Chp 14: Pricing & Post-transaction Issues

Question 1

What are seven factors a compnay should consider when deciding between a cash offer or paper offer?

Answer 1

1. Dilution of EPS
2. Cost to the company
3. Gearing
4. Control
5. Taxation
6. Future Investments
7. Share Price

Question 2

What are Earn-Out Arrangements?

Answer 2

A procedure where the owners selling an entity receive a portion of their consideration linked to the financial performance of the entity after the sale. This passes some of the financial risk back onto the sellers and gives the buyers more security

Question 3

How do you calculate the post-acquisition share price of a paper bid?

Answer 3

Add the value of the two companies plus any synergy

Divide by the new number of shares in issue to get an estimated price

Question 4

What is bootstrapping?

Answer 4

When a high growth, high P/E ratio company acquires a low growth, low P/E ratio company in the same sector, the P/E of the acquired company may rise

Question 5

What are four schemes designed to make takeovers difficult? (Pre-bid)

Answer 5

1. Communicate effectively with stakeholders
2. Revalue non-current assets (to reflect accurate value per share)
3. Poison Pill - If a hostile bid is made, a posion pill within the capital structure is triggered eg. offering new shares to shareholders at a discount
4. Change the ‘Articles of Association’ to require a super majority (>80%) for a takeover

Question 6

What are six strategies designed to make takeovers difficult? (Post-bid)

Answer 6

1. Appeal to shareholders
2. Attack the track record of the bidder
3. Searching for an alternative bidder (White Knight)
4. Counterbid (Pacman) defense - the taregt company bids for the predator company
5. Consider an MBO
6. Lobby the competition authorities

Question 7

What are the three types of exit strategy?

Answer 7

1. Divestment - sale of part of the company to a third party
2. Demerger - Splits the business into two or more parts. Doesn’t raise cash but may allow for disposal of non-core business.
3. Management buy-out - A form of divestment that sells a part of the business to the management team

Question 8

What are the two ways Ventrue Capital/Private Equity firms will look to exit their investment?

Answer 8

1. A flotation on the stock exchange
2. Sale to another firm

Question 9

What are Drucker’s Golden Rules for post-acquisition integration?

5 rules (MARCH)

Answer 9

1. Management with relevant rules should be in place within a year
2. Add value to the target (through targets, customer communication, realised synergies)
3. Repect the products, management and track record
4. Common core of unity between orgs
5. Hold onto existing staff where possible