C39CN - Past Exam Papers.doc

Boise cascade in paper manufacturing business for

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Boise Cascade: in paper manufacturing business for many years Acquired Office Max in 2003 for $1.15 billion Vertical integration Sold off its paper production business Involuntary Sell-offs as a result of anti-trust action Loh, Bezjak, and Toms (1995) Examined 59 companies that were involved in takeover speculation 1980 – 1987 Companies which did involuntary sell-offs did not show positive shareholder wealth effects The empirical evidence is as follows Schipper and Smith Equity Carve Outs : Increase shareholder wealth of parent firms: 1.8% Public Offerings : Decrease in shareholder wealth: –3% Schipper and Smith’s Reasoning : Increased efficiency for the parent company and division now that they are run separately Market can more easily evaluate each part now that it is separate Parent company has cash instead of the division and may be able to use this capital better to achieve higher returns Vijh (1999 ) looked at 628 carve outs over period 1981-1985 Carve out companies performed favorably compared to benchmarks Compared carve outs to IPOs Carve outs earned 14.3% return over 3 year period IPOs earned 3.4% However, initial day listings : IPO – 15.4%, carve outs 6.2% But initial day IPO effects are deceptive – after first 100 days IPO company performance often poor Michaely and Shaw (1995) – which companies to carve outs versus spin-offs? DECEMBER 7
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C39 CN Showed that more highly leveraged firms chose to go the spin-off route rather than equity carve outs They conclude that those with better access to capital markets will use equity carve outs Better access was interpreted as less risky Where possible, the fundamental principle is to determine present value of future benefits. The following represent some of the basic concepts and approaches. 4. Valuation Concepts Fair Market Value - most widely recognized standard of value Definition: 1. Price a willing buyer would pay 2. Price a willing seller would accept 3. Each being fully informed of the facts 4. Neither under compulsion to buy or sell Thus the FT argued in the case of KNOC versus Dana, that £18/share represented fair value. Fair Value is often used to mean the same thing as fair market value. However, it can have a very specific meaning in a legal context. The law in the US tends to look at the process of valuation and whether or not this was sufficiently thorough. Going Concern Value represents liquidation value plus present value of intangibles such as goodwill. In other words, it represents the basic value of assets plus a premium for the fact that the business is still operational with customers, employees etc. Liquidation Value is the value that the owner realizes when the business is terminated and the assets are sold off a) Orderly Liquidation : Assets sold over a reasonable time period so as to get the best price b) Forced Liquidation : Assets sold quickly such as through an auction sale In computing liquidation value you need to include all the costs of liquidation and
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