Lecture 9 Types of takeovers and terminology Flashcards
What are mergers and acquisitions and what is the difference between the two?
Mergers is when two businesses are combined under common ownership, shareholders will of each per-merged company will have similar ownership in combined company and management of each company will distribute management between each other
Acquisitions: one company takes ownership of the other
-shareholders of bidding company will have large majority ownership over the combined company and management of bidding company will hold onto management positions
What is a control premium?
The extra amount paid by the bidder to control over the target firm, over the value of the target operating as an independent entity
Takeover terminology (there are 6 lolol)
Horizontal takeovers: Target and acquirer are in the same industry
Vertical takeovers: Target’s industry buys from or sells to acquirer’s industries
Conglomerate takeovers: Target and acquirer operate in unrelated industries
Friendly takeovers: Typically approved by the target’s management
Hostile takeover: Not approved by the target’s management
Reverse takeover: a private company acquires a public company. This is sometimes called a reverse IPO since this can be easier route to becoming publicly listed than by doing a proper IPO.
One of the takeover offers is the cash bid, what is this and name an advantage and disadvantage of this?
Cash Bid:
Cash paid to the target’s shareholders for their shares
An advantage is:
it is certain and clearly understood by the target management and shareholders
Disadvantages of cash payment:
Raising necessary cash can be difficult for the bidder if the target is large
- it is possible that bidder’s debt rating will go down if it issues new bonds or borrows more to fund this transaction
-
One of the takeover offers is the share bid, what is this? Name an advantage and disadvantage of this
Bidder issues new shares to swap them with target shares (stock swap)
Advantage of purchase by shares:
- avoids strain on cash position of bidder
- has relative tax advantage because cash acquisitions may create immediate tax liabilities for the target shareholders
Disadvantages:
- equity issue is an expensive way of raising capital
What are some sensible reasons for takeovers? What are some dubious
Sensible reasons:
Operating synergies( cost go down, revenue goes up)
- economies of scale (horizontal) economies of scope (vertical)
- expertise or complementary resources
- replace poor existing management
Dubious reasons:
Diversification- for shareholders, they can diversify themselves by purchasing shares in different companies
Managerial motives:
- empire building behaviour (managerial agency costs)
- overconfidence(hubris hypothesis)
wont make this explicit yanno
How to value an acquisition? what are the steps, and why is this approach used?
USE DCF analysis: This is because the analysis attempts to estimate a firm’s intrinsic value by computing present value of expected free cash flows from firm’s operations (assets) over its life (essentially infinite, assume its a going concern)
steps:
1. FCF in forecast periods (t=1,…,T)
FCF= EBIT(1 - tc) + Dep - change in networking capital - capital expenditure
- Terminal value (after forecast period)
- done through exit multiple approach or Gordon growth model
Discount FCFs and terminal value with WACC
Firm value: number of free cash flows/ (1 + WACC)^t
Under the DCF analysis, when should you choose to be acquired or not?
When:
PV with synergies > PV stand alone
This means you should choose to be acquired or to acquire.
Vice versa if the other way around happen
What are the strengths and weaknesses of the DCF analysis?
Strengths:
- Forward looking and focuses on cash flows, not on profits
- Allows operating strategies/synergies to be built into a model
- valuation tied to underlying fundamentals
Weaknesses:
- only as accurate as assumptions and projections
- need to forecast managerial behaviour after takeover
- need to estimate discount rate using a theory (might be imprecise or tricky in some cases)
What market multiples are there? (for comparable companies analysis, comparing companies in same industry or market)
Price-earnings(P/E ratio)= market cap/ earnings
Price dividends = market cap/ total dividends
Price sales= market cap/sales
Ev to EBIT= EV/EBIT
EV to EBITDA= EV/EBITDA
EV to sales= EV/sales
What are the strengths and weaknesses of a comparable company analysis (relative valuation)
strengths:
Very common, convenient market based method
provides an alternative way to perform terminal value estimation
Weaknesses:
Subject to distortions due to market misvaluation and accounting policy
Does not directly incorporate the operational improvements and other synergistic efficiencies that acquirer intends to implement
choice of dates for comparing multiples can be arbitrary
What is the formula for value of takeover synergy gain?
Value of takeover synergy gain= difference between the values of the combined firm with and without synergy
How do you calculate the acquisition premium (net cost)?
offer price paid for target - target’s actual stand alone value (market cap value)
When is the NPV project positive to the bidder? (this relates to the premium)
When the premium doesnt exceed value of synergy
What is the Gain, NPV and net cost of a cash bid?
Gain= The value of the combined firms - (stand alone value of acquiring firm + stand alone value of target firm)
Net cost: Cash paid - standalone value of target firm
NPV: Gain - Net cost = Value of combined firm - (cahsh paid - value of target firm)
What is the Gain, NPV and net cost of a cash bid?
Gain= The value of the combined firms - (stand alone value of acquiring firm + stand alone value of target firm)
Net cost: Cash paid - standalone value of target firm
NPV: Gain - Net cost = Value of combined firm - (cahsh paid - value of target firm)
What is the exchange ratio?
The number of shares received in exchange for each target share
If exchange ratio is set too high there will be a transfer of wealth from bidding firm’s shareholders to target bidding firms shareholders
If exchange ratio is too low there will be a transfer of wealth from target firm’s shareholders to the bidding firm shareholder
When NPV is 0, we can find the maximum exchange ratio the bidder offers in a share bid at which the NPV to bidder will be 0.
With cash, who bears more risk, the buyer or seller?
buyer
With fixed share, who bears all the risk?m
Buyer and seller both bear risk similarly
Who bears the risk when there is a fixed value?
Buyer bears all pre-closing market risk, post-closing operational risk is proportionately shared by buyer and seller.
There are two structures, describe fixed and floating
Fixed:
- number of shares issued is certain, value may fluctuate
- prpotional shareholding doesnt change
- sellers are vulnerable to changes in companys share
floating
- amount is fixed, dpeending on number of shares to be issued not fixed until a date close to closing date
-proportional shareholding si left unreslved til end
buyer bears all price risk on its share betwene announcement and deal closing
