21
Case Analysis – Mergers and Acquisition World Enterprises and Wheelrim and Axle Company Submitted By:- Amanjot Bhullar Dheeraj Aggarwal Maninder Pal Singh Pardeep Dahiya Sanchit Agarwal Simaranjit Tiwana Vishvasniya Rathee

FM Case Analysis - M&A - Team 5

  • Upload
    dheer86

  • View
    116

  • Download
    0

Embed Size (px)

Citation preview

Page 1: FM Case Analysis - M&A - Team 5

Case Analysis – Mergers and AcquisitionWorld Enterprises and Wheelrim and Axle Company

Submitted By:-Amanjot BhullarDheeraj AggarwalManinder Pal SinghPardeep DahiyaSanchit AgarwalSimaranjit TiwanaVishvasniya Rathee

Page 2: FM Case Analysis - M&A - Team 5

Introduction

•Given case is a classic example of “Bootstrap effect” of a merger between World Enterprises and Wheelrim and Axle Company. World Enterprises wants to enter into the merger just to have a temporary boost in its EPS without any other strategic real gains.

•Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability.

•But in the given case, it is assumed that there are no real gains from the merger.

“One of the largest, most critical, and most difficult parts of a business merger is the successful integration of the enterprise networks of the merger partners.”

Page 3: FM Case Analysis - M&A - Team 5

Some key DefinitionsTakeover

▫ The transfer of control from one ownership group to another.Acquisition

▫ The purchase of one firm by another so that ownership transfersThere is no tangible difference between an acquisition and a takeover;

both words can be used interchangeably - the only difference is that each word carries a slightly different connotation. Typically, takeover is used to reference a hostile takeover where the company being acquired is resisting. In contrast, acquisition is frequently used to describe more friendly acquisitions, or used in conjunction with the word merger, where both companies are willing to join together.

Merger▫ The combination of two firms into a new legal entity.▫ A new company is created.▫ Both sets of shareholders have to approve the transaction.

Page 4: FM Case Analysis - M&A - Team 5

• Merger through Absorption: An absorption is a combination of two or more companies into an 'existing company'. All companies except one lose their identity in such a merger.▫ For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL).

TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

• Merger through Consolidation: A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares.▫ For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd,

Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Key Definitions …Continued

Page 5: FM Case Analysis - M&A - Team 5

Horizontal• A merger in which two firms in the same industry combine.• Often in an attempt to achieve economies of scale and/or scope.

EXAMPLE- The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger.

Vertical• A merger in which one firm acquires a supplier or another firm that is

closer to its existing customers.• Often in an attempt to control supply or distribution channels.

EXAMPLE- An example of a vertical merger is a car manufacturer purchasing a tire company.

Types of Mergers

Page 6: FM Case Analysis - M&A - Team 5

Conglomerate• A merger in which two firms in unrelated businesses combine.• Purpose is often to ‘diversify’ the company by combining uncorrelated

assets and income streams.• Conglomerate are much less popular now.

EXAMPLES- One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.

Cross-border (International)• A merger or acquisition involving a domestic and a foreign firm a either

the acquiring or target company.

• EXAMPLE -takeover of Zain Africa by Bharti Airtel, Vedanta Resources acquiring Cairn India from Cairn Energy and of course the latest -- Sun Pharma acquiring Israel's Taro

Types of Mergers

Page 7: FM Case Analysis - M&A - Team 5

Reasons for Mergers and Acquisitions

• Capacity• Capacity refers to the amount of output that a firm is capable of producing given its

existing assets. Acquiring another business might enable it to be able to increase its capacity relatively quickly.

• Economies of Scale• Economies of scale are the advantage of large scale production that result in lower

cost per unit produced.

• Accessing technology or skills• A firm may be targeted for acquisition because it has specific skills within its staff or

has a particular technology that would be useful to another business.

• Tax reasons• Businesses are always looking for ways to reduce their tax exposure. A firm has large

sums of money lying idle, using these sums to acquire another business that would not only enhance its operations but would also reduce its tax liability

Page 8: FM Case Analysis - M&A - Team 5

Reasons for Failure of Mergers and AcquisitionsSize Issues A mismatch in the size between acquirer and target has been found to

lead to poor acquisition performance. Many acquisitions fail either because of 'acquisition indigestion' through buying too big targets or failed to give the smaller acquisitions the time and attention it required

Lack of Research Acquisition requires gathering a lot of data and information and analyzing

it. It requires extensive research. A carelessly carried out research about the acquisition causes the destruction of acquirer's wealth

Diversification Very few firms have the ability to successfully manage the diversified

businesses. Unrelated diversification has been associated with lower financial performance, lower capital productivity and a higher degree of variance in performance.

Page 9: FM Case Analysis - M&A - Team 5

Recent Mergers and acquisitions

Reliance Industries in March 2009 approved a scheme of amalgamation of its subsidiary Reliance Petroleum with the parent company. The all-share merger deal between the two Mukesh Ambani group firms was valued at about Rs 8,500 crore ($1.68 billion). This makes it India's 11th largest Mergers and Acquisitions transaction till date.

Page 10: FM Case Analysis - M&A - Team 5

HDFC Bank-Centurion Bank of Punjab: $2.4 billion

HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9,510 crore ($2.4 billion) in one of the largest mergers in the financial sector in India in February, 2008. Centurion Bank of Punjab shareholders got one share of HDFC Bank for every 29 shares held by them. Post-acquisition, HDFC Bank became the second-largest private sector bank in India. The acquisition was also India's 7th largest ever.

Page 11: FM Case Analysis - M&A - Team 5

Boot Strap Effect

•“Bootstrap” or “Chain Letter” is referred to generating earnings growth from purchase of slowly growing firms with low price earnings ratio instead of earnings growth due to capital investments or improved profitability.

•When there is no real gain created by the merger and no increase in the two firm’s combined value.

Merger Gain= PVab - (Pva + PVb ) = PVab

Page 12: FM Case Analysis - M&A - Team 5

Key Assumptions

•Merger between the given firms will produce no economic benefit or real gain, hence the firms should be worth exactly the same together as they are apart

•There is no revaluation of firm by investors, so the market value of World Enterprises after merger is the sum of separate values of the two firms

Page 13: FM Case Analysis - M&A - Team 5

Q.1 Complete the table

Particulars World Enterprises

Wheelrim and Axle

Merged firm

Earnings per share

$2.00 $2.50 $2.67

Price per share $40 $25 $34.3

Price earning ratio

20 10 12.84

Number of shares

100,000 200,000 262,172

Total earnings $200,000 $500,000 $700,000

Total market value

$4,000,000 $5,000,000 $9,000,000

Page 14: FM Case Analysis - M&A - Team 5

Working Notes – Market Value and Total Earnings Calculations

• Total market value of merged firm = Market value of World enterprises + Market value of Wheel rim and Axle = 4,000,000 + 5,000,000 = $9,000,000

• Total earnings of merged firm = Earnings of world enterprises + earnings of Wheelrim and Axle = $200,000 + $ 500,000 = $700,000

Page 15: FM Case Analysis - M&A - Team 5

Working Notes – Number of Shares and Price Per Share

•Number of shares = Earnings of merged firm/Earnings per share = 700,000/2.67 = 262,172

•Price per share = Total market value/Number of shares = 9,000,000/262,172 = 34.33

Page 16: FM Case Analysis - M&A - Team 5

Working Notes – P/E Ratio Calculation

•Price-earnings ratio = Price per share/ Earnings per share = 34.33/2.67 = 12.86

Page 17: FM Case Analysis - M&A - Team 5

•Total shares offered by World enterprises to acquire Wheelrim and Axle

= Number of shares of merged firm – Number of shares of World enterprises before merger = 262,172 – 100,000 = 162,172•Shares exchanged for each share of Wheelrim and

Axle = 162,172/200,000 = 0.81

Q.2 How many shares of World enterprises are exchanged for each share of Wheelrim and Axle?

Page 18: FM Case Analysis - M&A - Team 5

Q.3 What is the cost of merger to World Enterprises

•Cost of merger = Shares offered * Market value of shares after merger – Market value of acquired firm = 162,172*$34.33 – $5,000,000 = $567,364.76

Page 19: FM Case Analysis - M&A - Team 5

Q.4 What is the change in the total market value of the world enterprise shares that were outstanding before the merger•Market value of given shares before merger = $4,000,000•Market value of given shares after merger = Number of shares * Price per share = 100,000*34.33 = $3,433,000•Therefore, change in market value = 3,433,000-4,000,000 = $(567000)

Page 20: FM Case Analysis - M&A - Team 5

Conclusion

•If the given deal, a characteristic example of Bootstrap effect, is able to fool the investors, then the financial manager may be able to puff up the stock price artificially.

•But it will happen only on the temporary basis, or the firm has to continue to expand via merger at the same compound rate.

•Obviously this cannot go forever, and at the point where it stops or slows down, the earnings growth will fall dramatically.

Page 21: FM Case Analysis - M&A - Team 5