Tài chính doanh nghiệp - Chapter 21: Mergers and divestitures

CHAPTER 21Mergers and DivestituresTypes of mergersMerger analysisRole of investment bankersCorporate alliancesLBOs, divestitures, and holding companiesWhy do mergers occur?Synergy: Value of the whole exceeds sum of the parts. Could arise from:Operating economiesFinancial economiesDifferential management efficiencyIncreased market powerTaxes (use accumulated losses)Break-up value: Assets would be more valuable if sold to some other company.What are some questionable reasons for mergers?DiversificationPurchase of assets at below replacement costGet bigger using debt-financed mergers to help fight off takeoversWhat is the difference between a “friendly” and a “hostile” takeover?Friendly merger: The merger is supported by the managements of both firms.Hostile merger:Target firm’s management resists the merger.Acquirer must go directly to the target firm’s stockholders try to get 51% to tender their shares.Often, mergers that start out hostile end up as friendly when offer price is raised.Reasons why alliances can make more sense than acquisitionsAccess to new markets and technologiesMultiple parties share risks and expenses Rivals can often work together harmoniouslyAntitrust laws can shelter cooperative R&D activitiesMerger analysis:Post-merger cash flow statements 2003 2004 2005 2006Net sales $60.0 $90.0 $112.5 $127.5- Cost of goods sold 36.0 54.0 67.5 76.5- Selling/admin. exp. 4.5 6.0 7.5 9.0- Interest expense 3.0 4.5 4.5 6.0EBT 16.5 25.5 33.0 36.0- Taxes 6.6 10.2 13.2 14.4Net Income 9.9 15.3 19.8 21.6 Retentions 0.0 7.5 6.0 4.5 Cash flow 9.9 7.8 13.8 17.1What is the appropriate discount rate to apply to the target’s cash flows?Estimated cash flows are residuals which belong to acquirer’s shareholders.They are riskier than the typical capital budgeting cash flows. Because fixed interest charges are deducted, this increases the volatility of the residual cash flows.Because the cash flows are risky equity flows, they should be discounted using the cost of equity rather than the WACC.Discounting the target’s cash flowsThe cash flows reflect the target’s business risk, not the acquiring company’s.However, the merger will affect the target’s leverage and tax rate, hence its financial risk.Calculating terminal valueFind the appropriate discount rate kS(Target) = kRF + (kM – kRF)βTarget = 9% + (4%)(1.3) = 14.2%Determine terminal valueTV2006 = CF2006(1 + g) / (kS – g) = $17.1 (1.06) / (0.142 – 0.06) =$221.0 millionNet cash flow stream 2003 2004 2005 2006Annual cash flow $9.9 $7.8 $13.8 $ 17.1Terminal value 221.0Net cash flow $9.9 $7.8 $13.8 $238.1Value of target firmEnter CFs in calculator CFLO register, and enter I/YR = 14.2%. Solve for NPV = $163.9 millionWould another acquiring company obtain the same value?No. The input estimates would be different, and different synergies would lead to different cash flow forecasts.Also, a different financing mix or tax rate would change the discount rate.The target firm has 10 million shares outstanding at a price of $9.00 per share. What should the offering price be?The acquirer estimates the maximum price they would be willing to pay by dividing the target’s value by its number of shares: Max price = Target’s value / # of shares = $163.9 million / 10 million = $16.39Offering range is between $9 and $16.39 per share.Making the offerThe offer could range from $9 to $16.39 per share.At $9 all the merger benefits would go to the acquirer’s shareholders.At $16.39, all value added would go to the target’s shareholders.Acquiring and target firms must decide how much wealth they are willing to forego.Shareholder wealth in a mergerShareholders’WealthAcquirerTargetBargaining RangePrice Paid for Target$9.00$16.390 5 10 15 20Shareholder wealthNothing magic about crossover price from the graph.Actual price would be determined by bargaining. Higher if target is in better bargaining position, lower if acquirer is.If target is good fit for many acquirers, other firms will come in, price will be bid up. If not, could be close to $9.Shareholder wealthAcquirer might want to make high “preemptive” bid to ward off other bidders, or low bid and then plan to go up. It all depends upon their strategy.Do target’s managers have 51% of stock and want to remain in control?What kind of personal deal will target’s managers get?Do mergers really create value?The evidence strongly suggests: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 MergersArranging mergersAssisting in defensive tacticsEstablishing a fair valueFinancing mergersRisk arbitrage