Professional Documents
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ACQUISITION
Risk arbitrageurs What is the likelihood that a hostile takeover offer will ultimately succeed, and are
there other potential acquirers likely to enter the bidding?
Acquiring Does this target fit our business strategy? If so, what is it worth to us, and how can
management we make an offer that can be successful?
(Earnings
Multiple) 8
Step One: Performance improvements can be
modeled as:
Forecasting • Higher operating margins through
Earnings economies of scale in purchasing, or
increased market power;
• Reductions in expenses as a result of
consolidating research and development
staffs, sales forces, and/or administration; or
• Lower average tax rates from taking
advantage of operating tax loss
carryforwards.
9
Step Two: • If the target firm is listed, it may
Determining be tempting to use the
preacquisition price-earnings
Price- multiple to value postmerger
Earnings earnings.
Multiple • Ensure that the multiple is
calculated prior to any acquisition
announcement, since the price
will increase in anticipation of the
1
premium to be paid to target 0
stockholders.
how price-earnings multiples are used
to value a target
firm before an acquisition
LIMITATIONS OF PRICE-
EARNINGS VALUATION
1. PE multiples assume that merger performance
improvements come either from an immediate increase in
earnings or from an increase in earnings growth (and hence
an increase in the postmerger PE ratio).
2. PE models do not easily incorporate any spillover benefits
from an acquisition for the acquirer, since they focus on
valuing the earnings of the target.
Discounted Cash Flows or Abnormal
Earnings
1
3
Discounted • Step One: Forecast Abnormal Earnings/Free
Cash Flows.
Abnormal
benefits of the acquisition to
materialize?
Acquisition
Financing
Effect of Form of Financing on Acquiring Stockholders
• CAPITAL STRUCTURE EFFECTS OF FORM OF FINANCING
• INFORMATION PROBLEMS AND THE FORM OF FINANCING
• FORM OF FINANCING AND POSTACQUISITION
ACCOUNTING 16
ACQUISITION
OUTCOME
ACQUISITION 18
OUTCOME
1. Other Potential Acquirers
2. Target Management Entrenchment
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