7 Pages

Accounting & Financial Management
Course Code
AFM 371
Neil Brisley

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Classnote 21, M&A, cash, stock, synergy 2012 “Quick wrap expected on Viterra auction”: auction/article2372242/ Bell, Astral Media, $3.4B, 75% cash, 25% stock, assumption of debt… Press Release: bce/article2371439/ board seat, 10x EBITDA Video: cost control, negotiating power. 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 Poison Pills • A financial device designed to make unfriendly takeover attempts unappealing if not impossible Shareholder Rights • A provision that allows shareholders to purchase stock at a certain price when the takeover occurs; purpose is to discourage hostile takeovers Golden Parachutes • 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 management. Synergies: Example. 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 Firm X? 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? Example. 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
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