Lecture06 - FIN2101 BUSINESS FINANCE II FIN2101 Module 5 -...

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FIN2101 BUSINESS FINANCE II FIN2101 BUSINESS FINANCE II Module 5 - Takeovers Module 5 - Takeovers
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Student Activities Student Activities Reading Text, Chapter 19 Text Study Guide , Chapter 19 Study Book , Module 5 Selected Reading 5.1 Tutorial Activities Tutorial Workbook , Self Assessment Activity 5.1 Text Study Guide , Chapter 19, All
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Terminology Terminology A TAKEOVER occurs when a company acquires a controlling interest in another company. A MERGER usually involves two or more independent companies coming together by mutual agreement. A CONSOLIDATION is the combination of two or more firms to form a completely new company.
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More Terminology More Terminology Acquiring company vs target company Hostile vs friendly takeover Strategic vs financial merger
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Types of Takeovers Types of Takeovers Horizontal 2 companies in same line of business. Vertical a takeover of either the supplier of goods/raw materials to, or a consumer of goods produced by, the acquiring company. Congeneric in the same general industry but neither in the same line of business nor a supplier or customer. Conglomerate in an unrelated business or industry.
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Reasons for Takeovers Reasons for Takeovers Like any other investment – maximise the value of the acquiring company’s shares. Must be financial benefits. Motivated by a desire for greater returns or reduction in risk profile, or both.
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Reasons for Takeovers Reasons for Takeovers Target company is managed inefficiently Complimentary assets Target company is undervalued
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Reasons for Takeovers Reasons for Takeovers Cost reductions Increased market power Excess liquidity & free cash flow
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Reasons for Takeovers Reasons for Takeovers Tax benefits continuity-of-ownership test continuity-of-business test Text (pp. 702-6) and Study Book (pp. 5.2-5.4)
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Invalid/Dubious Reasons Invalid/Dubious Reasons Diversification Risk reduction Increased debt capacity the co-insurance effect Higher EPS bootstrapping
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The Co-insurance Effect The Co-insurance Effect Combining two companies whose earnings streams are less than perfectly positively correlated will lower the risk of default on debt, so that the debt capacity of the combination is greater than the sum of the debt capacities of the two companies operating separately.
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Bootstrapping Bootstrapping Occurs in share-exchange takeovers whenever the acquiring company’s P/E ratio is greater than the target company’s P/E ratio. Need to distinguish between the effects of true growth and the bootstrap effect. Study Book Example 5.1.
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Reasons for Takeovers Reasons for Takeovers Valid Reason: I.E. SYNERGISTIC EFFECT ( 29 B A B A PV PV PV + +
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Synergism Synergism The combined company must be of greater value than the sum of the parts: 2 + 2 = 5 Benefit 2 + 2 = 4 No Benefit
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Terms of Offer Cash (when shares are purchased on the stock market). Exchange of shares
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This note was uploaded on 12/06/2011 for the course BUSINESS Finance taught by Professor Qilei during the Summer '11 term at Tianjin University.

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Lecture06 - FIN2101 BUSINESS FINANCE II FIN2101 Module 5 -...

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