{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

Info icon This preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
VALUATION OF FIRMS IN MERGERS AND ACQUISITIONS OKAN BAYRAK
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 2
Types of Mergers Horizontal Mergers - between competing companies Vertical Mergers - Between buyer-seller relation-ship companies Conglomerate Mergers - Neither competitors nor buyer-seller relationship
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 1990’s - Strategic mega-mergers
Image of page 4
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 = A’s measure of its own value P = premium paid for B E = expenses of the operation
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 firm’s assets were liquidated. Replacement Cost: the replacement cost of its assets less its liabilities.
Image of page 6
FIRM VALUATION IN MERGERS AND ACQUISITIONS-2 Dividend Discount Models 3 1 2 0 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
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
FIRM VALUATION IN MERGERS AND ACQUISITIONS-3 The Constant Growth DDM 2 0 0 0 2 (1 ) (1 ) ...... 1 (1 ) D g D g V k k + + = + + + + And this equation can be simplified to: 0 1 0 (1 ) D g D V k g k g + = = - - where g = growth rate of dividends.
Image of page 8
FIRM VALUATION IN MERGERS AND ACQUISITIONS-4 Price-Earnings Ratio 0 1 1 1 / P PVGO E k E k = + where PVGO = Present Value of Growth Opportunity 0 1 1 (1 ) P E b E k ROExb - = - Implying P/E ratio 0 1 1 P b E k ROExb - = - where ROE = Return On Equity
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 company’s 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.
Image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern