Classnote 22 2012
Revisit all the numbers from # 21…
Class 23, Tuesday, final class, wrap-up Q’s, review, exam discussion, Q&A, course
Class 24, Cancelled, Sorry, Unavoidable.
Extended office hour, Q&A, probably in amphi, e.g., Weds 4 April, 1pm-4pm.
Other office hours, To Be Arranged
1 What are the advantages/disadvantages of a cash bid versus a stock bid
For the shareholders of target Firm Z?
For the shareholders of bidding Firm A?
Cash or Stock? Risk & Uncertainty, Return, leverage, taxation, information effects,
management incentives, ownership & control
Why might firm A prefer to launch a cash offer? It is less risky for the bidding company (I
don’t know who firm A is)
Why might Firm A prefer to offer a share exchange? It is less risky for the issuing company
• Paying out in shares shows has less consequences…paying cash is risky.
2 • Market is less likely to be suspicious of a cash deal.
• Paying in stock shows that you may be over valued.
• There are information effects when stocks are issued.
• Paying in stock shows that maybe the deal isn’t so good, she’s paying stock because
she thinks the stock is at a higher level than it should be.
As a shareholder in Firm Z, what are the implications of accepting a Cash offer?
As a shareholder in Firm Z, what are the implications of accepting a Share Exchange?
Why buy/merge with another firm?
• Create synergy
• Create cost savings
• Increase market share
• These are all part of creating value.
3 • Even if the merger is going to create value, be careful that you don’t over pay for that
• Use the other company’s skills that you need
• “empire building”
4 Q (Dec2010 Final Exam)
Firm B (‘Bidder’) is contemplating a takeover of Firm T (‘Target’) by issuing new shares of B in exchange
for all the shares of T.
Prior to announcement of a bid, Firm B has 300 shares outstanding at a current market price of $10
each. Total Debt of $2,000 carries an interest rate of 5% p.a., the corporate tax rate is 40%, and the firm
has a TEV/EBITDA ratio of 8.
Prior to announcement of a bid, Firm T has a Debt/Equity ratio of ½. , has 50 shares outstanding, a
stock price of $20 and an EBITDA of $175.
The CEO of B and the Directors of Firm T believe that the combined firm would initially simply combine
the earning power of the two firms, but that potential future synergistic cost savings would lead the
market to value the total enterprise value of the combined firm at ‘nine times EBITDA’.
a) What would be the total dollar value created or destroyed by the merger?
• Final answer is 700
• TEV= 700
• EBITDA= 5000/8 GE T ANSWERS
• VALUE CREATED IS 700
5 b) Given the assumed value creation, what is the maximum exchange ratio that Firm B could offer in
order that its original shareholders maintain their pre-merger value? [i.e. the maximum number of
new B shares issued in exchange for each share of T, such that the B stock price does not fall?].
In this case, what d