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