IIM, Kozhikode

ACQUIRER ECONOMICS ANALYSIS by Suresh S., Director, DMS Financial Services Co.(P)Ltd.

September 2009 Slide 2 .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 DMS FINANCIAL SERVICES Co. (P) Ltd.

ACQUIRER ECONOMICS PVs PV OF BOTH ACQUIRER AND TARGET HAVE BEEN DISCUSSED Now talking about SYNERGIES DMS FINANCIAL SERVICES Co. September 2009 Slide 3 . (P) Ltd.

September 2009 Slide 4 .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. (P) Ltd. 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 VodafoneMannesmann case DMS FINANCIAL SERVICES Co. facilities.

CAP IN NEW COMBINED FIRM THE CHANGE IN MKT.UPJOHN PHARMACIA CASE IN UPJOHN PHARMACIA.ACQUIRER ECONOMICS ANOTHER APPROACH TO SYNERGIES .CAP FOR UPJOHN AND PHARMACIA WERE SEPARATELY WORKED OUT THE CHANGE IN MKT.CAP REPRESENTED µP¶ IN PERPETUITY FORMULA ³Ke = E/P ³ THE COST OF CAPITAL WAS APPLIED TO ARRIVE AT µSYNERGIES¶ 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 DMS FINANCIAL SERVICES Co. CAPS WERE ADDED TO ASSESS CHANGE IN MKT. (P) Ltd. THE DEAL WAS ALMOST AS GOOD AS THROUGH THE CHANGE IN MKT. .

CAP HOWEVER IF THIS IS NOT SO. CAP OF ACQUIRER DMS FINANCIAL SERVICES Co. September 2009 Slide 6 . (P) Ltd. THEN WE WILL TAKE A DETAILED COMPUTATION OF SYNERGY CASH FLOWS AND DISCOUNT IT TO PRESENT VALUE AND ADD TO MKT.ACQUIRER ECONOMICS VODAFONE CASE SO SYNERGIES MAY BE WORKED OUT IN TWO WAYS: IF ITS GOING TO BE THE SAME FIGURE EVERY YEAR. WE WILL TAKE THE PERPETUITY MODEL TO ARRIVE AT THE CHANGE IN MKT. AS IN UPJOHN PHARMACIA.

CAP) PV OF SYNERGIES PRICE PAID BY ACQUIRER GOING OVER TO µPRICE PAID¶ DMS FINANCIAL SERVICES Co. September 2009 Slide 7 . (P) Ltd.ACQUIRER ECONOMICS WE BEGAN THE CLASS WITH µCOMPONENTS¶ THERE ARE FOUR COMPONENTS PV OF ACQUIRER ON STANDALONE BASIS (OR MKT.CAP) PV OF TARGET ON STANDALONE BASIS (OR MKT.

September 2009 Slide 8 . OF COURSE THIS THROWS UP A THIRD ALTERNATIVE: PAYMENT PARTLY BY CASH AND PARTLY BY SHARES DMS FINANCIAL SERVICES Co.ACQUIRER ECONOMICS PRICE TO BE PAID THERE ARE TWO WAYS THIS GETS DONE PAYMENT ENTIRELY BY CASH OFFER ENTIRELY BY EXCHANGE OF SHARES. (P) Ltd.

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. (P) Ltd.CAP OF TARGET +PREMIUM GROSS GAIN = PV OF TARGET + SYNERGY COST = PV OF TARGET + PREMIUM HENCE NET GAIN = SYNERGY PREMIUM DMS FINANCIAL SERVICES Co.

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. (P) Ltd. September 2009 Slide 10 .CAP OF TARGET +PREMIUM premium synergy DMS FINANCIAL SERVICES Co.

September 2009 Slide 11 . (P) Ltd.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 DMS FINANCIAL SERVICES Co.

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 DMS FINANCIAL SERVICES Co. (P) Ltd. September 2009 Slide 12 .ACQUIRER ECONOMICS PRICE TO BE PAID FOR TARGET.

ACQUIRER ECONOMICS ENTIRE µPAYMENT¶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. (P) Ltd. NOW YOU HAVE GIVEN A PART OF IT ON RENT YOUR PRIVACY IS GONE. September 2009 Slide 13 . YOU SHARE WITH AN OUTSIDER ALL FACILITIES OF COURSE YOU GET RENT BUT THE HOUSE IS NEVER FULLY µYOURS¶ 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 DMS FINANCIAL SERVICES Co.

(P) Ltd.ACQUIRER ECONOMICS ENTIRE µPAYMENT¶BY EXCHANGE OF SHARES New entity = PV of ACQUIRER + PV of TARGET + PV of synergy New Entity shared as follows % of ACQUIRER IN NEW ENTITY % of TARGET IN NEW ENTITY DMS FINANCIAL SERVICES Co. September 2009 Slide 14 .

September 2009 Slide 15 .CAP OF OLD ACQUIRER+MKT.CAP ACQ+MKT.ACQUIRER ECONOMICS ENTIRE µPAYMENT¶BY EXCHANGE OF SHARES ACQUIRER CALCULATION OF NET GAIN WILL BE: µPERCENT¶ OWNED IN NEW ENTITY LESS PV OF OLD ACQUIRER IN CASE YOU GO BY MARKET PRICE.CAP TARGET+PV OF SYNERGIES] LESS MKT.CAP ACQUIRER TARGET CALCULATION OF NET GAIN WILL BE: µPERCENT¶ OWNED IN NEW ENTITY LESS PV OF OLD TARGET DMS FINANCIAL SERVICES Co.CAP OF OLD TARGET+PV OF SYNERGIES NET GAIN = µPERCENT¶ OWNED OF [MKT. (P) Ltd. NEW ENTITY: MKT.

(P) Ltd.ACQUIRER ECONOMICS PART CASH AND PART µPAYMENT¶BY EXCHANGE OF SHARES WHAT WOULD YOU DO? OVER TO ROCKY MOUNTAIN DMS FINANCIAL SERVICES Co. September 2009 Slide 16 .

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