Acquirer Economics Analysis by Suresh S., Director, DMS Financial Services Co. (P) LTD

IIM, Kozhikode
ACQUIRER ECONOMICS ANALYSIS

by Suresh S., Director, DMS Financial Services Co.(P)Ltd.
ACQUIRER ECONOMICS
COMPONENTS
THERE ARE FOUR COMPONENTS

PV OF ACQUIRER ON STANDALONE BASIS (OR MKT.CAP)
PV OF TARGET ON STANDALONE BASIS (OR MKT.CAP)
PV OF SYNERGIES
PRICE PAID BY ACQUIRER
September 2009
DMS FINANCIAL SERVICES Co. (P) Ltd.
Slide 2
ACQUIRER ECONOMICS
PVs
PV OF BOTH ACQUIRER AND TARGET HAVE BEEN

DISCUSSED
Now talking about SYNERGIES
September 2009
Slide 3
Acquirer economics
SYNERGIES
SYNERGIES CAN BE ASSESSED AS FOLLOWS:

BREAK IT UP INTO COMPONENTS
Synergies generated by INCREASED SALES
Synergies generated by CROSS SELLING
Synergies generated by REDUCTION IN EXPENSES (manpower, facilities,
supply chain savings in case of Vertical integration)
Synergies generated by REDUCTION IN CAPEX
A good illustration can be seen in one of the exhibits of Vodafone-
Mannesmann case
September 2009
Slide 4
ACQUIRER ECONOMICS
ANOTHER APPROACH TO SYNERGIES - UPJOHN PHARMACIA CASE
IN UPJOHN PHARMACIA, THE DEAL WAS ALMOST AS GOOD AS

THROUGH
THE CHANGE IN MKT.CAP FOR UPJOHN AND PHARMACIA WERE
SEPARATELY WORKED OUT
THE CHANGE IN MKT. CAPS WERE ADDED TO ASSESS CHANGE IN
MKT.CAP IN NEW COMBINED FIRM
THE CHANGE IN MKT.CAP REPRESENTED ‘P’ IN PERPETUITY
FORMULA “Ke = E/P “
THE COST OF CAPITAL WAS APPLIED TO ARRIVE AT ‘SYNERGIES’
THESE WERE ANNUAL SYNERGIES
THESE WERE COMPARED WITH MANAGEMENT’S CLAIM OF
SYNERGIES OF $ 500 EVERY YEAR AFTER CONVERTING TO POST-TAX
September 2009
Slide 5
ACQUIRER ECONOMICS
VODAFONE CASE
SO SYNERGIES MAY BE WORKED OUT IN TWO WAYS:
IF ITS GOING TO BE THE SAME FIGURE EVERY YEAR, AS

IN UPJOHN PHARMACIA, WE WILL TAKE THE PERPETUITY
MODEL TO ARRIVE AT THE CHANGE IN MKT. CAP
HOWEVER IF THIS IS NOT SO, THEN WE WILL TAKE A
DETAILED COMPUTATION OF SYNERGY CASH FLOWS AND
DISCOUNT IT TO PRESENT VALUE AND ADD TO MKT. CAP
OF ACQUIRER
September 2009
Slide 6
ACQUIRER ECONOMICS
WE BEGAN THE CLASS WITH ‘COMPONENTS’
THERE ARE FOUR COMPONENTS

PV OF ACQUIRER ON STANDALONE BASIS (OR MKT.CAP)
PV OF TARGET ON STANDALONE BASIS (OR MKT.CAP)
PV OF SYNERGIES
PRICE PAID BY ACQUIRER
GOING OVER TO ‘PRICE PAID’
September 2009
Slide 7
ACQUIRER ECONOMICS
PRICE TO BE PAID
THERE ARE TWO WAYS THIS GETS DONE

PAYMENT ENTIRELY BY CASH
OFFER ENTIRELY BY EXCHANGE OF SHARES.
OF COURSE THIS THROWS UP A THIRD ALTERNATIVE:
PAYMENT PARTLY BY CASH AND PARTLY BY SHARES
September 2009
Slide 8
ACQUIRER ECONOMICS
PRICE TO BE PAID
ENTIRELY BY CASH
THE GROSS GAIN FOR THE ACQUIRER IS THE PV OF TARGET PLUS
SYNERGY
COST IS PRICE PAID=PV OF TARGET + PREMIUM, OR MKT.CAP OF
TARGET +PREMIUM
GROSS GAIN COST HENCE NET

GAIN
= PV OF = PV OF = SYNERGY -
TARGET + TARGET + PREMIUM
SYNERGY PREMIUM
September 2009
Slide 9
ACQUIRER ECONOMICS
PRICE TO BE PAID
ENTIRELY BY CASH
THE GROSS GAIN FOR THE ACQUIRER IS THE PV OF TARGET PLUS
SYNERGY
COST IS PRICE PAID=PV OF TARGET + PREMIUM, OR MKT.CAP OF
TARGET +PREMIUM premium
 synergy
September 2009
Slide 10
ACQUIRER ECONOMICS
PRICE TO BE PAID
HENCE NET GAIN IS WILL WORK OUT TO SYNERGY LESS PREMIUM
PRICE PAID IS COMPUTED AS PRICE PER SHARE MULTIPLIED BY

NUMBER OF TARGET COMPANY SHARES
September 2009
Slide 11
ACQUIRER ECONOMICS
PRICE TO BE PAID
FOR TARGET, GAIN =

PRICE RECEIVED LESS PV OF TARGET
PRICE RECEIVED WILL BE = [PV OF TARGET + PREMIUM]
COST IS PV OF TARGET
HENCE NET GAIN FOR TARGET = PREMIUM
YOU CAN REPLACE PV ABOVE BY MKT.CAP ALSO
September 2009
Slide 12
ACQUIRER ECONOMICS
ENTIRE ‘PAYMENT’BY EXCHANGE OF SHARES
YOUR COMPANY ACQUIRES ANOTHER BY ISSUING SHARES TO IT

YOU CAN NEVER FEEL THE SAME WAY ABOUT YOUR COMPANY
OTHERS NOW HAVE ALSO BECOME SHAREHOLDERS
ITS LIKE ALL ALONG YOU WERE HAVING YOUR HOUSE TO YOURSELF,
NOW YOU HAVE GIVEN A PART OF IT ON RENT
YOUR PRIVACY IS GONE, YOU SHARE WITH AN OUTSIDER ALL
FACILITIES
OF COURSE YOU GET RENT
BUT THE HOUSE IS NEVER FULLY ‘YOURS’
ACQUIRER SHARES OWNERSHIP WITH TARGET’S SHAREHOLDERS
HE WILL STILL HAVE MAJOR SHARE BUT FOREVER HIS SHARE IN THE
NEW FIRM WILL ONLY BE CALCULATED AS A PERCENTAGE
September 2009
Slide 13
ACQUIRER ECONOMICS
 New entity =
PV of ACQUIRER + PV of TARGET +
PV of synergy
New Entity shared as follows % of ACQUIRER % of TARGET

  IN NEW ENTITY IN NEW ENTITY
September 2009
Slide 14
ACQUIRER ECONOMICS
ACQUIRER CALCULATION OF NET GAIN WILL BE:

‘PERCENT’ OWNED IN NEW ENTITY LESS PV OF OLD ACQUIRER
IN CASE YOU GO BY MARKET PRICE, NEW ENTITY: MKT.CAP OF OLD
ACQUIRER+MKT.CAP OF OLD TARGET+PV OF SYNERGIES
NET GAIN = ‘PERCENT’ OWNED OF [MKT.CAP ACQ+MKT.CAP
TARGET+PV OF SYNERGIES] LESS MKT.CAP ACQUIRER
TARGET CALCULATION OF NET GAIN WILL BE:
‘PERCENT’ OWNED IN NEW ENTITY LESS PV OF OLD TARGET
September 2009
Slide 15
ACQUIRER ECONOMICS
PART CASH AND PART ‘PAYMENT’BY EXCHANGE OF

SHARES
WHAT WOULD YOU DO?

OVER TO ROCKY MOUNTAIN
September 2009
Slide 16

Acquirer Economics Analysis by Suresh S., Director, DMS Financial Services Co. (P) LTD

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IIM, Kozhikode

ACQUIRER ECONOMICS ANALYSIS

THERE ARE FOUR COMPONENTS

PV OF BOTH ACQUIRER AND TARGET HAVE BEEN

SYNERGIES CAN BE ASSESSED AS FOLLOWS:

ANOTHER APPROACH TO SYNERGIES - UPJOHN PHARMACIA CASE

IN UPJOHN PHARMACIA, THE DEAL WAS ALMOST AS GOOD AS

SO SYNERGIES MAY BE WORKED OUT IN TWO WAYS:

IF ITS GOING TO BE THE SAME FIGURE EVERY YEAR, AS

WE BEGAN THE CLASS WITH ‘COMPONENTS’

THERE ARE FOUR COMPONENTS

GOING OVER TO ‘PRICE PAID’

THERE ARE TWO WAYS THIS GETS DONE

GROSS GAIN COST HENCE NET

TARGET +PREMIUM premium

HENCE NET GAIN IS WILL WORK OUT TO SYNERGY LESS PREMIUM

PRICE PAID IS COMPUTED AS PRICE PER SHARE MULTIPLIED BY

FOR TARGET, GAIN =

ENTIRE ‘PAYMENT’BY EXCHANGE OF SHARES

YOUR COMPANY ACQUIRES ANOTHER BY ISSUING SHARES TO IT

ENTIRE ‘PAYMENT’BY EXCHANGE OF SHARES

New Entity shared as follows % of ACQUIRER % of TARGET

ENTIRE ‘PAYMENT’BY EXCHANGE OF SHARES

ACQUIRER CALCULATION OF NET GAIN WILL BE:

PART CASH AND PART ‘PAYMENT’BY EXCHANGE OF

WHAT WOULD YOU DO?

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