REVIEW Final 2203 2015

For calculations of the acquisition price, the P/E is taken to be 8.6. The acquisition price is calculated by multiplying this value with the historical average of net income. Thus, the acquisition price comes out to be $186,215,800, which is $189,186,673 less than the enterprise value.

Q1. What is the approximate, net of tax, present value of the cost savings synergies created by the deal if the relevant cost of capital (discount rate) is 7%?

a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?

5.4. The backend offer would not materialise until late 1997, therefore the effective offer could be even less. If the cost of capital is 16.45% (more later), then the 60% shareholders will get $4.712bn/1.1645 = $4.04bn which effectively translates to $81.67/share ($3.03bn+$4.04bn/90.5m shares)

ii. What percentage of the total (gross) assets acquired in the NDS acquisition (excluding liabilities assumed) are comprised of goodwill and other intangibles?

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

d) Calculate the new value per share after the capital structure change. (Hint: use your answers to parts b and c.)

- A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,200 and other assets of $10,800. Equity is worth $12,000. The firm has 750 shares of stock outstanding and net income of $775. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

They derived this projection through estimating savings from increased operating efficiencies and by consolidation of duplicate functions. The present value of the synergies would range from $1.71 to $2.14 billion (Assuming the cash flows to be perpetuity using a discount rate of 8.3%). However, Vulcan’s leadership scoffed at Martin Marietta’s estimate of the merger synergies. Instead Vulcan CEO, Donald James was convinced the true value of synergies would not exceed $50 million per year. The present value of this synergy estimate would be $428 million (Assuming the cash flows to be perpetuity using a discount rate of 8.3%). This is summarized in table 2 below.

Analysts estimate that the $80 million in cost saving could be realized after the acquisition , however certain other costs associated with the integration approximately $130 million would occur .Hence, I take these cost savings and integration costs into consideration for the with-synergies valuation. Incorporating the effects of 80million cost savings for the merged firm (to be achieved by end of 2007 and assumed to incur in perpetuity then on) and 130 million integration costs (half of this accounted at the beginning years) in the estimated EBITs for Torrington, a new horizon value is estimated, the new FCF is discounted by acquiring company’s WACC 8.39%. Torrington company’s with- synergies valuation $1386.38 million exceeds the value as a stand-alone entity by approximately $286 million. sheet2: With-synergies Valuation of Torrington-DCF Method.

Since a manager’s central goal is to maximize the firm’s stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

above, how much should CSX be willing to pay for Conrail? Support your answer with appropriate analysis. According to operating income gains we can value a firm’s market price as its pre-merger value and the present value of gains in operating income. Let’s assume that value of Conrail before the merger is equal to its market cap. Then taking Conrail share price as $71.94 (average of year end and high stock price) and number of shares outstanding as 90.5 million shares (Exhibit 6) we get Conrail market value equal to $6,510.57 million ($71.94 x 90.5 million). We assume G =3%, MRP = 7%. We take risk free as 30-year maturity US Bonds rate, which is 6.83% (Exhibit 8); merged CSX-Conrail equity beta as average of CSX and Conrail equity betas, which is 1.33. rE = rf + MRP βE = 6.83% + 7% x 1.33 = 16.11% Now we can find Conrail’s synergy value as present value of gains in operating income. 1997 Total Gain in Operating Income Total Gain in OI after 40% Tax Gain in OI (discounted @ rE) $ $ $ 1998 $ 88 $ 12.80 $ 7.15 $ $ $ 1999 396 237.60 176.26 $ $ $ 2000 550 330.00 210.84 2001 $ 567 $ 340.20 $ 187.21

Also, the shareholders of the acquired company can be more vulnerable to decreases in price of stock because they are assuming part of the price risk in this structure. Companies also have the option of using the fixed value of shares structure. By using this structure, the number of shares does not become fixed until the date that the transaction is closed. This means that the proportion of ownership of the company that is continuing is not know until the end of the deal. With this structure, the acquiring company assumes all the price risk from the time the merger is announced until the time the deal is closed. I found this part of the article to be extremely helpful because the authors broke down the types of structure of the exchange of shares in such a way that even though I was never exposed to these different structures, I was able to understand the key difference between the two. I believe this section of the article could provide valuable insight to mangers in order to help decided what structure they should take if they chose to finance using stock.

Companies use various strategies to gain access to new markets and increase their profitability. Among the strategies are mergers and acquisition, which enable a company to gain synergy, industry visibility as well as economies of scale. Acquisition involves a takeover of one company, the target by another company called the acquirer. The acquired company may cease to exist and the acquirer’s stock continues to be traded. Mergers, on the other hand, involve two companies which are of approximately the same size or resources agree to form a single new company instead of having separate ownerships. Moreover, CEOs may decide to join their companies together for the best interest of both firms to form a merger. However, mergers and acquisitions are dependent on their purchase style, such as hostile or friendly, and how both exercises are announced and received by the stakeholders.

After purchasing new and used capital, a firm transfers its z to the new entity. Hence, the gain of a merger is largest when the difference between the target’s z and the acquirer’s z is biggest, that is, the target’s z is high and the acquirer’s z is low. Assume that the acquirer’s state is