Business planning, valuation + restructing

Question 1

Advantages / disadvantages of organic growth

Answer 1

Costs are spread
Less disruption to company ie new staff, culture

More risky
Process may be too slow (may be beaten by competitors)
There may be barriers to enter into new markets ie customer loyalty to an existing brand

Question 2

Why might a Co go through an acquisition?

Answer 2

A bidder Co acquires a target Co

1. Synergy = admin savings, access to under-utilised assets in other Co, bulk discounts, leaner mgmt structures
2. Vertical integration = acquire a key supplier
3. Reduced competition = merge with a competitor
4. Risk reduction = cheaper borrowing

Question 3

Why might a Co not go through an acquisition?

Answer 3

The bidding Co SH’s often lose out due to over-paying, high transaction fees and synergies being over-estimated - takeovers are often in the interests of the directors and NOT the shareholdersa

therefore max price a bidding Co should pay (ie if A is buying B):

B + AB = max price - B plus synergistic effects

Question 4

What does a business plan set out?

Answer 4

Direction of an organisation
Strategies
Background
Practical implications + outcomes

Question 5

Business plan: format

Answer 5

Mission statement + objectives
Resources, mgmt and operations - key staff, how we produce the goals
Financials, risks + returns - past performance, future projections
Action plan - actions needed to carry out the strategy
History + background - goals, strengths, weaknesses of business
Appendices - detailed information supporting points in the rest of the plan
Markets - details on who we sell to + how we sell
Executive summary - one page summary of the plan

Question 6

Reasons to divest

Answer 6

Avoid conglomerate discount - there is a tendency for the market to undervalue large conglomerates
Bad fit with other operations
The business is too time intensive
Poor results - not profitable as desired
For liquidity - need the cash

Question 7

Methods of divestment

Answer 7

Management buy-out = directors will purchase shares - involves junk bonds (high yield, high risk, high coupon rates), mezzanine bonds (similar to junk bonds but with conversion option); mgmt will inject equity; venture capital

Repurchase of own shares = reduce shares, reduce supply, increase DSP = increase gearing

Spin-off (demerger) = holding Co gives shares in subs to its’ SHs

Liquidation = sell all assets, creditors + SHs

Trade sale = sell trade and assets but not actual Co

Share sale = sell your shares