Classnote 21, M&A, cash, stock, synergy 2012
“Quick wrap expected on Viterra auction”: www.theglobeandmail.com/globe-investor/quick-wrap-expected-on-viterra-
Bell, Astral Media, $3.4B, 75% cash, 25% stock, assumption of debt…
Press Release: www.theglobeandmail.com/globe-investor/news-sources/?date=20120316&archive=cnw&slug=C4982
bce/article2371439/ board seat, 10x EBITDA
www.theglobeandmail.com/globe-investor/bce-to-acquire-astral-media-for-3-billion/article2371284/ cost control,
What is a ‘friendly’ takeover bid? When management is involved.
What is a ‘hostile’ takeover bid? Against management wishes, bidding company buys shares straight from shareholders
• A financial device designed to make unfriendly takeover attempts unappealing if not impossible
• A provision that allows shareholders to purchase stock at a certain price when the takeover occurs; purpose is to
discourage hostile takeovers
• Benefits given to executives in the event the company is taken over by another firm; main aim to protect execs
1 What is a ‘White Knight’?
• A kind of “ally” firm that would offer a takeover bid in order to force the “hostile” bidding company to negotiate with
Firm B and Firm X are both All Equity, no debt, and both have a cost of capital of 12%p.a. (WACC)
As a standalone firm, Firm X is expected to make Free Cashflows of $100 next year and for these cashflows to grow at a
constant rate of 2%p.a. thereafter.
Firm X consists of 100 shares.
Firm B is contemplating a cash offer for Firm X. Firm B management believe that if they takeover Firm X, then the
combined firm will make additional pre-tax cost savings of a constant $40 p.a. in perpetuity. The tax rate is 40%p.a.
• The cost savings points that there will be synergy
As a shareholder in firm X, what cash offer might you be willing to accept?
• Cash offer = Firm X Value + Synergy
• Note that the cost savings save $40 every year, which after tax would be $24, thus there is a cash inflow of $24
As a shareholder in firm B, what is the maximum cash offer that you would be willing for your Firm B to offer to takeover
As a shareholder in firm X, what cash offer might you expect?
2 Target firm, Private vs. Public
Does this merger create value? How?
Who benefits from this value creation?
Firm A has 1,000 shares outstanding, at a current stock price of $5. It has $5,000 of bonds outstanding.
Firm Z has 200 shares outstanding, at a current stock price of $10. It has $2,000 of bonds outstanding.
Both firms have a Weighted Average Cost of Capital of 10% p.a.
Firm A has current EBITDA of $2,000
Firm Z has current EBITDA of $1,000
The market has no idea that a takeover may be ahead.
What are the TEV/EBITDA ratios of the two firms? What might explain their difference?
3 Management of Firm A are c