synergy - Synergies What is it? Synergy Drivers Valuation...

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Unformatted text preview: Synergies What is it? Synergy Drivers Valuation of Synergies Actual market response to the Air Actual France-KLM merger announcement announcement 1 WHAT IS IT? Popular definition: 2 + 2 = 5 Roundabout definition: If am I willing to pay Roundabout 5 for the business market-valued at 4 there has to be the Synergy justifying that has More technical definition: Synergy is ability More of merged company to generate higher shareholders wealth than the standalone entities entities 2 Synergy Drivers Synergy 3 KLM Benefits Of Synergy KLM Cost cutting programme designed to yield €650 million in savings and €125 million worth of savings had been achieved Better profitability at KLM Reduce air fare and operational results Reduce will go up by €211 million tax to the bottom line bottom 4 Valuation of Synergies Mathematically: Synergy = n VFirm FCFt =∑ t t = 0 (1 + WACC ) Free cash flow(FCF) is the after-tax operating profit, Free plus noncash deductions, less investments in net working capital and capital projects working The weighted average cost of capital (WACC) is the The blended opportunity cost of all investors blended 5 The Merger Agreement The The exchange ratio of the deal is: The 11 Air France shares for 10 KLM common shares and 10 Air France warrants with strike price €20 and maturity 3.5 years Subscription parity: 3 warrants give the right to subscribe or to acquire 2 Air France shares subscribe Share price = €13.69 Warrant value =€1.68, the Share Total value of the offer for KLM shareholders = 11/10*€13.69+€1.68 =€16.74 per share 11/10*€13.69+€1.68 6 Present Value of Synergies At the day of the announcement, the management at Air France communicated their estimate of the expected synergies ( Euro amounts in millions) 7 PV of Synergies (cont) PV 2004- 2005- 2006 2007 2008 2009 2010 201 05 06 -07 -08 -09 -10 -11 112 2012 201 -13 314 Management’s estimate 65 110 220 295 385 600 600 600 600 600 After tax (35%) 42 72 143 192 250 390 390 390 390 390 WACC(11.99%) 0.89 0.80 0.71 0.64 0.57 0.51 0.45 0.4 0 0.36 0.3 2 Present value 37.73 57.01 101. 81 121. 90 142. 06 197. 69 176. 53 157 .63 140. 75 125 .68 Year Sum of Present value (ΣPV) Number of target shares PV of Synergies per target share €1258.79 46.85 €26.87 The median, weighted average cost of capital WACC based on the capital asset pricing model with a size premium is 11.99% — Ibbotson Associates, Cost of Capital 2004 Year Book, SIC Code 4512 Air Transportation, Schedule. The estimate of the present value of The expected synergistic gain per target share is €26.87 which exceeds €16.74 by €10.46 per target share. The control premium per KLM’s share The offered by Air France: offered [Implied value of target share LESS [Implied share price of the target two days prior to merger announcement] merger = €16.74 - €13.69 €16.74 = €3.05 €3.05 9 Thus, the implied net benefit to Air France Thus, per share is €5.11 as computed below per (PV of Synergy per KLM’s share less control premium) * (PV (Number of KLM shares outstanding) / Number of Air France shares outstanding France PV of Synergies per KLM’s shares €26.87 Control Premium per KLM's shares €3.05 Number of KLM shares outstanding 46.85 Number of Air France shares outstanding 218.18 Implied Net Benefit per Air France share €5.11 10 Actual Market Response Actual On May 6 2004, KLM announced that net profit On for the fiscal year 2003/2004 was €24 million or €0.51 per share €0.51 Before merger, in the fiscal year ending on March Before 31, 2003, KLM reported a loss of €186 million or €3.97 per share €3.97 Therefore, the actual market response to the Therefore, merger announcement shows the KLM share price increased by €4.48 per share post-announcement of the deal which is much lower than the estimated value of the expected performance improvements value 11 ...
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This note was uploaded on 01/27/2012 for the course ACCT 1501 taught by Professor Helen during the Three '09 term at University of New South Wales.

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