Fundamental of financial management 13th ed brigham houston chapter 021

An Overview of Financial Management Forms of Business Organization Balancing Shareholder Value and Society Interests Intrinsic Values, Stock Prices, and Managerial Incentives Important Business Trends Conflicts Between Managers, Stockholders, and Bondholders Financial Markets and Institutions Financial Statements, Cash Flow, and Taxes Analysis of Financial Statements Bonds and Their Valuation The Basics of Capital Budgeting Cash Flow Estimation and Risk Analysis Real Options and Other Topics in Capital Budgeting Time Value of Money Risk and Rates of Return The Cost of Capital Stocks and Their Valuation Mergers and Divestitures Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles Derivatives and Risk Management Financial Planning and Forecasting Multinational Financial Management Working Capital Management

Mergers and Divestitures

Types of Mergers Merger Analysis Role of Investment Bankers

Corporate Alliances Private Equity Investments and Divestitures

Chapter 21

What are some good reasons for mergers?

parts Could arise from:

– Operating economies

– Financial economies

– Differential management efficiency

– Increased market power

– Taxes (use accumulated losses)

sold to some other company.

What are some questionable reasons for mergers?

fight off takeovers

What is the difference between a “friendly” and a

“hostile” merger?

– The merger is supported by the managements of both firms.

– Target firm’s management resists the merger.

– Acquirer must go directly to the target firm’s stockholders and try to get 51% to tender their shares.

– Often, mergers that start out hostile end up as friendly when offer price is raised.

Merger Analysis:

Post-Merger Cash Flow Statements

- Cost of goods sold 36.0 54.0 67.5 76.5

Why is interest expense included in the

analysis?

than the single issue of new debt associated with a normal capital project

– Acquiring firms often assume the debt of the target firm, so old debt at different coupon rates is often part of the deal.

– The acquisition is often financed partially by debt

– If the subsidiary is to grow in the future, new debt will have to be issued over time to support the

expansion

Why are earnings retentions deducted in the

analysis?

assumed by the parent firm

– Like any other company, the subsidiary must reinvest some its earnings to sustain growth.

What is the appropriate discount rate to apply

to the target’s cash flows?

the acquirer’s shareholders.

cash flows Because fixed interest charges are deducted, this increases the volatility of the residual cash flows.

should be discounted using the cost of equity rather than the WACC.

Discounting the Target’s Cash Flows

the acquiring company’s.

leverage and tax rate, hence its financial risk.

Calculating Continuing Value

% 2 14 )

3 1

%)(

4 (

% 9

b ) r r(

r

r s ( T arg et ) RF M RF T arg et

= +

=

− +

=

million 0

221

$

) 06 0 142

0 /(

) 06 1 ( 1 17

$

) g r

/(

) g 1

( CF

value

=

−

=

− +

=

Cash Flow Stream

Annual cash flow $9.9 $7.8 $13.8 $ 17.1

– Enter CFs in calculator CFLO register, and enter I/YR = 14.2% Solve for NPV = $163.9 million

Would another acquiring company obtain the same

value?

different synergies would lead to different cash flow forecasts.

change the discount rate.

The Target Firm Has 10 Million Shares Outstanding at

a Price of $9.00 per Share

– The acquirer estimates the maximum price they would be willing to pay by dividing the target’s value

by its number of shares:

$16.39

million million/10

$163.9

shares

of value/#

s Target' price

Max.

=

=

=

Making the Offer

acquirer’s shareholders.

shareholders.

wealth they are willing to forego.

Shareholder Wealth in a Merger

Shareholders’

Wealth

Bargaining Range

Price Paid for Target

0 5 10 15 20

Shareholder Wealth

graph.

Higher if target is in better bargaining position, lower if acquirer is.

will come in, price will be bid up If not, could be close to $9.

Shareholder Wealth

bid to ward off other bidders, or make a low bid and then plan to increase it It all depends upon its strategy.

to remain in control?

get?

Do mergers really create value?

– Acquisitions do create value as a result of economies

of scale, other synergies, and/or better management.

– Shareholders of target firms reap most of the benefits, because of competitive bids.

Functions of Investment Bankers in Mergers