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Jawad - 2012 - 3758 - 1 - Mergers, Takeovers & Acquisitions
Jawad - 2012 - 3758 - 1 - Mergers, Takeovers & Acquisitions
1. INTRODUCTION
• Mergers and acquisitions (M&A) are complex, involving many parties.
• Mergers and acquisitions involve many issues, including
- Corporate governance.
- Form of payment.
- Legal issues.
- Contractual issues.
- Regulatory approval.
• M&A analysis requires the application of valuation tools to evaluate the M&A
decision.
November
July 2012 2012
• U.S.
Airways • AMR and • Details of the
proposes U.S. Airways • U.S. Airways proposes merger are
merger to • AMR creditors begin merger, with its
encourage AMR worked out.
bankrupt merger shareholders owning
to merge with discussions. • Merger filed
AMR. 30% of the new
another airline, with the FTC
company.
instead of under Hart-
emerging from September Scott-Rodino
April 2012 bankruptcy alone. Act.
2012
February
2013
Company
Company
A
X
Company Company
C X
Company
Company
B
Y
Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 20
Price per share $20 $10 $24
Market value of stock $2,000 million $500 million $3,000 million
$100 $50
Weighted PΤE = × 20 + × 10 = 16.67
$150 $150
Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies weighted average P/E to the post-merger company.
Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 16.67
Price per share $20 $10 $20
Market value of stock $2,000 million $500 million $2,500 million
Attitude of • Hostile
Management • Friendly
• Bear hug
• Tender offer
Enter into merger discussions.
• Proxy fight
Antitrust Securities
Law Law
Regulation
of Mergers
and
Acquisitions
Calculate NOPLAT
Calculate FCF
NOPLAT + Noncash charges – Change in working capital – Capital expenditures
From the pro forma income statement From the pro forma income statement
If the typical takeover premium is 20%, what is the XYZ Company’s value in a
merger using the comparable company approach?
Comparables’ Estimated
Multiples Stock Value
Earnings $10 million × 30 $300 million
Cash flow $12 million × 25 $300 million
Book value of equity $50 million × 2 $100 million
Sales $100 million × 2.5 $250 million
Average = $237.5 million
Estimated takeover price of the XYZ Company = $237.5 million × 1.2 = $285 million
Collect
Information on Calculate Estimate
Recent Takeover Multiples for Takeover Value
Transactions of Comparable Based on
Comparable Companies Multiples
Companies
Average of Multiples of
MNO Company Comparable Transactions
Earnings $10 million P/E of comparables 15 times
Cash flow $12 million P/CF of comparables 20 times
Book value of equity $50 million P/BV of comparables 5 times
Sales $100 million P/S of comparables 3 times
Estimate the value of the MNO Company using the comparable transaction
analysis, giving the cash flow multiple 70% and the other methods 10% each.
Value of MNO = 0.7 × $240 + 0.1 × $150 + 0.1 × $250 + 0.1 × $300
VA* = VA + VT + S – C (10-9)
where
VA* = post-merger value of the combined companies
VA = pre-merger value of the acquirer
C = cash paid to target shareholders
Equity
Carve-Out
Liquidation Spin-Off
Parent
compan
y
Divestiture Split-Off