Beruflich Dokumente
Kultur Dokumente
Why?
Gain market share Economies of scale Enter new markets Acquire technology Utilization of surplus funds Managerial Effectiveness Strategic Objective Vertical integration
3) Financial strength:
To improve liquidity and have direct access to cash resource.
4) General gains:
To improve its own image and to offer better satisfaction to consumers or users of the product.
5) Procurement of supplies:
To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.
Conclusion
What works for the company is announced with much fanfare, but what remains hidden is that what does not work!!!
5) Overly Diversified:
Acquirer doesnt have expertise required to manage unrelated businesses
Process of Acquisition
Finding A Target Business Appointing Advisers Negotiating terms Due Diligence Exchange of Contracts Completion
Negotiating Terms
The nature of the fit Commonality of client base Financial strength Strategic intent Sharing of resources Applicable Benefits
Appointing Advisers
The Right Chemistry The Right Experience Size is not Everything Talk Your Language
Acquisition Structure
Asset purchase Share purchase Merger Hostile Acquisition accounting fundamentals
Sequence of Events
Initial negotiations to closing
Valuation
Appraisal Principles Valuation Methods
Vb = market value of the shares of firm B. Va = As measure of its own value P E = premium paid for B = expenses of the operation
D3 D1 D2 V0 ! ....... 2 3 1 k (1 k ) (1 k )
Where Vo = value of the firm Di k = dividend in year I = discount rate
P0 E1 (1 b ) ! E1 k ROExb
Implying P/E ratio
P0 1 b ! E1 k ROExb
where ROE = Return On Equity
Continuing Value =
. Value of Debt
. Value of Equity
STEPS IN VALUATION
Analyzing Historical Performance
NOPLAT Invested Capital
Economic Profit
FCF
STEPS IN VALUATION-2
Forecast Performance
- Evaluate the companys strategic position, companys competitive advantages and disadvantages in the industry. This will help to understand the growth potential and ability to earn returns over WACC. - Develop performance scenarios for the company and the industry and critical events that are likely to impact the performance. - Forecast income statement and balance sheet line items based on the scenarios. - Check the forecast for reasonableness.
STEPS IN VALUATION-3
Estimating The Cost Of Capital S B P WACC ! kb (1- Tc ) k p k s V V V
where kb Tc B kp P ks S = the pretax market expected yield to maturity on non-callable, non convertible debt = the marginal taxe rate for the entity being valued = the market value of interest-bearing debt = the after-tax cost of capital for preferred stock = market value of the preferred stock = the market determined opportunity cost of equity capital = the market value of equity
Develop Target Market Value Weights Estimate The Cost of Non-equity Financing Estimate The Cost Of Equity Financing
STEPS IN VALUATION-4
Estimating The Cost Of Equity Financing - CAPM
k s ! r f E ( rm ) r f F
where rf E(rm) E(rm)- rf = the risk-free rate of return = the expected rate of return on the overall market portfolio = market risk premium = the systematic risk of equity
. Determining the Risk-free Rate (10-year bond rate) . Determining The Market Risk premium 5 to 6 percent rate is used for the US companies . Estimating The Beta
STEPS IN VALUATION-5
The Arbitrage Pricing Model (APM)
ks ! rf E ( F1 ) rf F1 E ( F2 ) rf F 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
CV = where Economic Profit T+1 = the normalized economic profit in the first year after the explicit forecast period. NOPLAT T+1 g ROIC WACC = the normalized NOPLAT in the first year after the explicit forecast period. = the expected growth rate of return in NOPLAT in perpetuity = the expected rate of return on net new investment. = weighted average cost of capital Economic Profit T+1 (NOPLATT+1 )( g / ROIC )( ROIC WACC ) + WACC WACC (WACC g )
STEPS IN VALUATION-7
Calculating and Interpreting Results - Calculating And Testing The Results - Interpreting The Results Within The Decision Context
Anti-takeover Mechanisms
Poison pills and other defensive measures Anti-trust Policies
I believe this will be the first step in showing that Indian industry can step outside the shores of India in an international market place and acquit itself as a global player
- Ratan Tata
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