adv. fine. man. mergers and acquisitions

adv. fine. man. mergers and acquisitions - 'Lo“,agswotd...

Info icon This preview shows pages 1–10. Sign up to view the full content.

Image of page 1

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

Image of page 2
Image of page 3

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

Image of page 4
Image of page 5

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

Image of page 6
Image of page 7

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

Image of page 8
Image of page 9

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

Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 'Lo“ - ,agswotd far JOVHMRGKCVM gom’nw‘ Venkat Subramaniam, Lecture Notes Chapter 29 - Mergers and Acquisitions . _ OE “33MB“, \mMA‘png 0‘on - Merger or Consolldatlon CE} ‘ N r e V _ com (MR \5 '3 C] - Acquisition of Stock bflfl [Li Y\ - Acquisition of Assets Merger or Consolidation Acquisition Acquisition of Stock _ (iendef 0 PRO ~ in 051'] ‘3 In in (LN T Q Takeovers Proxy Contest Acquisition of Assets Going Private Merger - Absorption of the selling firm by the buying firm - .The selling firm ceases to exist as a separate legal entity Consolidation - An entirely new firm is created. New name. - Both a Merger and a Consolidation will have to pass the anti-trust law tests Advantages - Simple (Buyer assumes fl assets and liabilities) Chapter 29 - Page 1 Venkat Subramaniam, Lecture Notes - No minority interest ( ~ i’Ox‘ls 5mm not (seemed bq come 0v scmmaas 155mg Disadvantages - All liabilities assumed - Two-thirds of shareholders of both firms must approve 0 Dissenting shareholders can sue to receive “ air” value Acquisition of Stock ® CLDTD‘fi OQPTOOLCMC} fiare-hOIdd omol post-col [h haw-fpck 6” - Tenderoffer 1‘ \ _ 0m“? {15. but?) Shaés 0v} Advantages 5‘ h 5/ h CL P “Am 0 Target shareholder, or Management, or Board of Directors approval is not necessary it . C to ‘f ' Pmmo room Disadvantages _ \ nth‘n M An Ctorox and i w a - Minority holdout noraow . . . . Cl‘O‘r-D‘L boom bough’t 0 Integration Is not possrble Without T0096 shares ’ 3‘?) $33“ Share 7 low ( Acquisition of Assets - Buy specific assets of the target -7 ._ ‘ W0 QwF” Mam 505‘“: can“ " '01 Us Advantages ‘ fie \\ 5 a so? 6‘ m 030‘ 0 Buyer acquires assets; no minority shareholde WWV‘C - Only 50% of seller’s shareholder approval is necessary Disadvantages - Individual transfer of assets (Legal and Administrative Costs) Classification 0 Horizontal Mergers £603ch < _ . enOWNS - Vertical Mergers - suopuer 0 fl 9\ amS and use T c. € plies m5 “0.“ {ti ‘ 9K3“ Mmhuficmrar moot (nir— mam/em“ ‘6 930.008 - Conglomerate Mergers um, [ct-Rd __ “a 15+ (”ML PH ““0 MOW' ( 1’? LESS poifflfius ‘GUC fiaihfi: Chapter 29 — Page 2 ’61) 17. Lj‘i’LCL-rq H 24) pfivm Venkat Subramani m, Lecture Notes \m‘MC‘ Sources of Gains in at Met er Firms A and B merge.Synergy = V AB - (V A + VB) HWJ'Qfi’ ”LO Lthh \fa‘MSynergy = PV (Incremental Cash Flow) f‘ z c) m mm 1 . pa : ISOM OOM‘QU‘Og All synergy is not gains to the acquiring firm. f-H-Efi 1'50 on tum “we ". . . 1505010 h 4 Mains = Synergy - Premium paid to acquire the target W _ we“ Horafi XDm- 50m 6901:1959 = WW ACF = ARev - ACost — ATaxes - ACapi required. ‘30": \H OI OfCWMdi-k Increased Revenues premium .; m 32 h 35 5t I S 0W0" ' Increased market power Pad Iq 6hr U - Coflusion in prices ( 0 Efficient marketing and distribution network , '\ ‘amkS ' Coordination in productmix (fflkhmfi UCLU’W hem“ ‘32 3‘me GP“ if 4 . ~ 7 of 3 0k C 1“ 0 Strategic benefits —— 6M Oktcbbut'td “WCJNS 00 Q} (NH a WY) ' :OL bx“ g, Divan-(1°. Hmojws mew mSW‘f "'“‘ k w M Decreased Costs 0C”? Lame A (1 M \ {NW N U“ mum, K ice-Wm.“ m3) (yMOSProA W0 4 mccbvud‘l “- 0 Lower operating costs after a merger 00m (1Un Wt haul. Than (5 Chcm-" Chase adi‘dmu need co +cch me he“ {*Wm3tfij W moVM \9 (MO V-S)Economies of scale and scope 0““ U“ 0W“ 0”“ C’f‘V“ °' SW maficUUQ N’fimca 008i" mug W SCLWH: #09 Cult} a“ Named ()0 SH Complimentary resources Wm'ha to Gun WISH m [d | my 4 m V i (Leah; do not C m a and“ b1___£gfyfim% hi‘nfl - Oktorcajccktmob‘k ~____m_.__kfl TUMo - \osses MW 305 a Oars/mots W gooch buy: other products weren't —b00m(10$§€,&)* nmm Com use tosses T0 09031:? “MR aromas Efficient use of unused tax losses — Loss cm forward — Must ass IRS scrutinyr \M. W9 EVE Wis‘hfn . 5C!“ , Vt. 5. I L creagé'd d fa) W“ “5 CL C tCEPaCl m “CLEO“. no ' New dabi‘ ‘ OFW [00,19 3.? m bacon-SC cuecm n a WK”, : mime ““5 {“cm'ueghapterZQ—Page3 *‘qUOY‘hWY‘Ofi ) (033’)! 5mm») Luauvhinj £50; 500m +cxxe§ LS MEGA) 4 Hasbro boujht‘i—DHKO tomabctmww Oreo-(goo: 300 flames: mum : ' kat Subramaniam, Lecrnre Notes ashore: fisheres (31m: d9 35mm: a” f” 115.3441}. Share) '3 Noam 5W5: _ Winfll'm used hie—c Wealth Transfer due to Comsurance Effect 4- mg“ (mm mm- - In a merger, debt is “insured” by both firms’ assets. So probability of default decreases i.e., debt is safer. ° If the initial loan contract did not account for the merger, then it is a transfer of wealth to the bondholders from the shareholders Prevention of value lossfram Coinsumnce effect 0 If callable debt, buy back debt before the merger If not callable, issue new debt — senior or equal seniority debt — Coinsurance effect increases debt value — New senior debt decreases the old bond’s value, and offsets the increase due to coinsurance effect Form of payment in a Merger [ ' Payment in Cash Firm A acquires Firm B. Value of Firm A after acquisition = Value of combined firm — Cash paid for the acquisition NPV to the acquirer m Synergy - Premium Firm A = $500; Firm B = 100; Firm (AB) = $700 Synergy = $100 (mddfii‘bflw {Won 00$ka Cash paid to acquire FirmB = $160 [Finn 97 WGLWcS Profits me a“ ’hxoq A wtm \ee: mom-ed) WHEN Premium = £69 Ctuo—Qlifitbb) stun NPV of merger = 100 — 60 = $40 (955 b50509 ...._-——-w——“'"-'_‘ a 336:»: - Valuation and anticipation of the merger by the market 6’0 O J '1 06 (e100) {Dodo\ \UZD Q ‘3 1,00” “90: Lit tpvékflw_\\ Chapter 29 — Page 4 Venkat Subramaniam, Lecture Notes ' Payment through Stock # of shares of Firm A = 25 [affirm A cram: Share price = $20 =5500/25sa5ma If Firm A issues 8 new shares to acquire Firm B then the value paid out to acquire Firm B = 8*20 = $32.02: amomnr fimq A Omfiml‘b Total # of shares outstanding now in AB = 25 + 8 = 33 ’1 0 cm Firm B shareholders have 8/33 = 24.24% of the new firm New Firm value = $700 A g l/ Firm B shareholders value = 24.24% of 700 = $169.70 C Ibo—s; ) z \1‘], So Firm A shareholders effectively paid $9.70 more than what they planned to. ‘l '1’. “ 1 00: i {‘0 a, W0 4 530 Reason for overpayment: _'N_ 3 l (a D (gem) 6731 Unlike in a cash transaction, in a stock transaction the shareholders of Firm B make additional gains by participating in the increased value of Firm AB. 7 D'DN = W“ L199 Calculating the Correct # of shares to issue fl 05 t—t q . I 1. ‘. . Correct # of shares to issue is such that the after merger value to Finn B shareholders = $160 If N shares were issued to Firm B shareholders and if 0 shares were already outstanding in Firm A, then after the merger Firm B shareholders own N/(N+O) fraction of the firm AB. AV” “Q “-4." FindN such that [N/(N+25)} $700 a 160 0’0 03w?“ Pv My WW” => ’700N = 16ON + 160 *25 A 9 we“ ;( 963' 3:30 m \ => 540N = 4000 => N : 4000/540 = 7.41 shares P; 35 CH fie" u Advantages of Payment through Stocks s01 ’L ‘ ' ° Defers capital gains tax to the target 6? - Decreases risk to the acquirer associated with Overvaluation Chapter 29 — Page 5 Venkat Subramaniam, Lecture Notes Ill-Class Example Solution to Problem # 29.14 a) The synergy from the merger = $500,000/ODS = $6.25 million. (Since the cash flow is a perpetuity) b) The value of Flash-in-the-Pan to Fly-By-Night = $10 million + $6.25 million = $16.25 million (3) The cost of the acquisition to Fly-By-Night if it pays $13 million in cash is $13 million. However, if it offers 30% stock then the cost is the value of those shares of stock. The total garefolder 1:11:ng merged firm «'— \le\U\€\o $0418)" «e \{Oaflrgee 4 S a n erg M15 ‘” =‘Ebam1. + $16.25 mil. = $42.25 mil. 6 Cost of acquisition m 0.30 * $42.25 million \ 5m . _ 30 1 ‘1 ' ,1 __._..._— : \l I . ' ' ~ = $12675 million egos - 1 ex . 5, .015: Nl’Vexeeer [Q 9 Wk. 3‘ 915m:\ (1) The NPV of the acquisition to Fly-By-Night pays cash 2 $16.25 — $13 = $3.25 million \f NPV if it pays by stock (“Nil stout ’. 7 W I = 16.25—12.675 = $3.575 million WW (oar; e) Paying stock is cheaper, and hence that alternative has a higher NPV. Chapter 29 — Page 6 Venkat Subramaniam, Lecture Notes What is the percent of ownership that Fly-by-Night should offer to mimick its cash offer of $13 mil.? Let the correct percentage of ownership be y%. Then, y (42.25) = 13 => y = 13142.25 21> y = 0.3077 or 30.77%. s:> Value After An Acquisition Example: Gamble Inc, acquisition of Shapiro Inc. Gamble Inc.: Soaps Shapiro Inc; Cold remedies (‘7 Whit“ [Jana as) Shares Outstanding Gamble = 2 mil. Shires Shapiro = 3 mil. shares Tax Shiclelds: 5‘ ”g” I O/Sbm‘e stiro 30 m Increases by $1 million per year 1 : $1 0 m Discount rate: 5% (Cost of Debt Capital) , 05 Operating Eficiencies: Efficient use of unused production capacity of Shapiro. $1.5 miiiion per year l-Em_ gm?“ Discount rate: Shapiro’s discount rate = 15% ‘ 19 Strategic Fit: Extension of Shapiro’s Bac-Rub ointment into the new skin care cosmetics business 50% chance of $6 million each year ‘_...a--—— Discount rate: 20% (recognizing the risk, You may use pure—play technique to estimate the discount rate) 2‘) 7'1. 0 if Gamble pays $50 mil. to acquire Shapiro, what is the NPV of the acquisition? NPV = Mkt. Val. of Shapiro + Synergies — Price paid = (30 + 45 — 50) mil. = $25 mil. r) \il 8 U W B Chapter 29 — Page 7 50 i ‘45 = i75m a safer bus in Anew; o- ‘9ng Venkat S ubramaniam, Lecture Notes If Gamble pays for the acquisition by issuing 500,000 new shares to the shareholders of Shapiro, what is the NPV of the acquisition? Total Value of the combined firm = 100 + 30 + 45 = $175 mil. Total # of shares outstanding after the acquisition = 2.5 mil. Value of each share after the merger m 17512.5 = $70 Value given to Shapiro shareholders = 70 * 500,000 = $35 mil. ‘ \ar .l-d" NW)“- C‘ ‘1 500K “91...: Shawn; Shard gm W ”amt Sl’LCLrtS Q m\\ shard s? S‘jchgiifi“ 55““ _ 15 £300?— = 030 [a(lgbfi‘“§o‘r‘¥§>: {75(3) _' 351%.; £35m 100V» shame “3M” l“ “WW WLLA¥ «we, Owshl‘g v w W ‘ WWtaW/W Mr?“ (1.3.3 Noun CcuS‘n. fibu “ j was \n To \Dkao more gleam; Can \AS-Q W 0.0-8 mom wavered"- Chapter 29 — Page 8 xterm W Oncw‘x" Venkar Submmaniam, lecture Notes Sample Problem on Acquisition Valuation and Payment Northern Electronics, Inc., is considering acquiring Wisconsin Software. The CFO of Northern has estimated that the acquisition would increase the annual after-tax cash flow by $2 million indefinitely. The current shareholder value of Wisconsin Software is $70 million, and that of Northern is $125 million. The appmpriate discount rate for the incremental cash flows is 8%. Northern has 1 million shares outstanding. a) What is the synergy from the merger? b) What is the value of Wisconsin Software to Northern Electronics? c) What is the NPV of the acquisition to Northern if it pays $75 million for Wisconsin Software? (:1) What is the total shareholder vatue of the merged firm? e) What is the NPV of the acquisition to Northern if instead of cash it issues 500,000 new shares to Wisconsin Software’s shareholders to acquire that firm? Solution: a) The synergy from the merger = $2 million/0.08 = $25 million. (Since the cash flow is a perpetuity) b) The value of Wisconsin Software to Northern Electronics = $70 million + $25 million 2 $95 million c) The NPV of the acquisition to Northern if it pays $75 million for Wisconsin Software = (95 — 75) million = $20 million (1) The total shareholder value of the merged firm = $125 million + $95 million = $220 miIlion e) The NPV of the acquisition to Northern if it issues 500,000 new shares to Wisconsin Software’s shareholders to acquire that firm 2 ($95 million - Cost of acquisition) Cost of acquisition = [500,000/(l,000,000 + 500,000)] * $220 million : $73,333,33333 NPV = 95 — 73.333 = $21667 million Chapter 29 — Page 9 Um [0K QEV‘Id/ené «9mm WWW Micjhmd CW (Lunch 0 ‘5 x N1: Bur. 65 ”La 5 «m J; “0’? (\Dfmou —-‘ OKOWJr expegh \— an OWE” MhOu/KHC’QW’T W ($5lsw‘) (“SW & WW3 Imam Own/mum pcu‘dl ‘Wflé (WM, WU £1.31, ,-_’. "3,59. . _ .J' :1 3 ‘ _.r . ...
View Full Document

  • Spring '14
  • VenkatSubramaniam

{[ 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