Profit margin (%) 1 = $250,000/$4,000,000 = 6.25% Fixed costs per unit = $1,000,000/1,000,000 = $1 Period 2 : Firm A (Post-merger) Assumptions : Firm A acquires Firm B which is producing 500,000 units of the same product per year Firm A closes Firm B’s plant and transfers production to Firm A’s plant Price = $4 per unit of output sold Variable costs = $2.75 per unit of output Fixed costs = $1,000,000 Profit = price x quantity – variable costs – fixed costs = $4 x 1,500,000 - $2.75 x 1,500,000 - $1,000,000 = $6,000,000 - $4,125,000 - $1,000,000 = $875,000 Profit margin (%) 2 = $875,000/$6,000,000 = 14.58% Fixed costs per unit = $1,000,000/1.500,000 = $.67 Key Point : Profit margin improvement is due to spreading fixed costs over more units of output. Profit margin
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  • Spring '18
  • Nidhi Malhotra

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