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Part 1

Description of Merger
In Business, the term merger is a sector which relates with corporate strategy. In general, merger
will take place when the two or more business or organization fused with each other. Most of
merger takes place with same nature of organization. Mergers can be categorized as follows in
relation with economy theory:

Horizontal Merger: When two companies are merged on the basis of similar products or
services it is known as Horizontal merger. Frequently it used as a way for a company to
increase its market share by joining with a competing company. For example, the merger
between AIB also merged with EBS a financial institution which had more than 400,000
customers and distributes its services via branches and worked as a franchised agency
network on 1 July 2011. The merge of banks with banks and other financial intuition
similar to the horizontal merger.

Vertical Merger: The merge between two companies based along the value-chain, like as a
manufacturer merging or get with a supplier. Vertical mergers are also to gain a more
merits within the marketplace concerning the competition. Most of companies merge have
buyer and seller relationship. For example, Merck, a large manufacturer of
pharmaceuticals, merged with Medco, a large distributor of pharmaceuticals, in order to
gain an advantage in distributing its products.(Vadapalli 2007, p.1)

Conglomerate Merger: Two firms in completely different industries merge, such as a gas
pipeline company merging with a high technology company. Conglomerates are usually
used as a way to smooth out wide fluctuations in earnings and provide more consistency in
long-term growth. Typically, companies in mature industries with poor prospects for
growth will seek to diversify their businesses through mergers and acquisitions. Most of
the firm merges who do not have business relationship with each other. For example,
General Electric (GE) has diversified its businesses through mergers and acquisitions,
allowing GE to get into new areas like financial services and television broadcasting.
(Vadapalli 2007, p.1)

Mergers can be fairly complex structures. An agreement is needed about the corporate structure
and stockholdings structure of combined companies Agreement can be varied widely .(Coyle
2000, p.87)Mergers can also be driven by basic business reasons, such as:

Bargain in Acquisition Sometime it is less cost if we purchase new firm and invest internally.
For example, suppose a company is considering expansion of retail facilities. Another firm
might have has almost same kind of facility not used. Thus, it is very cheap to acquire new one
with lot of process from beginning and set ups.

Diversification - It may be necessary to smooth-out earnings and achieve more consistent

long-term growth and profitability. This is particularly true for companies in very mature
industries where future growth is unlikely. It should be noted that traditional financial
management does not always support diversification through mergers and acquisitions. It is
widely held that investors are in the best position to diversify, not the management of
companies since managing a steel company is not the same as running a software company.

Undervalued Target Some of the company may be undervalued and thus, it represents a good
investment. Some mergers and purchase are done for "financial" reasons and not strategic
reasons. For example, Microsoft acquires not good performing mobile company Nokia now,
there is almost Microsoft`s value not Nokia.

There are two primary motivations for companies to make acquisitions:

To fill a strategic gap in the companys product, manpower and other resources and
capabilities. The goal of every merger primarily is to enhance the growth but the
reason sometimes seems ambiguous too.
To assist the company in entering a naive market, preferably with a revenue stream.
(Rao 2015)
Overall, to take a market Power over competitor has the main deviation of acquiring its gains
and reduces off the competition. While sales and profits get high and competition will be
diminishes. But, this type of merger more like to done with very large businesses. For
example, Ryanair once make ambitious plan to purchase Aer Lingus.
Discussion of Paddy Powder and Betfair
The board of paddy Powder and Betfair Plc has announced the merge and create Paddy
Power Betfair plc (the Combined Group) according to press release in 26th Aug 2015. This
type of merger can be described as horizontal merger. Although it is horizontal merger there
some rationale that creates this merger like same type or homogenous company or
complimentary products and services, here;

In 1999 Betfair was established which is now specialise in betting concept for
customer who were trading traditionally in stock exchange only. Now, it is biggest online
sports betting service providers. It has established its foot to US also from Europe.
Where Paddy powder founded in 1988, now this company is developing online and
retail betting and reaches to international level with world class preconisation, which
specially have business to business relationship with its sporting patterns and societies.
(Paddypower plc 2015a)
This Merger make the Combined Group) one of the largest public online betting and
gaming company of the world by regarding gross revenue with enlarged scale, capability and
distinctive and complementary brands. This merger has reliable strategic logic and represents
an attractive opportunity for both companies to improve their position in online betting and
gaming and to deliver synergic effect, which also aid customers and shareholder s as their
increase in value. For the Agreements terms are:

Proportion of Share is likely to be Paddy Power shareholders would own 52 per cent
and Betfair shareholders would own 48 % of the issued and to be issued share capital
of the Combined Group.
Gary McGann, Chairman of Paddy Power, would become Chairman of the Board of
the Combined Group;

Breon Corcoran, CEO of Betfair, would become CEO of the Combined Group. Andy
McCue, CEO of Paddy Power would become COO and an Executive Director of the
Combined Group. Alex Gersh, CFO of Betfair, would become CFO and an Executive
Director of the Combined Group;
The Board of Directors of the Combined Group would also comprise other nonexecutive directors nominated equally from each of Paddy Power and Betfair; and
The structure of the Possible Merger is being finalised with a view to maximising
benefits to shareholders and other stakeholders, and it is expected that the Combined
Group will maintain a significant presence in Ireland and in the UK.
(Paddypower plc 2015a)

As every merger there are strategies for merger like here in this merger between paddy
powder and betfair have some strategies, they can be described as;

Making one the largest online betting and gaming company with revenues of over
1.1 billion (1.5 billion1) in their last financial years;
The Combined Groups scale and capabilities would leave it better placed to compete
in current and new markets;
Dual brand strategy in Europe utilising the distinctive and complementary brands of
Betfair and Paddy Power;
Complementary online business and geographic mix;
Diversified group with strong platforms across online and retail in the UK and
Ireland, and attractive international growth opportunities in Continental Europe, the
US and Australia; and
Cost and revenue synergies from efficiencies which reflect the complementary nature
of the businesses and through leveraging of the Combined Groups enlarged scale.
(Paddypower plc 2015a)

In Business analysis the term synergic effect will take place due to merge can be described as
2+2 = 5, and in general, Synergy value can take three forms while merging:
1. Gross Revenue: By combining the two companies, we will realize more revenues then if the
two companies operate separately .Synergy works basically at here and economics of scale:
most of this type of merger activity involves taking over a competitor in the same business
2. Expenses: By combining the two companies, we will realize lower expenses then if the two
companies operate separately.
3. Cost of Capital: By combining the two companies, we will experience a lowest overall cost of
capital. Most of
In sum up, the merger of Paddy Power and Betfair will create a company of world class capability
and people who will deliver substantial up-front synergies and a platform for very exciting
business expansion. The combination of Breon, Andy and their colleagues in this merger of
equals comprises "the A team" in the business with the ambition to create a unique global
player in a very(McGann 2015) dynamic industry. (McGann 2015) The synergies for the
company exist based on the following indicators as principle of Integration which states that

both are European Brand and only centered on positioning their services via shared technology,
operation and Corporate function.
Cost Synergy indicated by about 50 million annualized on pre-tax basis, where cost
implementation one off cash cost of about 1.3x recurring. In the terms of timing all full benefit
of synergies achieved in three post competition.
Share Price and Market Capitalization
Share Price of Paddy Power in different date, where Share price in date 8th September 2015 was
98.50 Euro.


(Paddypower plc 2015b)

(Paddypower plc 2015b)

Share Price of Bet Fair PLc in 8th September 2015 is 3,113.00 Euro while volume of
transaction was 326,578 shares.

(BetFair 2015)
Here we can find out the reasons of volatility in the share price of both Paddy powder and Bet
fair, there are several reasons in variance in the price can be described as:
Here from 8th September to mid of the October Share price of Bet fair goes down and from
the end of September and early October it went up. This graph depicts that due to
announcement of merger of betfair and paddy powder many investor are sceptical about
trends in the shares. Before the September the share price seems moderately changing but
after drops constantly until end of September.
Regarding the nature of Paddy Powder share changes in 8 th September 2015, share price of
paddy powder 98.59 after the announcement of the merger the price was step down slowly
up to 10th of September and from the point of 10th September it grows steadily in fluctuating
Market Capitalization
Market Capitalization is market value of common shareholders or total value of investors
Shares which determine company size and value. It is public perceived value of particular
The most common method of calculating the value of a company is to look at its market
capitalisation often referred to as the "market cap".
The value of a company based on the total value of its entire outstanding Shares market

Market capitalisation formula: outstanding shares x share value = market capitalization. In

If Paddy Powder 44,053,967(Paddypower plc 2015b) outstanding shares and they were worth
98.5 each, then the market capitalisation will be 4339315750
If Betfair 1286708 outstanding shares and they were worth 3,113.00, then the market
capitalisation will be 1016637314.Here, we can present the calculation in table:


outstanding shares

Price* Market Capitalization

Paddy Powder

98.5* 44,053,967




4005522231 from 48% of

total value.

Here we must calculate the total value as 100% and find outstanding share of Betfair if betfair
holds 48 % of shares by equation as,
52% of No. total value +48% of Total value = Total Value, Total Value is 100%,
Then, if Total value is x, we have,
4339315750+0.48x= x
Or, x= 8344837981.
Now, Market capitalization after merger new company Paddy Powder Betfair Share will be
The market capitalisation therefore shows how much it would cost to purchase the entire
company at the current share value, in other words, buying all of its shares. When a
company's share price goes up or down, the market capitalisation will increase or decrease
respectively. Here. Calculating the market capitalization is most important but company

valuation methods may be different due to cash flow approach and comparable valuation
approach in mergers like comparable analysis and comparable transaction analysis.
The quick increase in market capitalization through the merger put the turnover expensive
and difficult (Khera 1998, p.133). But it works as power shield in new market again. Here in
case of this merged company the growth in share price taking place slowing from this week
although initially the whole market capitalization grow due to merged and confusion in
shareholders and new buyer causes down in share price.

Impact on Share Holders of Betfair and Paddy Powder:

Some of things are to be concerned to Shareholders of both company, it obviously effect in
dividend and earnings.
Current Paddy Power and Betfair dividend policies are to apply prior to completion there will
be bigger cash-generative and strong balance sheet, it is expected to have dividend policy for
the Combined Group to target a pay-out ratio of 50% of profit after tax.
Paddy Power shareholders will have a 52 per cent in new build company known as Paddy
Power Betfair, and will also receive special dividends of approx. of 80 million, which will
be paid out on the business time of day before to completion of the merger.
Betfair shareholders will take a 48 per cent stake, and will be entitled to receive 0.4254 new
Paddy Power Betfair Shares in exchange for each Betfair share. Here it is necessary to find
out the market barometer known as P/E ratio and valuation of net worth of company for
shareholders which can determine in respect to shareholders. This deal will be completed by
Paddy Power acquiring Betfair, and shareholders of combined company in the latter will
receive 0.4254 in new shares in the this company for exchange for every single share they
have in the exchange of betting. This merger is expected to complete at the first quarter of
following year.
(Paddypower plc 2015a)
In sum up there are several other factors that also help in mergers of company while it
depends upon nature of merger and types of company. Moreover price of share and valuation
of company, its probable synergies are needed to determine before merger. So that, investors
can expands the boundaries and produce synergy. There are several merger successful and
some of get failure due to lack of foresight of management and wrong mergers and lack of
favourable condition in daily operation. Thus, all of the pros and cons of the merger directly
and indirectly affect to shareholders.

BetFair, 2015. Share Price Monitor. Available at: [Accessed October 15,
Coyle, B., 2000. Mergers and acquisitions, Chicago; New York: Glenlake Pub.; AMACOM.
Available at:
direct=true&scope=site&db=nlebk&db=nlabk&AN=52734 [Accessed October 19,
Khera, S., 1998. You can win: winners dont do different things they do things differently: a
step-by-step tool for top achievers, London: Prentice Hall.
McGann, G., 2015. Rule 2.7 Announcement. Available at: [Accessed
October 13, 2015].
Paddypower plc, 2015a. announcement_merger.pdf. Available at:
[Accessed October 13, 2015].
Paddypower plc, 2015b. Share Price | Paddy Power. Available at: [Accessed October 15,
Rao, S., 2015. What Should Everyone Know About Mergers And Acquisitions? Forbes.
Available at: [Accessed October 16, 2015].
Vadapalli, R., 2007. Mergers Acquisitions and Business Valuation - Ravindhar Vadapalli Google Books. Available at:

%20advantage%20in%20distributing%20its%20products.&f=false [Accessed
October 23, 2015].