9. Mergers and Acquisitions Flashcards
How does a share exchange acquisition work?
The predator company acquires the shares of the target company by issuing shares to the target shareholders in proportion to their existing shareholding
Under a share based payment acquisition, what is the maximum that the acquirer would be willing to pay?
MVa+b - MVa
Given a P/E ratio, what are the steps to calculating the premium offered in a share exchange aqusition?
- Calculate the market cap of the acquirer
- Calculate the share price of the acquirer
- Calculate the premium value of shares given in the exchange
- Calculate the market cap of the target
- Calculate the share price of the target
- Calculate the market value of shares given
THE DIFFERENCE IS THE PREMIUM
What are the 3 methods for MV of each company in a mergers and acquisitions question?
- Share price x no shares (market cap)
- P/E ratio x earnings
- PV of future cash flows
When there are expected synergies from a merger, what is the equation for MVa+b?
MVa + MVb + PV of syngeries
What is the PV of a perpetuity of £1 a year, with cost of capital x%?
1/x
What is the maximum price that should be offered for an acqusition?
MVa+b - MVa
What is the equation for MVa+b when using a combined P/E ratio?
P/E ratio x sustainable combined earnings
What P/E ratio is used under bootstrapping?
That of the acquirer
What 2 P/E ratios can be used to value the combined company?
- Acquirers (bootstrapping)
- Merged PE
What are the 3 methods for assessing the post acquisiton value of a joint entity?
- Separately valuing and adding synergies
- P/E valuation of combined earnings
- PV of combined free cash flows
What is the MV based calculation for share price of a combined company?
MVa + MVb + synergies / new no. of shares
What is the earnings based calculation for share price of a combined company?
Combined earnings x P/E ratio / new no. of shares
What is the new number of shares of MVa+b?
Shares of A + shares used to acquire B
(IGNORE SHARES IN B HELD BEFORE)
What are the steps to calculate gain in wealth from a share based acqusition?
- Calculate MVa+b
- Calculate the new number of shares
- Find the new share price
- For the Acquirer - new share price x old no. shares - old share price x old no. shares (only own original part)
- For the target - new share price x no. shares in parent MINUS old value of company
What are the 3 key aims of competition authorities?
- Strengthen competition
- Reduce anti-competitive activities
- Protect the public interest
What are the 2 main areas that regulation around takeovers focuses on?
- Market power
- Bid behaviour
What are 4 possible pre bid defensive tactics of a target company?
- Effective communication with shareholders
- Poison pill (grant rights to shareholders)
- Alter the constitution to require a majority - shark repellant
- Asset revaluation upwards
What are 5 possible post bid defensive tactics of a target company?
- Revised financial forecast upwards
- White knight (look for friendlier bidder)
- Refer bid to competition authorities
- Issue negative statements about the bidder
- Counterbid for the predator (pacman)
What are Drucker’s five golden rules of integration?
- Common core of unity (tech, markets, finance)
- Two way relationship/gains
- Treat products and customers with respect
- Provide acquired top management with skills
- Cross company promotion of staff
