Everything Flashcards
When would synergies be positive? and who does this power hurt?
if the merger results in:
- economies of scale
- economies of scope
Market power (horizontal merger) hurts customers, employees suppliers and competitors
vertical integration (vertical mergers)
diversification and financial gains (conglomorate mergers)
improving management (discipline) hurts managers
When are synergies < 0
Empire building (agency problem)
hubris and mistake
when are there no synergies but an acquisition could still make money? and who does this hurt
exploiting misvaluation
exploiting information advantage
both hurt the sellers
what is a warrant?
a call option given by a firm
Formula for the Wacc
= E/V * re + D/V * rd*(1-t)
Market or book values?
Always have market vlaues in mind at least for equity
Current or target ratios?
usually use target because we are discounting future cash flows, if the target ratio is not available it is normally assumed to be the average of the industry leverage ratio
if the firms business risk is expected to remain constant and the firm is a pure player current is fine
how to get cost of debt?
if traded use yield to maturity if not find or estimate credit rating and take one of the following approaches:
risk free rate + beta of debt for corporate bonds for the rating * market risk premium
risk free rate + credit spread for the rating
how to get the beta for multi-segment firms?
first find beta of comparable pure players for each divison then unlever the beta and re lever the beta
how to find D/V
peer average / historical average
how to find return debt?
RF + debt beta * market risk premium
When is tax shield risk similar to asset risk?
when the firm maitains a target leverage ratio (aligning with the assumption of the WACC method)
When to choose APV and when to choose Wacc?
APV if there is a debt schedule rather than a target leverage
How to choose growth rate?
2 procent voor de meeste industrien die matured zijn als de industrie sneller gaat goreien dan inflatie 3 of 4 dan pak je inflatie en long term GDP growth (groei industrie) krimp industrie kan je naar 0
Value APV = V unlevered firm + PV (Financial side effects) what are those side effects?
Interest rate tax shield,
issuance costs
cost of financial distress
agency costs and benefits of debt
How should the Interest tax shield be discounted?
If the tax shield is a s certain as the debt repayment than the cost of debt is appropriate
if the tax shiled is more risky than the ability to apyoff the debt, then a higher discount rate is necessary
in particular, when the firm maintains a target leverage ratio, the discount rate is the cost of unlevered equity.(but in this case you could also use the WACC)
Which valuationto use for constant leverage ratio?
The Wacc, for a level you use APV
which valuation method is best for incorporating other market imperfections?
the APV
What are types of completion risks? in the merger agreement
Closing conditions (anti trust, financing, etc.)
best effort/hell or high water
ticking fee
termination fee
what are valuation risks
Consideration Cash vs stock
MAE/MAC clause
What do you have to substract from the Enterprise value to get to the Equity value
debt
Minority interest
preferred equity
and add cash and cash equivalents
How to quickly get the maximum price per share?
calculate NPV of the standalone firm per share
and calculate the NPV of the synergies per share
What is a squeeze out?
the forced sale of stock owned by minority shareholders, usually in the context of an acquisition.
a squeeze out requires fair cash value bepaid to the minority shareholders from the acquiring corporation in exchange for their stock, treshold differ usually around 90%
Freeze out
any tactic used by majority shareholders to deprive minority shareholders of governing control of a corporate
used to pressure minority shareholders to sell their stock
what to do before taking the average beta?
filter out companies that you do not think match exactly
how to calculate the debt beta?
credit spread / risk premium
What to use to calculate growth (not for terminal)
three year average, not five
what is the zero premium exchange ratio?
current stock priceof the one getting acquirerd/ stock price of the acquirer
how to get the exchange ratio if you have the end NPV?
Start with the NPV and reverse engineer, you need to know howmany shares own to the company to get that NPV
so if Synergies = 4700 and you want to split them evenly you calculate:
2350 + marketcap own company / market cap newco + synergies. this way you get the percentage of shares and you can work your way back
What takeaways does the announcement effect give you?
lean what the market thinks about:
Synergies
the terms of the deal
the quality of management
What does a collar provide?
the target shareholders exposure to the bidder
What is a spread collar and how can it be replicated?
Places a cap and floor on an equity offer
can be replicated with stock puts and calls or bond and hosrt and long calls to value the collar
what is a local collar?
locks in an exact price wihtin a certain range of the bidders stock price
can be replicated with stock and shot and long calls to value the collar
What are closing conditions in a merger agreement?
specific requirements that must be met before a merger can be finalized. they typically include regulatory approvals like antitrust clearance, financing arrangement and other prerequisites that both aprties agree must be resolved to complete the transaction
What are the best effort and hell or high water clause?
Best effort - requires one or both of the merging parties to make their best effort to ensure that the merger goes througb. . this might involve securing necessary approvals or meeting other specified conditions.
Hell or high water is a stronger commitment it obligates the parties to complete the transaction no matter what obstacles arise often including a commitment to divest assets to meet antitrust requirements.
What is a ticking fee?
a fee paid by one party to another if the merger takes longer than expected to close, typically after a certain deadline. it compensates the other party for the time value of money and other opportuniites lost due to the delay
Termination fee
also konwn as a breakup fee, htis is paid by one party to the other if the merger agreement is terminated under specified circumstances. for example if one party decides to accespt a superior offer from a third party
consideration (cash vs Stock)
This refers to what the shareholders of the target company receive in return for their shares. It can be in the form of cash, stock of the acquiring company, or a combination of both. The form of consideration affects the financial outcomes for shareholders and the tax implications of the deal.
MAE/MAC clause
Material Adverse Effect/Material Adverse Change: This clause allows a party to back out of the transaction without a penalty if a significant event occurs that negatively affects the target company’s business, financial condition, or prospects significantly. The specifics of what constitutes a material adverse change must be clearly defined in the merger agreement.
