Takeover

1311 WordsJan 16, 20116 Pages
1) Why is Flagstar in financial distress? When possible, back your claims with data. Signs of financial distress • The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets. • The company evolved through an elaborate series of mergers and divestitures, and financed its acquisitions through debt.…show more content…
4) Evaluate DLJ’s analysis, highlighting at least three points that you judge contentious. DLJ used comparable method of valuation and used lower side of EPITDA multiple, and that makes valuation undervalued. Following are three points which are contentious: 1. Used Lower side of EBITDA Multiples: Dillon report does not justify that why they should take lower side of multiples. Even though JP Morgan valuation proposed such low multiples, but failed to indicate how it arrived at this multiple value. 2. Used M&A comparables method which does not fit well in Flagstar’s case. Flagstar’s lawyer argues that their valuation is valid because it is verified with Mergers and Acquisition method, which does not seem right method for Flagstar case. Since company is going through financial distress, M&A method should not be used to verify the valuation. 3. Multiples Applied to 1997 operating Results: Since in 1997, company’s operating results do not reflect its true potential because of all the impending bankruptcy news, using 1997 results makes valuation undervalues. 5) Evaluate Jefferies’ analysis, highlighting at least three points that you judge contentious. Jefferies used discounted cash flow method to value Flagstar and came up with higher valuation. This seems to be overvalues for following reasons. 1. WACC is not right method: When Debt to Value ratio is changing

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