CORPORATE RESTRUCTURING:

MERGERS, LBOs, AND DIVESTITURES

Brigham-Gapenski Mini Case
Tara Raissa (29014003)
Indriani Rustomo (29014009)
Outline
Introduction
Case
M&A Decision
M&A in Indonesia: XL & Axis
Introduction
The Compumax Company, a regional computer retailer. Due to rich
in cash, they consider acquisition as one of the possible uses for the
excess funds. A company that may be acquired is Pacific Computer
Products Inc., a small mail order hardware and software company
that sells nationwide. Pacifics estimated cash flow (in million dollars)

1996 1997 1998 1999

Net Sales $10.0 $20.0 $25.0 $30.0
Cost of goods sold 6.0 12.0 15.0 18.0
Selling/administrative expenses 1.0 1.5 2.0 2.0
Depreciation 2.0 4.0 5.0 6.0
Interest expense 0.5 1.0 1.2 1.5
Cash flow plow-back 1.0 2.5 3.0 4.0
 Interest expense
Interest on Pacifics existing debt
Interest on new debt that CompuMax would issue to help finance
the acquisition
Interest on new debt expected to be issued over time to help
finance expansion within the Pacific division
Other data
Debt ratio 20.0% Tax rate on 40%
consolidated firm
Tax rate 30% Risk-free rate 10.0%
Beta coefficient 1.5 Market Risk 5.0%
Premium
Debt ratio after 50% Growth of cash flow 7%
acquisition stream after 1999
The Case
Among tax considerations, diversification, control, purchase of assets
at below replacement cost, breakup value, and synergy, which of the
reasons are economically justifiable? And which are not?
Synergy and break-up value are economy justifiable for mergers

Synergy.
Because with merger & acquisition, Compumax company can increase
their power in the market. And, they can also increase the value from:
Operating economies
Financial economies
Differential management efficiency
Taxes

Break-up value.
Assets of Pacific Computer Products Inc. would be more valuable if the
company broken up and sold to other companies.
 Below are questionable reasons for mergers
Diversification

Purchase of assets at below replacement cost

Acquire other firms to increase size, thus making it more difficult
to be acquired
Synergy and control might be fit as the reasons for the merger
of Compumax & Pacific Computer Products Inc.
Pacifics Operating Cash Flow
Pacifics operating cash flow statements for 1996 through
1999
1996 1997 1998 1999
Net sales $ 10.00 $ 20.00 $ 25.00 $ 30.00
Cost of goods sold 6.00 12.00 15.00 18.00
Selling/administrative
expense 1.00 1.50 2.00 2.00
Depreciation 2.00 4.00 5.00 6.00
Interest expense 0.50 1.00 1.20 1.50
EBT $ 0.50 $ 1.50 $ 1.80 $ 2.50
Taxes ( 40% ) 0.20 0.60 0.72 1.00
Net Income $ 0.30 $ 0.90 $ 1.08 $ 1.50
Plus Depreciation 2.00 4.00 5.00 6.00
Cash Flow $ 2.30 $ 4.90 $ 6.08 $ 7.50
Les Retentions 1.00 2.50 3.00 4.00
Cash Flow $ 1.30 $ 2.40 $ 3.08 $ 3.50
Interest Expense & Discount rate
Interest expense deducted in merger cash flow statements
because estimated cash flows are residuals that belong to the
shareholders of the acquiring firm. Including fixed interest
charges increases the volatility.
Because the cash flows are equity flows, they should be
discounted using a cost of equity rather than overall cost of
capital.
 Cost of capital
(Target) = + Target
(Target) = 10% + (10% 5%) x 1.5 = 17.5%
Unlevered calculation
1.5
= = = 1.32
1 + (1 )(/) 1 + (1 0.3)(0.2)
Levered after merger
(new 50% debt ratio) = 1 + (1 ) /
= 1.32 1 + (1 0.4)(0.5) = 1.32 1.3 = 1.716
Cost of equity of target firm after the merger
= + = 10% + 5% 1.716 = 18.58%
Terminal Value
Terminal value
FCF (1 + ) 3.5(1 + 0.07)
TV = = = $32.34M
18.58% 7%
The value of Pacific
CF1 CF2 CF3
Net CF to Compumax = 1
+ 2
+
(1 + ) (1 + ) (1 + )3
TV
+
(1 + )4
1.3 2.4 3.08 35.84
= 1
+ 2
+ 3
+ 4
= $21.41M
(1.1858) (1.1858) (1.1858) (1.1858)
If another firm were evaluating Pacific as an acquisition
candidate, they might not obtain the same value, since the
discount rate and forecast they use might be different.
Bid Price
If Pacific currently has 10 million shares outstanding, with
last price $1.00 per share. Then, the market value of Pacific is
V = shares outstanding price = 10,000,000 $1
= $10,000,000
From our last calculation, the value of Pacific is $21.41M,
which is greater than the market value of Pacific.
Compumax can offer bid to Pacific at minimum price $1 per
share, which is the same as market price. Compumax can also
offer higher bid than the market price, with maximum price
$2.141 per share.
Mergers
If mergers create value, the value would be shared to the
parties involved. The stockholders of target firm would gain
value from the difference between market value and the
merger value. And acquiring firm would gain value from the
difference between merger value and firm valuation.
Some merger-related activities undertaken by investment
bankers
Arranging mergers
Developing defensive tactics

Establishing a fair value

Financing mergers
Raise financing for companies
XL Axiata Acquisition on Axis Telekom
PT XL Axiata Tbk. is one of the major cellular providers in
Indonesia. PT XL Axiata Tbk. is 66.5% owned by Axiata
Group Berhad through Axiata Investments (Indonesia) Sdn
Bhd and public 33.5%, and is part of Axiata
PT Axis Telekom Indonesia, owned by Saudi Telecom
Company.
The acquisition done by entering into a conditional sale and
purchase agreement (CSPA) with Saudi Telecom Company
(STC) and Teleglobal Investments B.V. (Teleglobal), a
subsidiary of STC.
The acquisition announced on September 26 2013 and
completed on March 19 2014.
Conditional Sale And Purchase
Agreement
Teleglobal will sell (or procure the sale of) a 95% equity stake
in AXIS to XL
AXIS is valued at 100% enterprise value of USD 865 million,
on a cash free and debt free basis.
The purchase consideration will be utilized towards payment
of a nominal value for AXIS equity and redemption of AXIS'
indebtedness.
The completion of the transaction is subject to
Allapplicable regulatory approvals
XL shareholders approval at an Extraordinary General Meeting of
Shareholders
Spectrum retention
Key Rationale
Over 65 million customers will immediately benefit from the superior
quality of service and wider coverage
Consolidates the industry further and paves the way for more prudent,
growth focused expansion with a more efficient capex profile
Supports the governments national broadband objective
Addresses XLs current challenges - Provides additional spectrum capacity
to XL, subject to regulatory approvals, leading to:
Significantly enhanced quality of service and network experience on both
2G and 3G
Enhanced asset utilization, particularly on XL's towers and network
equipment, with tangible reduction in capex and opex spends
Further reinforces XLs leadership position, with sizeable business
operations and scale
Larger subscriber base and on-net community
Stronger and more effective data focus and traction amongst the youth
segment
Complementary businesses with multiple areas of revenue and
cost synergies
XL Stock Price during Acquisition