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MERGER AND

ACQUISITION

Catur Widi Jurgen 1606952736


Gita Swasti P. Ruum 1606953000
Vania Dyarti Kusuma 1606953562
17 NOVEMBER 2018
HOW FINANCIAL ANALYSIS CAN EXAMINED
FOR MERGERS & ACQUISITION
Securities analysts Does a proposed acquisition create value for the acquiring firm’s stockholders?

Risk arbitrageurs What is the likelihood that a hostile takeover offer will ultimately succeed, and are
there other potential acquirers likely to enter the bidding?

Acquiring Does this target fit our business strategy? If so, what is it worth to us, and how can
management we make an offer that can be successful?

Target Is the acquirer’s offer a reasonable one for our stockholders?


management Are there other potential acquirers that would value our company more than the
current bidder?
Investment bankers How can we identify potential targets that are likely to be a good match for our
clients?
And how should we value target firms when we are asked to issue fairness
opinions?
MOTIVATION FOR MERGER OR
ACQUISITION
1. Taking Advantage of Economies of Scale
2. Improving Target Management.
3. Combining Complementary Resources.
4. Capturing Tax Benefits.
5. Creating Value Through Restructuring and Break-Ups
6. Providing Low-Cost Financing to a Financially Constrained Target.
7. Increasing Product-Market Rents.
KEY ANALYSIS QUESTION 4

1. What is the motivation(s) for an acquisition and any anticipated benefits


through public disclosures by acquirers or targets?
2. What are the industries of the target and acquirer?
3. What are the key operational strengths of the target and the acquirer?
4. Is the acquisition a friendly one, supported by target management, or hostile?
5. What is the premerger performance of the two firms?
6. What is the tax position of both firms?
ACQUISITION
PRICING

1. Analyzing Premium Offered to Target Stockholders


2. Analyzing Value of the Target to the Acquirer
Compare the premium offered to
Analyzing target stockholders to premiums
Premium offered in similar transactions
Offered to
Target but
Stockholders
it is not obvious how to define a
comparable transaction

and can be misleading if an offer is


anticipated by investors. 6
Value of target after acquisition
=
Value as independent firm
+
Value of merger
Analyzing • Step One: Forecasting Earnings.

Value of the • Step Two: Determining Price-Earnings


Multiple.
Target to
the
Acquirer

(Earnings
Multiple) 8
Step One: Performance improvements can be
modeled as:
Forecasting • Higher operating margins through
Earnings economies of scale in purchasing, or
increased market power;
• Reductions in expenses as a result of
consolidating research and development
staffs, sales forces, and/or administration; or
• Lower average tax rates from taking
advantage of operating tax loss
carryforwards.
9
Step Two: • If the target firm is listed, it may
Determining be tempting to use the
preacquisition price-earnings
Price- multiple to value postmerger
Earnings earnings.
Multiple • Ensure that the multiple is
calculated prior to any acquisition
announcement, since the price
will increase in anticipation of the
1
premium to be paid to target 0

stockholders.
how price-earnings multiples are used
to value a target
firm before an acquisition
LIMITATIONS OF PRICE-
EARNINGS VALUATION
1. PE multiples assume that merger performance
improvements come either from an immediate increase in
earnings or from an increase in earnings growth (and hence
an increase in the postmerger PE ratio).
2. PE models do not easily incorporate any spillover benefits
from an acquisition for the acquirer, since they focus on
valuing the earnings of the target.
Discounted Cash Flows or Abnormal
Earnings

1
3
Discounted • Step One: Forecast Abnormal Earnings/Free
Cash Flows.

Cash • Step Two: Compute the Discount Rate

Flows • Step Three: Analyze Sensitivity.


– What happens to the value of the target
or if it takes longer than expected for the

Abnormal
benefits of the acquisition to
materialize?

Earnings – What happens to the value of the target


if the acquisition prompts its primary
competitors to respond by also making
1
an acquisition? Will such a response 4

affect our plans and estimates?


ACQUISITION
FINANCING
Effect of Form of Financing on Target Stockholders
• TAX EFFECTS OF DIFFERENT FORMS OF CONSIDERATION
• TRANSACTION COSTS AND THE FORM OF FINANCING

Acquisition
Financing
Effect of Form of Financing on Acquiring Stockholders
• CAPITAL STRUCTURE EFFECTS OF FORM OF FINANCING
• INFORMATION PROBLEMS AND THE FORM OF FINANCING
• FORM OF FINANCING AND POSTACQUISITION
ACCOUNTING 16
ACQUISITION
OUTCOME
ACQUISITION 18

OUTCOME
1. Other Potential Acquirers
2. Target Management Entrenchment
THANK YOU