Alpha Plc is “The Acquirer Company” and Delta Plc is “The Target Company” in this report. The aim of this report is to analyze various options offered by Acquirer company to Target Company which are in negotiation process between Alpha Plc and Delta plc.
Acquirer Company proposed three offers to Target Company which are mentioned later in this report.
A description of the each offer and an analysis and calculation for each offer are followed by a comparison of the three offers. Finally, the most beneficial and cost efficient offer incase of Acquirer company and Delta company is recommended.
Methodology:
Three offers proposed by Alpha Plc to Delta Plc are
- Cash Offer: Alpha Plc will pay £12.00 per share for the shares of Delta Plc;
- Stock Offer: Alpha Plc will issue Delta Plc Shareholders 0.80 shares of Alpha Plc per share of Delta Plc ;
- Mixed Offer: Alpha Plc will pay £6.00 plus 0.40 shares of Alpha Plc per share of Delta Plc.
It has been agreed by the two companies that the merger will result in economies of scale with a Net Present Value (NPV) of £90 million.
We have adopted to analyze above three offers by calculating;
- Target shareholders’ gain – (the premium)
- Acquirer’s gain
- The post-merger values of the combined companies
Target shareholders’ gain is the difference between “Price paid for the target company (PT)” and “pre-merger value of the target company (VT)” also said the premium paid on acquisition and in financial terms “Goodwill” acquired on acquisition.
Acquirer’s gain is the difference between “Synergy obtained (S)” and “Premium paid on acquisition (PT - VT)”.
And the post-merger values of the combined companies is the sum of “pre-merger value of acquirer (VA)” plus “pre-merger value of target company (VT)” plus “Synergy obtained (S)” less “cash paid to the target shareholders (C)”
In formula terms they can be written as;
Target shareholders’ gain = (PT - VT)
Acquirer’s gain = S - (PT - VT)
The post-merger values of the combined companies = (VA) + (VT) + (S) - (C)
Findings:
Financial data on two companies are;
Alpha Plc Delta Plc
Pre-merger stock price (£ ) 15.00 10.00
Number of shares (million) 75 30
Pre-merger market value (£ million) 1125 300
A confident acquirer will tend to pay consideration for the acquisition of target company by cash and the stock markets historically in past have been encouraging this. Resultantly, share value rises in response to this confidence.
While purchase consideration in the form of stock (which is quite often) results in different response if any sense is developed that the Acquirer’s stock is overvalued. More oftenly in many cases, When the deal is announced officially in financial market, the stock value of Acquirer takes a dip as it’s a common slogan in stock markets that “buy on rumors and sale on news”. But the cash consideration makes sure that target company’s shareholders’ do not give up any merger gains to the acquired companies’ shareholders.
Purchase consideration under each offer which are also calculated in appendices are;
Offer 1 – Cash Offer
30 million shares of Delta Plc acquired at £12 per share resulting £360 million cash paid.
Offer 2 – Stock Offer
Issuing 24 million shares of Alpha Plc whose stock price is £15 per share resulting issuing shares valuing £360 million.
Offer 2 – Mixed Offer
Issuing 12 million shares of Alpha Plc whose stock price is £15 per share resulting issuing shares valuing £180 million and 30 million shares of Delta Plc acquired at £6 per share resulting £180 million cash paid, making consideration £360 million in total.
It is witnessed that purchase consideration in each case is £360 million. But the finance manager would definitely be concerned to withhold its current assets i.e. cash and issue stocks instead because huge cash outflow may result increased finance cost to the acquirer which may negatively impact the financial performance of the acquirer in short term.
It is assumed that Alpha Plc is confident that the merger will result in economies of scale with a Net Present Value (NPV) of £90 million, so finance manager may consider stock option.
If we assume that finance cost is 5% per annum then;
- offer 1 would cost extra £18 million (£360 x 5%) making bid for Delta Plc £378 million
- offer 2 would not incur extra cost hence bid remains as same as £360 million
- offer 3 would cost extra £9 million (£180 x 5%)making bid for Delta Plc £369 million
Analysis:
Target shareholders’ gain – (the premium)
(PT - VT)
Where;
PT = price paid for the target company = £360 million
VT = pre-merger value of target company = £300 million
Premium under each alternative offer are;
Offer 1: (£360 - £300) = £60 million
Offer 2: (£360 - £300) = £60 million
Offer 3: (£360 - £300) = £60 million
Before we analyze acquirer’s gain synergy as a benefit of acquisition is best explained as “The benefits realized in a strategic acquisition are largely a result of synergies and economies of scale. Concept of Synergies (Can 2 + 2 = 5?)
In a well executed acquisition, the acquiring company can take advantage of synergies. That is, the two companies together will be stronger and more profitable than either company was previously.
Synergy is roughly defined as two or more things together being better or more effective than the sum of their parts. As it's used here, it means two or more companies merging such that the combined resources of the merged unit have more than the sum of the value they had individually.
For example, suppose XYZ Engineering Company has very skilled sales and marketing people. Through their marketing abilities they have a number of contracts for sophisticated engineering projects. However, their engineering staff leaves something to be desired. The engineers are inexperienced and are not well equipped to handle the contracts that XYZ sales personnel are able to secure. (Gary L. Schine, 2009)”
Acquirer’s gain
S - (PT - VT)
Where;
S = Synergy obtained =£90 million
PT = price paid for the target company = £360 million
VT = pre-merger value of target company = £300 million
Acquirer’s gains under each alternative offer are;
Offer 1: £90 - (£360 - £300) = £30 million
Offer 2: £90 - (£360 - £300) = £30 million
Offer 3: £90 - (£360 - £300) = £30 million
The post-merger values on combined companies
(VA) + (VT) + (S) - (C)
Where;
VA = pre-merger value of acquirer company = £1125 million
VT = pre-merger value of target company = £300 million
S = Synergy obtained =£90 million
C = cash paid incase of offer 1 = £360 million
C = cash paid incase of offer 2 = 0
C = cash paid incase of offer 3 = £180 million
The post-merger values on combined companies under each alternative offer are;
Offer 1: £1,125 + £300 + £90 - £360 = £1,155 million
Offer 2: £1,125 + £300 + £90 - 0 = £1,515 million
Offer 3: £1,125 + £300 + £90 - £180 = £1,335 million
Another view at this acquisition
What if post-merger values on combined companies under each alternative offer are summed up with extra cost incurred due to paying consideration in cash in each case of offer?
Offer 1: £1,155 less £18 = £1,137 million
Offer 2: £1,515 less 0 = £1,515 million
Offer 3: £1,335 less £9 = £1,326 million
To acquire a company is not so easy while looking at financial advantage. Acquirer come across various non financial difficulties such as change of management which may impact company’s operations in either way. This is well discussed as“This is quite possibly the most complex 'simple' process I've ever seen.” That is a sentiment
that resonates for any manager or executive who has been through the
same drill. The steps and the process mechanics are not unique or challenging
in and of themselves, but the environment of change—the pace, the pressure,
the stress and uncertainty, the widespread fears and skepticism—combine with
the sheer volume of difficult decisions to create a Herculean task that can quickly
overwhelm even the most capable manager and the most sophisticated organization.
As if the excitement of the formation and planning phase were not difficult
enough, companies are then left with the seemingly never-ending (and rather
boring) work of the execution phase. Either phase, if poorly led and managed,
can sink an otherwise successful endeavor.
As a result, merger integration is without a doubt the ultimate change-management
challenge. Unless the organization is equipped with a well-defined,
replicable, flexible process, it is doomed to repeat its mistakes—or make new
ones—in every future deal. Most organizations do a reasonably good job of identifying
the generally accepted principles and the critical success factors for major
change initiatives.”( Timothy J. Galpin and Mark Herndon, 2000)
Conclusion:
With the rising trend of expansion of industry in the world, it is becoming essential for companies in each industry sector to expand either by huge investment (expansion process is slow in this case) or by acquiring another company in the same industry (expansion is much quicker).
Finding in this report indicates that Delta Plc is ideal for acquisition assuming that target company is in the same industry in which Alpha Plc operates. We analyzed by different calculations under each offer.
Purchase consideration for each offer is £360 million with different combinations. Each offer has its own benefits I addition to benefit of synergy and economies of scale amounting to £90 million due to acquisition of Delta Plc.
The post-merger values on combined companies under each alternative offer are;
Offer 1: £1,125 + £300 + £90 - £360 = £1,155 million
Offer 2: £1,125 + £300 + £90 - 0 = £1,515 million
Offer 3: £1,125 + £300 + £90 - £180 = £1,335 million
Recommendation:
After detailed evaluation and analysis it is recommended that
Acquirer company’s point of view
Acquirer Alpha Plc should negotiate offer 2 to Delta Plc.
Save cash outflow by issuing stocks to Delta Plc shareholders.
Avoid finance cost £18 million and £9 million incase of offer 1 and offer 3 respectively
hire a debt collection agency.
Target company’s point of view
Delta Plc should negotiate offer 1 from Alpha Plc.
Invite cash inflow by accepting cash consideration of £12 per share of Delta Plc.
Earn profit on deposit £18 million incase of offer 1
List of References:
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(David T. Annis, 2009) Author of book Strategic Acquisition: A Smarter Way to Grow a Small or Medium Size Company . www.strategic-acquisitions.com
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(Gary L. Schine, 2009) Author of book Strategic Acquisition: A Smarter Way to Grow a Small or Medium Size Company .
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( Timothy J. Galpin and Mark Herndon, 2000) Book Title: The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level. Contributors: Timothy J. Galpin - author, Mark Herndon - author. Publisher: Jossey-Bass. Place of Publication: San Francisco. Publication Year: 2000. Page Number: 55. http://www.questia.com/PM.qst?a=o&d=108870861
Appendixes:
Appendix 1
Appendix 2
Calculation