5. P0=66.25; D1 = 5.30 g =4% Re =?
Re= 12%
230
9. We=.55; Wd=.45;P0=43; D1 = 1.30;
g=3% Re =?; Cr= 7%;YTM=6.8%; T=34%;
231
11. WACC=? EBIT=2mln; T=34%; Re
= 14; D=4mln; Rd =9%
Vl=10,788571.43
232
12. EBIT=300,000; 100000sh*18;
D=600,000; Intr=8%; ROE=?
233
Problem 13, 14, 16 (yellow)
13. EBIT=400; D=600; VU =100 T=34%;VL
=?
 VL = VU + DTC =1000+600*.34=1204
14. T=35% Re =14% D=1000 EBIT=
300.00
 VU = 300*.65/.14 =1,392.85
16. D=500;V=1100; T=34%; R =7% R =14%
D
e
WACC= (6/11).1785+
(5/11)(.07)(.66)=.1184
Re=.1785
234
17, 18, 19, 20
. EBIT=46,000; Re =15%; T=34%; Vu =? If
D=75,000 -- Vu = 202,400
VL = VU + DTC=202,400+25,500=227,900
18. D/E=.4; WACC=16%; YTM=13%; Re=?
D/E=.4 ; We =.7143 Wd =.2857
.16=.7143*Re+. 2857*.13 Re=.1720
19. P=12; 10% stock div. P=12/1.1=10.90
20. D/E=1/2; New Fin=2700 New Eq=1800
NI=1700; no res div can be paid..
17
235
Chapter 23
MERGERS AND
ACQUISITIONS
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Definition

The phrase mergers and acquisitions
(abbreviated M&A) refers to the aspect
of corporate strategy, corporate finance
and management dealing with the buying,
selling and combining of different
companies that can aid, finance, or help a
growing company in a given industry grow
rapidly without having to create another
business entity.
237
Business valuation
The five most common ways to valuate a
business are
 asset valuation,
 historical earnings valuation,
 future maintainable earnings valuation,
 relative valuation (comparable company &
comparable transactions),
 discounted cash flow (DCF) valuation
238
Chapter Outline







The Legal Forms of Acquisitions
Accounting for Acquisitions
Gains from Acquisition
The Cost of an Acquisition
Defensive Tactics
Some Evidence on Acquisitions
Divestitures and Restructurings
9
Legal Forms of Acquisitions

Merger or consolidation

Acquisition of stock

Acquisition of assets
10
Merger versus Consolidation

Merger
◦ One firm is acquired by another
◦ Acquiring firm retains name and acquired firm
ceases to exist

Consolidation
◦ Entirely new firm is created from combination
of existing firms
11
Stock Acquisition (1)
A firm can be acquired by purchasing
voting shares of the firm’s stock
 Tender offer – public offer to buy shares
 Circular bid – takeover bid communicated
to shareholders by direct mail
 Stock exchange bid – takeover bid
communicated to shareholders through a
stock exchange

12
Stock Acquisition (2)
No stockholder vote required
 Can deal directly with stockholders, even
if management is unfriendly
 May be delayed if some target
shareholders hold out for more money –
complete absorption requires a merger

13
Acquisition Classifications

Horizontal – both firms are in the same
industry

Vertical – firms are different stages of the
production process

Conglomerate – firms are unrelated
14
Takeovers
Control of a firm transfers from one
group to another
 Possible forms

◦ Acquisition
◦ Proxy contest
◦ Going private (LBO vs. MBO)
15
Alternatives to Merger

Strategic alliance = agreement between
firms to cooperate in pursuit of a joint
goal

Joint venture = an agreement between
firms to create a separate, co-owned
entity established to pursue a joint goal
16
Accounting for Acquisitions

The Purchase Method
◦ Assets of acquired firm are written up to fair
market value
◦ Goodwill is created – difference between
purchase price and estimated fair market
value of net assets
17
Gains from Acquisition
Synergy
 Revenue enhancement
 Cost reductions
 Tax gains

18
Synergy

The whole is worth more than the sum of
the parts
Synergies
should create enough benefit
to justify the cost
19
Revenue Enhancement

Marketing gains
◦ Advertising
◦ Distribution network
◦ Product mix

Strategic benefits

Market power
20
Cost Reductions

Economies of scale
◦ Ability to produce larger quantities while
reducing the average per unit cost

Economies of vertical integration
◦ Coordinate operations more effectively
◦ Reduced search cost for suppliers or customers

Complimentary resources
21
Taxes

Tax losses

Unused debt capacity

Surplus funds

Asset write-ups
22
Reducing Capital Needs

Firms may be able to manage existing
assets more effectively under one
umbrella

Some assets may be sold if they are not
needed in a combined firm
23
Diversification

Diversification, in and of itself, is not a
good reason for a merger

Stockholders can diversify their own
portfolio cheaper than a firm can diversify
by acquisition
24
EPS Growth

Mergers may create the appearance of growth
in earnings per share

If there are no synergies or other benefits to
the merger, then the growth in EPS is just an
artifact of a larger firm and is not true growth

In this case, the P/E ratio should fall because the
combined market value should not change
25
The Cost of Acquisition:
Cash Acquisition

The NPV of a cash acquisition is
◦ NPV = VB* – cash cost

Value of the combined firm is
◦ VAB = VA + (VB* - cash cost)
26
The Cost of Acquisition:
Stock Acquisition

Value of combined firm
◦ VAB = VA + VB + V

Cost of acquisition
◦ Depends on the number of shares given to the target
stockholders
◦ Depends on the price of the combined firm’s stock
after the merger
27
Shares vs. Common Stock

Sharing rights

Taxes

Control
28
Defensive Tactics(1)

Corporate charter
◦ Establishes conditions that allow for a
takeover
◦ Supermajority voting requirement
Targeted repurchase (Greenmail)
 Standstill agreements
 Exclusionary offers
 Poison pills
 Share rights plans

29
Defensive Tactics (2)
Leveraged buyouts (LBO)
 Other defensive tactics

◦ Golden parachutes
◦ Crown jewels
◦ White knight
30
Evidence on Acquisitions

Shareholders of target companies tend to
earn excess returns in a merger
◦ Shareholders of target companies gain more
in a tender offer than in a straight merger
◦ Target firm managers have a tendency to
oppose mergers, thus driving up the tender
price
31
More Evidence

Shareholders of bidding firms do not earn much
excess return in either a tender offer or a
straight merger
◦ Anticipated gains from mergers may not be achieved
◦ Bidding firms are generally larger, so it takes a larger
dollar gain to get the same percentage gain
◦ Management may not be acting in stockholders best
interest
◦ Takeover market may be competitive
◦ Announcement may not contain new information
about the bidding firm
32
Divestitures and Restructurings
Divestiture = sale of assets, operations, or
divisions to a third party
 Equity carve-out


Spin-off

Split-up
33