Scribd
Upload
43 views

Corporate Finance: Resource Person: Isbah Naim Reference Book: Fundamentals of Corporate Finance, Related Websites

1. Mergers and acquisitions involve one company gaining control of another through purchasing stock or assets. The main methods are mergers, acquisitions of stock, and acquisitions of assets. 2. Reasons for mergers and acquisitions include increasing capabilities, gaining competitive advantage, diversifying products, replacing leadership, cutting costs, and surviving. 3. When evaluating a potential merger, companies consider whether there are overall economic gains and synergies from combining, and whether the terms make shareholders of the acquiring company better off. 4. Accounting for mergers and acquisitions differs depending on whether a purchase method or pooling of interests is used.

Uploaded by

A. Saeed Khawaja
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
43 views

Corporate Finance: Resource Person: Isbah Naim Reference Book: Fundamentals of Corporate Finance, Related Websites

1. Mergers and acquisitions involve one company gaining control of another through purchasing stock or assets. The main methods are mergers, acquisitions of stock, and acquisitions of assets. 2. Reasons for mergers and acquisitions include increasing capabilities, gaining competitive advantage, diversifying products, replacing leadership, cutting costs, and surviving. 3. When evaluating a potential merger, companies consider whether there are overall economic gains and synergies from combining, and whether the terms make shareholders of the acquiring company better off. 4. Accounting for mergers and acquisitions differs depending on whether a purchase method or pooling of interests is used.

Uploaded by

A. Saeed Khawaja
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 27

Corporate Finance

Resource Person: Isbah Naim


Lecture: 09
Reference Book: Fundamentals of Corporate Finance, Related Websites
Mergers, Acquisitions and Takeovers

Divestiture
/ Spins off
• TAKEOVER
• an act of assuming control of something, especially the buying out of
one company by another
Can be done in 4 ways
1. Acquisition
2.Proxy Fight
3. Going private
4. Divestiture / Spin off
Contd.
• (1) the purchase of one firm by another in a merger or acquisition;
• (2) a successful proxy contest in which a group of stockholders votes in a new group of
directors, who then pick a new management team;

• (3) a leveraged buyout of the firm by a private group of investors. The LBO group takes the
firm private and its shares no longer trade in the securities markets. Usually a considerable
proportion of LBO financing is borrowed, hence
the term leveraged buyout.
If the investor group is led by the management of the firm, the takeover is called a
management buyout, or MBO. In this case, the firm’s managers actually buy the firm from
the shareholders and continue to run it. They become owner-managers. We will discuss LBOs
and MBOs later

• (4) a divestiture, in which a firm either sells part of its operations to another company or
spins it off as an independent firm.
Acquisitions
• THE LEGAL FORMS OF ACQUISITIONS
There are three basic legal procedures that a firm can use to acquire
another firm:
1. Merger or consolidation
2. Acquisition of stock
3. Acquisition of assets
Although these forms are different from a legal standpoint, the financial
press frequently does not distinguish between them. The term merger is
often used regardless of the actual form of the \ acquisition.
Contd.
• acquiring firm is known as the bidder/ acquirer. This is
the company that will make an offer to distribute cash or securities to
obtain the stock or assets of another company.

• The firm that is sought (and perhaps acquired) is often called the
target firm. The cash or securities offered to the target firm are the
consideration in the acquisition.
1. Merger
• A merger is the complete absorption of one firm by another. The acquiring firm retains
its name and its identity, and it acquires all of the assets and liabilities of the acquired
firm. After a merger, the acquired firm ceases to exist as a separate business entity
• Follow the link to find successful merger examples in Pakistan: https://
dps.psx.com.pk/webpages/mergedcmp.php

• A consolidation is the same as a merger except that an entirely new firm is created. In a
consolidation, both the acquiring firm and the acquired firm terminate their previous
legal existence and become part of a new firm.

the only difference lies in whether or not a new firm is created.


Reasons of mergers and acquisitions
• Increasing capabilities
• Gaining competitive advantage or market share
• Diversifying products and services
• Replacing leadership
• Cutting costs
• Surviving
2. Acquisition of Stock
• A second way to acquire another firm is to simply purchase the firm’s
voting stock with an exchange of cash, shares of stock, or other
securities.
• This process will often start as a private offer from the management
of one firm to that of another.
Regardless of how it starts, at some point the offer is taken directly to
the target firm’s stockholders.
• This can be accomplished by a tender offer. A tender offer is a public
offer to buy shares. It is made by one firm directly to the shareholders
of another firm
3. Acquisition of Assets

A firm can effectively acquire another firm by buying most or all of its
assets. This accomplishes the same thing as buying the company.
In this case, however, the target firm will not necessarily cease to exist;
it will have just sold off its assets. The “shell” will still exist unless its
stockholders choose to dissolve it.
Acquisition Classifications

• Horizontal acquisition. This is acquisition of a firm in the same


industry as the bidder.

• Vertical acquisition. A vertical acquisition involves firms at different


steps of the production process. The acquisition by an airline
company of a travel agency would be a vertical acquisition.

• Conglomerate
Evaluating Mergers

• If you are given the responsibility for evaluating a proposed merger,


you must think hard about the following two questions:
1. Is there an overall economic gain to the merger? In other words, is
the merger value enhancing? Are the two firms worth more together
than apart?
2. Do the terms of the merger make my company and its shareholders
better off? There is no point in merging if the cost is too high and all
the economic gain goes to the other company
Evaluating potential merger
1. Equity value-to-book value of the stock.
2. Enterprise Capitalization-to-sales.
3. Equity value-to-earnings
4. Enterprise capitalization-to-EBITDA
5. EPS
6. Discounting cashflow analysis
Determining value of firm
• Book Value of firm:
• Book value of firm = total assets-intangible assets and liabilities

• Appraisal value of firm:


• The value which is used to determine the creditworthiness of the
business . This is done when a potential buyer goes to the lender for
getting property on lease. It is done through evaluating various
factors
Contd.
• Market value is the amount a potential buyer are willing to pay for a
property.
• Market Value= Shares* share price
• https://www.youtube.com/watch?v=8orS4V_gBuA
Assignment Question: 04
• Using the given information evaluate:

• 1. Exchange Ratio
• 2. the new post merger no. of shares
• 3. Post merger EPS
• 4. Pre and Post merger Market Value of firms
• 5. Using answers in part 4 evaluate NPV for each of the firms
EPS BOOTSTRAPPING
• What is EPS BOOTSTRAPPING?
• A CORPORATE FINANCE practice where an acquirer buys a company
with a low PRICE/EARNINGS RATIO through a STOCK SWAP in order to
boost the post acquisition EARNINGS PER SHARE (EPS) of the newly
formed group and create a rise in the stock price.
• This EPS has gone up just because company has been able to
purchase the earnings of a company at a cheaper ate
• The P/E of the acquirer means that has been able to invest $25 to get
access to $1 of earnings of the target company
Bootstrapping answers us for:
Pooling of Interest Method
• What is 'Pooling-of-Interests'
• Pooling-of-interests was a method of accounting that governed how
the balance sheets of two companies were added together during an
acquisition or merger. The Financial Accounting Standards Board (FASB)
issued Statement No. 141 in 2001, ending the usage of the pooling-of-
interests method. The FASB then designated only one method - the
purchase method - to account for business combinations. In 2007, FASB
further evolved its stance, issuing a revision to Statement No. 141 that
the purchase method was to be superseded by yet another improved
methodology - the acquisition method.
Purchase Method
• purchase method gave a truer representation of the exchange in value in a business
combination because assets and liabilities were assessed at fair market values.

• Purchase acquisition is an accounting method used in mergers and acquisitions


 where there is no pooling of interests and the purchasing company treats the 
target firm as an investment.
• The assets of the target are valued and added to the balance sheet of the acquirer
at fair value, increasing the acquirer's fair market value. Liabilities of the target are
subtracted from the fair value of the assets. The amount paid by the acquirer over
the net value of the target's assets and liabilities is considered goodwill, which is
kept on the balance sheet and amortized yearly.
Acquisition Accounting
• Acquisition accounting is a set of formal guidelines describing how
assets, liabilities, non-controlling interest and goodwill of a target
company must be reported by a purchasing company on its
consolidated statement of financial position. With acquisition
accounting the fair market value of the acquired firm is allocated
between the net tangible and intangible assets portion of the balance
sheet of the acquiring firm; the difference is regarded as goodwill.
Also called "business combination accounting."
• https://www.youtube.com/watch?v=-Ghx4ph3oag
Revision Question( Merger):
Incorporating CBT in Mergers
Assignment question (related to lecture

You might also like