Beruflich Dokumente
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OKAN BAYRAK
Definitions
A merger is a combination of two or more
corporations in which only one corporation
survives and the merged corporations go out
of business.
Statutory merger is a merger where the
acquiring company assumes the assets and
the liabilities of the merged companies
A subsidiary merger is a merger of two
companies where the target company
becomes a subsidiary or part of a subsidiary
of the parent company
Types of Mergers
Horizontal Mergers
- between competing companies
Vertical Mergers
- Between buyer-seller relation-ship companies
Conglomerate Mergers
- Neither competitors nor buyer-seller relationship
History of Mergers and
Acquisitions Activity in United
States
The First Wave 1897-1904
- After 1883 depression
- Horizontal mergers
- Create monopolies
The Second Wave 1916-1929
- Oligopolies
- The Clayton Act of 1914
The Third Wave 1965-1969
- Conglomerate Mergers
- Booming Economy
The Fourth Wave 1981-1989
- Hostile Takeovers
- Mega-mergers
Mergers of 1990’s
- Strategic mega-mergers
Motives and Determinants of
Mergers
Synergy Effect
NAV= Vab –(Va+Vb) – P – E
Where Vab = combined value of the 2 firms
Vb = market value of the shares of firm B.
Va = A’s measure of its own value
P = premium paid for B
E = expenses of the operation
- Operating Synergy
- Financial Synergy
Diversification
Economic Motives
- Horizontal Integration
- Vertical Integration
- Tax Motives
FIRM VALUATION IN
MERGERS AND ACQUISITIONS
Equity Valuation Models
- Balance Sheet Valuation Models
• Book Value: the net worth of a company as shown on the
balance sheet.
• Liquidation Value: the value that would be derived if the firm’s
assets were liquidated.
• Replacement Cost: the replacement cost of its assets less
its liabilities.
FIRM VALUATION IN MERGERS
AND ACQUISITIONS-2
D1 D2 D3
V0 = + + + .......
1 + k (1 + k ) (1 + k )
2 3
P0 E (1 −b )
= 1
E1 k − ROExb
P0 1 −b
=
E1 k − ROExb
where ROE = Return On Equity
FIRM VALUATION IN MERGERS
AND ACQUISITIONS-5
Cash Flow Valuation Models
- The Entity DCF Model : The entity DCF model values the value of a company as
the value of a company’s operations less the value of debt and other investor claims,
such as preferred stock, that are superior to common equity
. Value of Operations: The value of operations equals the discounted value of
expected future free cash flow.
. Value of Debt
. Value of Equity
FIRM VALUATION IN MERGERS
AND ACQUISITIONS-6
What Drives Cash Flow and Value?
- Fundamentally to increase its value a company must
do one or more of the following:
. Increase the level of profits it earns on its existing
capital in place (earn a higher return on invested
capital).
. Increase the return on new capital investment.
. Increase its growth rate but only as long as the return
on new capital exceeds WACC.
. Reduce its cost of capital.
FIRM VALUATION IN MERGERS
AND ACQUISITIONS-7
NOPLAT
Return on Investment Capital =
Invested Capital
B P S
WACC = kb (1- Tc ) + k p + k s
V V V
where
kb = the pretax market expected yield to maturity on non-callable, non convertible debt
Tc = the marginal taxe rate for the entity being valued
B = the market value of interest-bearing debt
kp = the after-tax cost of capital for preferred stock
P = market value of the preferred stock
ks = the market determined opportunity cost of equity capital
S = the market value of equity
ks = r f + E (rm ) − r f β
ks = rf + E ( F1 ) − r f β 1 + E ( F2 ) − r f β 2 + ....
where E(Fk ) = the expected rate of return on a portfolio that mimics the kth factor and is
independent of all others.
Beta k = the sentivity of the stock return to the kth factor.
STEPS IN VALUATION-6
Estimating The Continuing Value
- Selecting an Appropriate Technique
. Long explicit forecast approach
. Growing free cash flow perpetuity formula
. Economic profit technique
Economic Profit T+1 (NOPLATT+1 )( g / ROIC )( ROIC − WACC )
CV = +
WACC WACC (WACC − g )
where
Economic Profit T+1 = the normalized economic profit in the first year after the explicit
forecast period.
NOPLAT T+1 = the normalized NOPLAT in the first year after the explicit forecast period.
g = the expected growth rate of return in NOPLAT in perpetuity
ROIC = the expected rate of return on net new investment.
WACC = weighted average cost of capital
STEPS IN VALUATION-7
Calculating and Interpreting Results
- Calculating And Testing The Results
- Interpreting The Results Within The
Decision Context
HP-COMPAQ MERGER CASE
The HP/Compaq merger. By The Numbers:
HIGH-END
High-endUnix Servers: Worldwide(2000) High-end Unix servers: US (2000)
Factory Factory
Revenues ($m) MarketShare Revenues ($m) Market Share
Hewlett-Packard 512 11.4% Hewlett-Packard 124 6.1%
Compaq 134 3.0% Compaq 66 3.3%
ClosestRival: Sun Microsystems with factory revenues of Closest Rival: Sun Microsystems with factory
$2.1 billion and a 47.1%market share revenues of $1.2 billion and a 60.1% market share
MID-RANGE
Mid-rangeUnix servers: Worldwide(2000) Mid-rangeUnix servers: US (2000)
Factory Factory
Revenues ($m) MarketShare Revenues ($m) Market Share
Hewlett-Packard 3,673 30.3% Hewlett-Packard 1552 28.2%
Compaq 488 4.0% Compaq 296 5.4%
ClosestRival: Sun Microsystems with $2.8 billion in MarketLeader: Sun Microsystems with revenues of $1.7
factory revenue and a 23.5%market share billion and a 30.5%market share)
PERSONAL COMPUTERS
PC Shipments: Worldwide(inthousands of units) PC Shipments: US(inthousands of units)
Hewlett- Hewlett-
Packard Compaq Packard Compaq
Units (q2/01) 2,065 3,590 Units (q2/01) 991 1,332
Share(q2/01) 6.9% 12.1% Share(q2/01) 9.4% 12.7%
Units (q2/00) 2,260 4.011 Units (q2/00) 1,221 2,293
Share(q2/00) 7.4% 13.2% Share(q2/00) 10.7% 20.1%
Growth -8.6% -10.5% Growth -18.8% --21.3%
Accretion/Dilution Analysis
EPS EPS
Accretion/Dilution 2002 2003
Compaq stand-alone 0.67 0.88
HP stand-alone 1.21 1.86
Combined entity pro-forma, excluding proj. synergies 0.74 1.09
Combined entity pro-forma, including proj. synergies 1.05 1.51
Accretion/(Dilution) to Compaq, excluding proj. synergies 11% 24%
Accretion/(Dilution) to Compaq, including proj. synergies 57% 71%