External Growth through Mergers.ppt

1、External Growth through Mergers,20,1-2,Chapter Outline,Mergers as a means of increasing operating efficiency and for financial motives Acquiring of companies through cash or the exchange of shares Potential impact of mergers on earnings per share and assessment of stock value Diversification benefit

2、s Unfriendly buyouts,1-3,Largest Acquisitions Ever,1-4,Motives for Business Combinations,Merger A combination of two or more companies in which the resulting firm maintains the identity of the acquiring firm Consolidation Two or more companies combined to form a new entity Might be utilized when the

3、 firms are of equal size and market power,1-5,Financial Motives,Merger allows acquiring firms to enjoy a potentially desirable portfolio effect Achieve risk reduction while maintaining the firms rate of return Variability in performance may be reduced for the business firms with opposite phases of t

4、he business cycle Portfolio diversification becomes complicated with respect to practicalities It improves the financing posture as a result of expansion,1-6,Financial Motives (contd),Larger firms may enjoy greater access to the capital market Can attract larger and more prestigious investment banke

5、rs to handle future financing Greater financing may also be inherent in the merger itself, especially likely when: The acquired firm has the strong cash position A low debt-equity ratio that can be used to expand borrowing by the acquiring firm,1-7,Tax Loss Carryforward,May be available in a merger

6、if one of the firms has previously sustained a tax loss Assuming Firm A acquires Firm B, which has a $220,000 tax loss carryforward The assumption is that the firm has a 40% tax rate. The tax shield value of a carryforward to Firm A is equal to the loss involved times the tax rate ($220,000 X 40% =

7、$88,000) The company can reduce its total taxes from $120,000 to $32,000, and thus could pay $88,000 for the carryforward alone The income available to stockholders also has increased by $88,000 Firm Bs anticipated operating gains and losses for future years must also be considered in analyzing the

8、deal,1-8,Tax Loss Carryforward (contd),1-9,Nonfinancial Motives,Desire to expand management and marketing capabilities, and acquisition of new products May be directed toward vertical or horizontal integration Antitrust policy generally precludes the elimination of competition Management motivation

9、- synergistic effect: Eliminating overlapping functions in production and marketing Meshing together various engineering capabilities,1-10,Motives of Selling Stockholders,Motivation can be from the probability of receiving the acquiring companys stock Stockholders can diversify their holdings into n

10、ew investments - if cash is offered Officers may receive attractive postmerger management contracts along with directorship of the acquiring firm Bias against smaller businesses that has developed worldwide can be a motivational factor,1-11,Cash Purchases,Instead of purchasing new plant or machinery

11、, the purchaser has opted to acquire a going concern Assume that Firm A is considering the acquisition of Firm B for $1 million. Firm B has an expected cash flow (aftertax earnings plus depreciation) of $100,000 per year for the next 5 years and $150,000 per year for the 6th through the 20th years T

12、he synergistic benefits will add up to $10,000 per year to cash flow Firm B has a $50,000 loss carryforward for immediate use. With a 40% tax rate, this will shield $20,000 of profit from taxes Firm A has a 10% cost of capital, and this is assumed to remain stable with the merger,1-12,Cash Purchases

13、 (contd),1-13,Cash Purchases (contd),The present value factor for the first five years is based on n = 5, i = 10%. For the 6th through the 20th years, the present value factor is taken for n = 20, i = 10% Total present value of inflows.$1,172,690 Net cash outflow. 980,000 Net present value. $192,690

14、 The acquisition seems like a desirable option,1-14,Stock-for-Stock Exchange,Emphasis is laid on earnings per share impact of exchanging securities Shareholders of the acquired firm are concerned with: The initial price they are paid for their shares The outlook for the acquiring firm Analysis is he

15、nce made mainly from the viewpoint of the firm,1-15,Financial Data on Potential Merging Firms,1-16,Postmerger Earnings Per Share,1-17,Possibilities of Mergers based on Stock-for-Stock Exchanges,Acquiring firm increases its immediate earnings per share as a result of the merger: But may slow its futu

16、re growth rate if is buying a less aggressive firm Acquiring firm may dilute immediate postmerger earnings per share: But increase its potential growth rate for the future as a result of acquiring a rapidly growing firm,1-18,Portfolio Effect,The reduction or increase in risk may influence the P/E ra

17、tio as much as the change in the growth rate If the overall risk is reduced, there is an increase in postmerger P/E ratio and market value may increase Business risk reduction: acquire another firm that is influenced by a set of factors opposite from those that influence the firm Financial risk redu

18、ction: restructure the postmerger financial arrangements to include less debt If there is less risk in a firm, the investor may be willing to assign a higher valuation, thus increasing the P/E ratio,1-19,Risk-Reduction Portfolio Benefits,1-20,Accounting Considerations in Mergers and Acquisitions,Poo

19、ling of interests: Acquiring firm issues only common stock in exchange for mostly all of the other firms voting stock Acquired firms stockholders maintain an ownership position in the surviving firm Combined entity does not intend to dispose of a large portion of the assets of the merged firms withi

20、n two years Combination is effected in a single transaction,1-21,Purchase of Assets,Goodwill may be created when assets purchase is involved Necessary when the tender offer is in cash, bonds, preferred stock, or common stock with restricted rights FASB put SFAS 141 and SFAS 142 in place to eliminate

21、 pooling of interests accounting Placed on the balance sheet of the acquiring firm at the time of acquisition,1-22,Evaluation of Goodwill,Fair value of goodwill can be determined by taking present value of future cash flows, and subtracting liabilities If the goodwill is impaired, part of it must im

22、mediately be written down against operating income The FASB also allows companies to take a one-time write-down of all past goodwill impairments at the time of adoption by the firm,1-23,Negotiated versus Tendered Offers,Traditionally, product lines, quality of assets, and future growth prospects hav

23、e been discussed and an exchange ratio is agreed upon The takeover tender offer involves an attempt by a company to acquire a target firm against its will (McGraw-Hill American Express) Not all companies can fend off such unwanted advances,1-24,Negotiated versus Tendered Offers (contd),Saturday nigh

24、t special: a surprise offer made just before the market closes for the weekend White knight: a third firm that the management calls on to help it avoid the initial unwanted tender offer Moving the corporate offices to states that have tough prenotification and protection provisions in regard to take

25、over bids Buying back some of their own shares to restrict the amount of stock available for the takeover,1-25,Protective Measures against a Takeover Tender Offer,Encouraging employees to buy stock under the pension plans Increasing dividends Possible targets have also bought up other companies to i

26、ncrease their own size Poison pill is also an effective device for protection,1-26,Premium Offers and Stock Price Movements,Most mergers are not acquired at their current market value A merger premium of 40-60% (or more) is paid over the premerger price of the acquired company Disadvantage: Much of

27、the upside movement may occur before the public announcement Advantage: Good profits can be made after the merger is accomplished,1-27,Premium Offers and Stock Price Movements (contd),Trouble with any merger-related investment strategy: The merger may be called off Merger candidates stock may fall b

28、ack to the original value Price may quickly rebound if there is merger negotiation with another company,1-28,Stock Movement of Potential Acquirees,1-29,Two-Step Buyout,The acquiring company attempts to gain control by offering a very high price of 51% of the shares outstanding Announces a second, lo

29、wer price that will be paid off late, either in cash, stock, or bonds Provides a strong inducement to stockholders to quickly react to the offer Allows acquiring firm to pay a lower total price than if a single offer is made,1-30,Two-Step Buyout (contd),The SEC keeps a close eye on this method Fears

30、 that smaller stockholders may not be informed enough to keep up with institutional investors Emphasizes the need for pro rata processing of stockholder orders Each stockholder receives an equal percentage of shares tendered,International Financial Management,21,1-32,Chapter Outline,The multinationa

31、l corporation Effect of exchange rates Hedging and reduction of foreign exchange risk Evaluating political risk in foreign investments Ways of financing international operations,1-33,Growing Interdependency,Integrated nature of capital markets Possible declines beyond the expected economic impact of

32、 an event Currency markets Impact trade between nations affecting sales and earnings of international companies The advent of the euro Impact on earnings of U.S. companies doing significant business in Europe,1-34,One U.S. Dollar to the British Pound and Euro,1-35,International Sales of Selected U.S

33、. Companies,1-36,The Multinational Corporation: Nature and Environment,A firm doing business across its national borders Can take on various forms Exporter Licensing Agreement Joint Venture Fully Owned Foreign Subsidiary,1-37,The Multinational Corporation: Nature and Environment (contd),Exporter Lea

34、st risky method Reap benefits of foreign demand No long-term investment commitment required Licensing Agreements License granted to an independent, local manufacturer Returns include licensing fee or royalty Effective exporting technology,1-38,The Multinational Corporation: Nature and Environment (c

35、ontd),Joint Venture Established with a local foreign firm Most conducive environment - legal, political, and economic Fully owned foreign subsidiary Higher risks and complexities of operation Lowers portfolio risk of the parent corporation More profitable than domestic firms Decisive factor in shapi

36、ng the pattern of trade, investment, and the flow of technology,1-39,Factors Influencing Exchange Rates,The currencies of major trading partners of the United States are traded in free markets Exchange rate is determined by the supply of, and demand for, those currencies This activity is subject to

37、intervention by many countries central banks,1-40,Exchange Rated to the Dollar,1-41,Other Factors Influencing Exchange Rates,Inflation: Purchasing power parity theory: Exchange rates vary inversely with their respective purchasing powers Provides the same or similar purchasing power in each country

38、Interest rates: Interest rate parity theory: The interplay between interest rate differentials and exchange rates,1-42,Other Factors Influencing Exchange Rates (contd),Balance of payments: Government accounts that catalog flow of economic transactions between countries Trade surplus and trade defici

39、t Government policies: Intervention in the foreign exchange market Maintenance of undervalued currency Currency values set by government decree Restriction of the inflow and outflow of funds Monetary and fiscal policies,1-43,Other Factors Influencing Exchange Rates (contd),Other factors: Extended st

40、ock market rally Significant drop in demand for a nations principal exports globally Political turmoil in a country Widespread labor strikes,1-44,Spot Rates and Forward Rates,Spot rate Exchange rate at which the currency is traded for immediate delivery Forward rates Trading of currencies for future

41、 delivery Reflects the expectations regarding the future value of a currency Discount or premium: Expressed as an annualized percentage deviation from the spot rate,1-45,Cross Rates Key Currency Cross Rates as of February 21, 2006,1-46,Managing Foreign Exchange Risk,Foreign exchange risk Possibility

42、 of a drop in revenue or an increase in cost in an international transaction due to changes in foreign exchange rates Free trading - freely floating rate system Increased volatility forced the attention toward foreign exchange risk management Exchange risk of a multinational company: Accounting or t

43、ranslation exposure Transaction exposure,1-47,Translation Exposure,MNCs foreign assets and liabilities are exposed to losses and gains due to changing exchange rates The SFAS 52: Requires all foreign currency-denominated assets and liabilities to be converted at the rate of exchange Partially reduce

44、s the impact of accounting exposure,1-48,Transaction Exposure,Foreign exchange gains or losses resulting from international transactions Volatility of reported earnings per share increases Different strategies can be used to minimize transaction exposure: Forward exchange market hedge Money market h

45、edge Current futures market hedge,1-49,Other Forms of Protection against Foreign Exchange Risk,MNCs have developed foreign asset management programs, involving strategies: Switching cash and other assets into strong currencies Piling up debt and other liabilities in depreciating currencies Quick col

46、lection of bills in weak currencies by offering sizable discounts, while extending liberal credit in strong currencies,1-50,Foreign Investment Decisions,Factors encouraging foreign affiliates: Avoid the imposition of trade barriers Lower production costs overseas American technology enabled exploita

47、tion of resources in developing countries Advantages related to taxes Motivated by strategic considerations in an oligopolistic industry International diversification of risks,1-51,Risk Reduction from International Diversification,1-52,Foreign Investment Decisions (contd),Deterrents: Government inte

48、rference by imposition of unfriendly foreign exchange restrictions Limitation of foreign ownership to a small percentage Repatriation of a subsidiarys profit to the parent firm may be blocked temporarily Government may expropriate the foreign subsidiarys assets,1-53,Guarding Against Political Risk,I

49、nvestigate the countries political stability - methods include: Establish a joint venture with a local entrepreneur Establish a joint venture with firms from other countries Insurance against perceived political-risk level can be obtained Overseas Private Investment Corporation (OPIC) Insurance or political-risk umbrella is not che