Okan Bayrak

Okan Bayrak - VALUATION OF FIRMS IN MERGERS AND...

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Unformatted text preview: VALUATION OF FIRMS IN MERGERS AND ACQUISITIONS OKAN BAYRAK Definitions A merger is a combination of two or more corporations in which only one corporation survives and the merged corporations go out of business. Statutory merger is a merger where the acquiring company assumes the assets and the liabilities of the merged companies A subsidiary merger is a merger of two companies where the target company becomes a subsidiary or part of a subsidiary of the parent company Types of Mergers Horizontal Mergers- between competing companies Vertical Mergers- Between buyer-seller relation-ship companies Conglomerate Mergers- Neither competitors nor buyer-seller relationship History of Mergers and Acquisitions Activity in United States The First Wave 1897-1904- After 1883 depression- Horizontal mergers- Create monopolies The Second Wave 1916-1929- Oligopolies- The Clayton Act of 1914 The Third Wave 1965-1969- Conglomerate Mergers- Booming Economy The Fourth Wave 1981-1989 - Hostile Takeovers- Mega-mergers Mergers of 1990s - Strategic mega-mergers Motives and Determinants of Mergers Synergy Effect- Operating Synergy- Financial Synergy Diversification Economic Motives - Horizontal Integration - Vertical Integration - Tax Motives NAV= Vab (Va+Vb) P E Where Vab = combined value of the 2 firms Vb = market value of the shares of firm B. Va = As measure of its own value P = premium paid for B E = expenses of the operation FIRM VALUATION IN MERGERS AND ACQUISITIONS Equity Valuation Models - Balance Sheet Valuation Models Book Value: the net worth of a company as shown on the balance sheet. Liquidation Value: the value that would be derived if the firms assets were liquidated. Replacement Cost: the replacement cost of its assets less its liabilities. FIRM VALUATION IN MERGERS AND ACQUISITIONS-2 Dividend Discount Models 3 1 2 2 3 ....... 1 (1 ) (1 ) D D D V k k k = + + + + + + Where V o = value of the firm D i = dividend in year I k = discount rate FIRM VALUATION IN MERGERS AND ACQUISITIONS-3 The Constant Growth DDM 2 2 (1 ) (1 ) ...... 1 (1 ) D g D g V k k + + = + + + + And this equation can be simplified to: 1 (1 ) D g D V k g k g + = =- - where g = growth rate of dividends. FIRM VALUATION IN MERGERS AND ACQUISITIONS-4 Price-Earnings Ratio 1 1 1 / P PVGO E k E k = + where PVGO = Present Value of Growth Opportunity 1 1 (1 ) P E b E k ROExb- =- Implying P/E ratio 1 1 P b E k ROExb- =- where ROE = Return On Equity FIRM VALUATION IN MERGERS AND ACQUISITIONS-5 Cash Flow Valuation Models- The Entity DCF Model : The entity DCF model values the value of a company as the value of a companys operations less the value of debt and other investor claims, such as preferred stock, that are superior to common equity . Value of Operations: The value of operations equals the discounted value of expected future free cash flow....
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Okan Bayrak - VALUATION OF FIRMS IN MERGERS AND...

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