Session 7

Recap:
1 share of Target Company x shares of the acquiring company
1 share of target company = x rs.
1 share of target company = x rs + x shares of acquiring company
No of shares outstanding for acquiring and Target Company at the time of
acquisition
Value per share at the time of acquisition
Market capitalization of the two firms
No. of shares outstanding for Acquiring & target company at the time of
acquisition
Value per share at the time of the acquisition
Market capitalisation of the firm
Read:
FCX will acquire all of the outstanding common shares of Phelps Dodge for a
combination of cash and common shares of FCX for a total consideration of
$126.46 per Phelps Dodge share, based on the closing price of FCX stock on
November 17, 2006. Each Phelps Dodge shareholder would receive $88.00 per
share in cash plus 0.67 common shares of FCX. This represents a premium of 33
percent to Phelps Dodges closing price on November 17, 2006, and 29 percent
to its one-month average price at that date. The cash portion of $18 billion
represents approximately 70 percent of the total consideration. In addition, FCX
would deliver a total of 137 million shares to Phelps Dodge shareholders,
resulting in Phelps Dodge shareholders owning approximately 38 percent of the
combined company on a fully diluted basis. The boards of directors of FCX and
Phelps Dodge have each unanimously approved the terms of the agreement and
have recommended that their shareholders approve the transaction. The
transaction is subject to the approval of the shareholders of FCX and Phelps
Dodge, receipt of regulatory approvals and customary closing conditions. The
transaction is expected to close at the end of the first quarter of 2007. FCX has
received financing commitments from JPMorgan and Merrill Lynch to fund the
cash required to complete the transaction. After giving effect to the transaction,
estimated pro forma total debt at December 31, 2006, would be approximately
$17.6 billion, or approximately $15 billion net of cash.
Total offering made to PD (target firm) = 25.9 billion cash & stock
No. of shares of PD x offering per share = 26000 mn
Offering made per share = 126.46 = cash + stock = 88 + 0.67 stock of FCX
Offering made per share = 88 cash + 38.46 stock
38.46 = 0.67 shares of FCX
Value per share of FCX = 38.46/0.67 = 57.4 USD/share
No. of shares outstanding post acquisition = pre acquisition no. of shares +
shares offerd to the target company
% ownership offered (fully diluted) = 37%

Number of shares offered for 37% ownership = 137 million

Total no. of shares post acquisition = 137/0.37 = 360 million
Total no. of shares pre acquisition = 360-137 = 223 million (FCX pre acquisition)
Market capitalisation of the acquiring firm = 223 million * 57.4 = 13 billion
approx..
When companies participating in the acquisition are from same sector it is called
a horizontal merger
Total offering = 25900 mn
Per share offering = 126.46
No. of shares of PD = 25900/126.46 = 204 mn shares outstanding
Market price per share (current) for PD = 126.46/1.30 = 97.27 per share
Market cap of PD = 204 * 97.27 = 20 billion approx.
Observation: Size does not matter in an M&A transaction if the capital markets
are at a matured stage
The financing can be arranged without much difficulty
Mode of funding: internal accounts + raise debt + raise preference or
convertibles
Pecking Order Hypothesis:
Bridge loan: temporary
An initial step in this financing was the joint commitment by JPMorgan and Merrill
Lynch to a combined $6 billion bridge loan prior to approval of the merger. FCX
announced on March 15 the pricing of a total of $17.5 billion in debt financing for
the Phelps Dodge acquisition, including $6 billion in high-yield senior notes
offered in the public debt market (the bridge loan would be drawn down only if
this public offering failed) and $10 billion in senior secured term loans. In
addition, a $1.5 billion senior secured revolving credit facility was provided,
which was to be undrawn at closing. The initial press release indicated an
offering of approximately 35 million shares of common stock and 10 million
shares of mandatory convertible preferred stock at $100.00 per share.
223 million shares existing
1. Shares offered to PD 137 mn
2. New issue of equity 47.15 mn
3. Convertible pref. stock 28.75 1.63 & 1.36
The TED spread is the difference between the interest rates on interbank loans
and on short-term U.S. government debt ("T-bills"). TED is an acronym formed
from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.
Eurodollar is one of the least regulated market and yet one of the most
competitive. Why?
Regulation has a cost.
Profile of the market: issuer and investor information asymmetry
PE market:

Regulation cost is reduced

Information asymmetry is low
Reduced regulation and hence deal closes faster.

Similarly in Eurodollar:

Investors are banks & hence better informed.