Mergers and takeover

Measure of corporate growth Increase in sales It indicates size or quantity in the market Increase in profit Operations into greater return for the shareholder Increase in assets Increase in firm’s operating resources

Mergers A merger is a combination of two or more businesses in which only one of the corporation survives. the other corporation ceases to exist and its assets and possibly debts are taken over by the surviving company

Methods to bring a merger Purchase of assets Purchase of common stock Exchange of stocks for assets Exchange of stock per stock

Acquisition Taking over of assets in the process of external growth Consolidation Combination of two or more business into a third entirely a new business The new corporation absorb the assets of original corporation,which cease to exist

Takeover A takeover generally involves the acquisition of current block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company. Acquirer must buy more than 50% of the paid –up capital to enjoy complete control

Regulatory principles Transparency of all process Interest of small shareholder Realization of economic gain No undue concentration of market power

Pyramiding Controlling many or several firms with relatively small Investment in each of them. It is a technique used to employ the parent subsidiary relationship for allowing one firm to gain control over other firm

Justification of acquisition Economies of sale Utilization of production plant, distribution networks, engg. services Reduction of inefficiency Utilization of tax shields Growth Diversification Strategic benefits Utilization of surplus funds

Valuation of target company Equity valuation model (balance sheet valuation model) Book value, liquidation value Replacement cost Dividend discount model V=[D1/1+k]+[D2/(1+k) 2 ]+[D3/(1+k) 3 ]+………… V=value of the firm D=dividend k=discount rate

Constant growth dividend discount model V=D i /k-g g=growth rate of dividend Price earning ratio PVOG=present value of growth opportunity K=discount rate Cash flow valuation model Economic profit model Exchange ratio The number of shares that the acquiring firm is ready to give in exchange of the shares of the company it wishes to acquire

Steps involved in valuation Analyzing historical performance Forecast performance Estimating the cost of capital Estimating the cost of equity financing Determining the pricing model Calculating and interpreting results

The financing of acquisition Pay cash Issue corporate stock

Finding suitable acquisition` Candidates with no operating loss Candidates those must avoid improper profit accumulation Candidates with low price-earning ratio Candidates with turnaround prospectus

Approach adopted for takeover Negotiations Solicit tenders Solicit proxies

Resistance to an acqisition Target firm’s management feels acquiring firm does not understand the problem of existing firm Resulting in harm to the interest of shareholder Company soon going to start improving

Example- Northwest industries-Acquiring company B.F.Goodrich group-Target company Issued letters to all shareholder recommending them to refuse from signing the proxies Refuse to release mail list of their shareholder Issued stock to gulf oil company in return of assets The publicity of the fact the existing management is ready to fight

International financial market

Introduction Foreign exchange market-one country’s currency is traded for another’s country Importers Exporters Foreign exchange broker

Sources of international finance Commercial banks-foreign currency loans can be taken Financial institute Discounting of trade bills International agencies-reconstruction and development

Exchange rates The price rate of one currency expressed in term of another OR Cost of money. Spot rate Exchange rate which applies to ‘on the spot’ delivery of the currency Forward rate Exchange rate applicable to a transaction, which will occur at a specified point of time in future Future rate Exchange rate which applies to the future delivery of currency

Methods of exchange The floating exchange rate The pegged exchange rate Hybrids

The Euro On jan 1,2002,the euro become the single currency of 12 member states of the European Union Elimination of exchange rate fluctuation Transaction cost Increased trade across borders Increased cross-border employment

Factors affecting foreign exchange Law of one price Interest rates The business environment Stock market political factor Confidence in currency