9. Mergers and Acquisitions

Question 1

How does a share exchange acquisition work?

Answer 1

The predator company acquires the shares of the target company by issuing shares to the target shareholders in proportion to their existing shareholding

Question 2

Under a share based payment acquisition, what is the maximum that the acquirer would be willing to pay?

Answer 2

MVa+b - MVa

Question 3

Given a P/E ratio, what are the steps to calculating the premium offered in a share exchange aqusition?

Answer 3

1. Calculate the market cap of the acquirer
2. Calculate the share price of the acquirer
3. Calculate the premium value of shares given in the exchange
4. Calculate the market cap of the target
5. Calculate the share price of the target
6. Calculate the market value of shares given
   THE DIFFERENCE IS THE PREMIUM

Question 4

What are the 3 methods for MV of each company in a mergers and acquisitions question?

Answer 4

1. Share price x no shares (market cap)
2. P/E ratio x earnings
3. PV of future cash flows

Question 5

When there are expected synergies from a merger, what is the equation for MVa+b?

Answer 5

MVa + MVb + PV of syngeries

Question 6

What is the PV of a perpetuity of £1 a year, with cost of capital x%?

Answer 6

1/x

Question 7

What is the maximum price that should be offered for an acqusition?

Answer 7

MVa+b - MVa

Question 8

What is the equation for MVa+b when using a combined P/E ratio?

Answer 8

P/E ratio x sustainable combined earnings

Question 9

What P/E ratio is used under bootstrapping?

Answer 9

That of the acquirer

Question 10

What 2 P/E ratios can be used to value the combined company?

Answer 10

1. Acquirers (bootstrapping)
2. Merged PE

Question 11

What are the 3 methods for assessing the post acquisiton value of a joint entity?

Answer 11

1. Separately valuing and adding synergies
2. P/E valuation of combined earnings
3. PV of combined free cash flows

Question 12

What is the MV based calculation for share price of a combined company?

Answer 12

MVa + MVb + synergies / new no. of shares

Question 13

What is the earnings based calculation for share price of a combined company?

Answer 13

Combined earnings x P/E ratio / new no. of shares

Question 14

What is the new number of shares of MVa+b?

Answer 14

Shares of A + shares used to acquire B

(IGNORE SHARES IN B HELD BEFORE)

Question 15

What are the steps to calculate gain in wealth from a share based acqusition?

Answer 15

1. Calculate MVa+b
2. Calculate the new number of shares
3. Find the new share price
4. For the Acquirer - new share price x old no. shares - old share price x old no. shares (only own original part)
5. For the target - new share price x no. shares in parent MINUS old value of company

Question 16

What are the 3 key aims of competition authorities?

Answer 16

1. Strengthen competition
2. Reduce anti-competitive activities
3. Protect the public interest

Question 17

What are the 2 main areas that regulation around takeovers focuses on?

Answer 17

1. Market power
2. Bid behaviour

Question 18

What are 4 possible pre bid defensive tactics of a target company?

Answer 18

1. Effective communication with shareholders
2. Poison pill (grant rights to shareholders)
3. Alter the constitution to require a majority - shark repellant
4. Asset revaluation upwards

Question 19

What are 5 possible post bid defensive tactics of a target company?

Answer 19

1. Revised financial forecast upwards
2. White knight (look for friendlier bidder)
3. Refer bid to competition authorities
4. Issue negative statements about the bidder
5. Counterbid for the predator (pacman)

Question 20

What are Drucker’s five golden rules of integration?

Answer 20

1. Common core of unity (tech, markets, finance)
2. Two way relationship/gains
3. Treat products and customers with respect
4. Provide acquired top management with skills
5. Cross company promotion of staff