mergers and takeover. measure of corporate growth increase in sales it indicates size or quantity in...

Mergers and takeover

Measure of corporate growthIncrease in sales

It indicates size or quantity in the marketIncrease in profit

Operations into greater return for the shareholder

Increase in assetsIncrease in firm’s operating resources

Mergers A merger is a combination of two or more

businesses in which only one of the corporation survives. the other corporation ceases to exist and its assets and possibly debts are taken over by the surviving company

Methods to bring a mergerPurchase of assetsPurchase of common stockExchange of stocks for assetsExchange of stock per stock

AcquisitionTaking over of assets in the process of external

growthConsolidation

Combination of two or more business into a third entirely a new business

The new corporation absorb the assets of original corporation ,which cease to exist

Takeover A takeover generally involves the acquisition

of current block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company.

Acquirer must buy more than 50% of the paid –up capital to enjoy complete control

Regulatory principles

Transparency of all processInterest of small shareholderRealization of economic gainNo undue concentration of market power

PyramidingControlling many or several firms with

relatively smallInvestment in each of them.It is a technique used to employ the parent

subsidiary relationship for allowing one firm to gain control over other firm

Justification of acquisitionEconomies of sale

Utilization of production plant, distribution networks, engg. services

Reduction of inefficiencyUtilization of tax shieldsGrowth DiversificationStrategic benefitsUtilization of surplus funds

Valuation of target companyEquity valuation model (balance sheet

valuation model)Book value,liquidation valueReplacement cost

Dividend discount modelV=[D1/1+k]+[D2/(1+k)2]+[D3/(1+k)3]+…………V=value of the firmD=dividendk=discount rate

Constant growth dividend discount modelV=Di/k-g

g=growth rate of dividendPrice earning ratio

PVOG=present value of growth opportunityK=discount rate

Cash flow valuation modelEconomic profit modelExchange ratio

The number of shares that the acquiring firm is ready to give in exchange of the shares of the company it wishes to acquire

Steps involved in valuationAnalyzing historical performanceForecast performanceEstimating the cost of capitalEstimating the cost of equity financingDetermining the pricing modelCalculating and interpreting results

The financing of acquisition

Pay cash Issue corporate stock

Finding suitable acquisition`Candidates with no operating lossCandidates those must avoid improper profit

accumulationCandidates with low price-earning ratioCandidates with turnaround prospectus

Approach adopted for takeoverNegotiations Solicit tendersSolicit proxies

Resistance to an acqisitionTarget firm’s management feels

acquiring firm does not understand the problem of existing firm

Resulting in harm to the interest of shareholder

Company soon going to start improving

Example-Northwest industries-Acquiring company B.F.Goodrich group-Target company

Issued letters to all shareholder recommending them to refuse from signing the proxies

Refuse to release mail list of their shareholderIssued stock to gulf oil company in return of

assetsThe publicity of the fact the existing

management is ready to fight

International financial market

Introduction Foreign exchange market-one country’s

currency is traded for another’s countryImporters Exporters Foreign exchange broker

Sources of international financeCommercial banks-foreign currency loans can

be takenFinancial instituteDiscounting of trade billsInternational agencies-reconstruction and

development

Exchange ratesThe price rate of one currency expressed in

term of another OR Cost of money.Spot rate

Exchange rate which applies to ‘on the spot’ delivery of the currency

Forward rateExchange rate applicable to a transaction, which

will occur at a specified point of time in futureFuture rate

Exchange rate which applies to the future delivery of currency

Methods of exchangeThe floating exchange rateThe pegged exchange rateHybrids

The EuroOn jan 1,2002,the euro become the single

currency of 12 member states of the European Union

Elimination of exchange rate fluctuationTransaction costIncreased trade across bordersIncreased cross-border employment

Factors affecting foreign exchangeLaw of one priceInterest ratesThe business environmentStock marketpolitical factorConfidence in currency