Mergers and Acquisitions: A Strategic Valuation Approach

Transcription

1 Mergers and Acquisitions: A Strategic Valuation Approach

2

3 Mergers and Acquisitions: A Strategic Valuation Approach Emery A. Trahan

4

5 Contents About This Course How to Take This Course xiii 1 An Overview of Mergers and Acquisitions 1 Methods of Business Combination Acquisition Merger Consolidation Leveraged Buyout (LBO) Holding Company Divestitures Hostile versus Friendly Combinations Motives for Acquisitions Growth through Acquisition Antitrust Considerations Accounting Methodology: Purchase versus Pooling of Interests Postmerger Analysis Overview of This Course 2 Financial Analysis 17 Strategic Analysis The Basic Structure of Financial Statements The Balance Sheet The Income Statement The Statement of Cash Flows

6 Ratio Analysis Liquidity Ratios Debt Ratios Activity Ratios Profitability Ratios Cautions on Financial Analysis A Comprehensive Ratio Analysis Return on Equity Analysis BIOPLAS Corporation and TARGON Corporation: An Illustration of Strategic Analysis, Financial Statements, Ratio Analysis, and Return on Equity Analysis Strategic Analysis Threat of New Entrants Industry Rivalry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes Financial Statements Ratio Analysis Return on Equity Analysis Statement of Cash Flows 3 Securities Markets and Valuation 41 Definitions and Structures of Primary Securities Corporate Bonds Preferred Stock Common Stock Junk Bonds Convertible Bonds Convertible Preferred Stock Combinations of Securities Efficient Capital Markets Valuing a Company Discounting Finding the Present Value of an Uneven Stream of Cash Flows Finding the Present Value of a Cash Flow Expected to Grow Indefinitely at a Constant Rate

7 4 Motives for a Merger or Acquisition 51 A Brief History of Recent Merger and Acquisition Activity Sources of Potential Gain from Acquisitions Synergies Economies of Scale Economies of Scope Financial Synergies Gaining Market Power Eliminating Inefficiencies Growth Diversification Increasing Net Income and Earnings per Share Facilitating an Exit Strategy Serving Personal Interests Defensive Maneuver Considerations of the Selling Company Considerations of the Buying Company Evidence on the Impact of Acquisitions The Impact of Mergers and Acquisitions on Value Long-Run Value Effects Industry Effects 5 Search and Screening of Acquisition Candidates Methods of Searching for Acquisition Candidates Internal Acquisition Team Standard & Poor's Compustat Disclosure Thomson Financial Securities Data Dow Jones News/Retrieval Telnet Session Mergers and Acquisitions Mergerstat Review Sources Listed by Sherman (1998) Sources Listed by Reed and LaJoux (1995) Sources Listed by Copeland, Koller, and Muffin (1996) Trade Publications Investment Bankers Business Brokers Outside Consultants Financial Screens Industry Adjustments Using Knockout Criteria for Screening A Strategic Screen 69

8 Restructuring Strategies Strategic Analysis of BIOPLAS and TARGON 6 Valuing the Acquisition Target Discounted Cash Flow Valuation Calculating Free Cash Flows Free Cash Flow for TARGON in 1999 Value of TARGON as an Independent Company Free Cash Flow for TARGON if It Is Acquired by BIOPLAS Determining the Required Rate of Return Weighted Average Cost of Capital Illustration: Computing the Weighted Average Cost of Capital for BIOPLAS and TARGON Adjusted Weighted Average Cost of Capital The Pure Play Method Illustration: Computing the Adjusted Weighted Average Cost of Capital for TARGON Valuing an Acquisition Candidate Illustration: Estimating the Value of TARGON to BIOPLAS Additional Methods for Determining Value Other Valuation Considerations Net Working Capital Price of a Poorly Managed Company Required Premiums Assessing Risk Dependency on Key Customers Dependency on Key Employees Litigation 7 The Impact of a Merger on Financial Statements The Exchange Ratio The Impact on Earnings per Share Growth in Earnings per Share Impact on the Price-Earnings Ratio Financing Impacts of the Acquisition Package Financial Position of the Target Company Financial Composition of the Exchange Package

9 Tax Impact of the Acquisition 8 The Campaign to Acquire, Postacquisition Analysis, Special Topics, and Wrap-Up 117 A Review of Some Acquisition Terminology Takeover White Knight White Squire Proxy Fights Poison Pills Corporate Raider Leveraged Buyout Premium Tender Offers Golden Parachute The Campaign to Acquire Friendly Acquisitions Unfriendly Acquisitions Resisting an Unfriendly Takeover Due Diligence Postacquisition Analysis International Acquisitions Reasons for International Mergers and Acquisitions Growth Technology Product Advantages and Product Differentiation Government Policy Exchange Rates Political and Economic Stability Differential Labor Costs, Productivity To Follow Clients (Especially by Banks) Diversification To Assure a Source of Raw Materials Returns to Shareholders in International Mergers and Acquisitions Acquisitions of Nonpublicly Traded Companies Data Availability for Nonpublicly Traded Companies Risk and Required Return for the Nonpublicly Traded Company Forecasting Cash Flows for the Nonpublicly Traded Companies

10 Glossary 137 Bibliography 145 Post-test Index 179