ch10 - Chapter 10 Increasing the Value Increasing of the...

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Increasing the Value Increasing the Value of the Organization of the Organization 10 10 Chapter Chapter
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Chapter 10-2 Valuation and Merger Analysis Valuation approaches and tests Comparable companies or transactions Spreadsheet and formula approaches Test whether transaction makes sense Test whether premium paid is justified by potential synergies Additional analysis Nature of industry Value drivers (historical and projected) Competitive and antitrust effects of merger Issues related to implementing the merger
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Chapter 10-3 Merger Analysis: Oil industry experienced a merger wave in the late 1990s Characteristics of the oil industry Oil is a global market Strategically important for industrial, political, and military reasons OPEC has historically played a large role Large costs for environmental protection High degree of price instability – mergers can be seen as a response to lower breakeven levels
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Chapter 10-4 Merger Analysis: Reasons for the merger Stronger presence in promising oil regions Better position to invest in costly programs with high risks and returns Complementary operations in South America, Russia, Canada, Asia, Africa Synergies: predicted $2.8B, analysts estimated to be $7B by 2002 (actual) Deal terms Mkt. value before: XON $175B, MOB $59B XON offer: 1.32 XON shares x $72 share price x 780 outstanding MOB shares = $74B (26% premium over premerger mkt. cap.)
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Chapter 10-5 Merger Analysis: Impact of the deal Premerger, Exxon shares represented 75% of combined market value Postmerger, Exxon shares represented 70% of combined market value Event analysis (-10,0): +14.8% Mobil, -0.5% Exxon (-10,+10): +20.6% Mobil, +3.1% Exxon Positive returns reflect market view that the merger made economic sense
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Chapter 10-6 Cost of Capital: Cost of equity: k e = r f + ERP(beta) • r f = risk free rate (10 yr. treasuries) = 5.6% ERP = equity risk premium (historical market return patterns) = 7% Beta = firm’s systematic risk = 0.85 (Exxon), 0.75 (Mobil) • Exxon k e = 5.6 + 7(0.85) = 11.55% • Mobil k e = 5.6 + 7(0.75) = 10.85% Cost of debt (before-tax) Exxon: AAA (160bp over treasuries) = 7.2% Mobil: AA (190bp over treasuries) = 7.5%
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Chapter 10-7 Cost of Capital: Capital structure Oil companies have usually had debt-to-total capital ratios between 20 and 40% During acquisitions, ratios at upper end Plausible target ratio would be 30% (B/V) Weighted average cost of capital • WACC = (S/V) k e + (B/V) k b (1–T) Cash tax rates estimated: 35% Exxon, 40% Mobil Exxon=(70%)(11.55%)+(30%)(7.2%)(1–35%)= 9.49% Mobil=(70%)(10.85%)+(30%)(7.5%)(1–40%)= 8.95%
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ch10 - Chapter 10 Increasing the Value Increasing of the...

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