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Steps to a Successful Merger Mergers need careful planning to achieve financial goals, reduce problems and for profit-making. Drop in productivity is expected to be around 50% as people from different workplaces have differences of opinion. Even a successful merger can take three months to three years for the completion of recovery process in an organization. For employees, possibility of changes and uncertainty at workplace can create stress. This affects judgments, perceptions, and interpersonal relationships. Often reduced communication and increased centralisation as part of re-structuring in companies creates space for rumours and insecurity in employees. During these times, employees do not have much access to senior level managers. Active intervention is necessary to maintain the level of productivity and to assure employees. Some suggestions for a smoother restructuring and transition are: Circulate a consistent message in the combining entities from top down. Maintain consistent accountability and compensation throughout the company for similar positions. Find out new ways of structuring the company to bridge corporate culture differences. Establish gauge able objectives, especially in areas, which will for a common goal. Revamp the compensation plan to recognize the additional work required by transition. Plan different ways for people to get to know each other. be working together
MF0011 Mergers and Acquisitions 1. Present value analysis 2. Capital assets pricing.
Present value analysis The present value analysis is mostly similar to valuation on the basis of steady-state earnings and/or dividends for listed companies. The earnings or the target firm are projected and discounted at the acquirers cost of capital to obtain a theoretical market price of the shares of the target company. This is then compared with the actual market price to determine the net present value of investment in the target company. The following example gives you an idea of how to calculate theoretical price. Given data: i = k = Acquirer company's cost of capital 10% do = po = target company's payout ratio ` 1 per share. Target Companys market price per share ` 50 Target Company's merger @ 100% basis g = Target company's earnings and dividend expected to grow at 8% p.a. Using above data and the formula for the constant annual growth rate of (1+ g) dividend d0 i( g) as discussed earlier in dividend approach target company's theoretical price is as under: P (1 + g) 1(1.08) 1.08 p+0 (k g) = .10 .08 = .02 = 54 The theoretical price exceeds the market price, i.e., 54 50 = 4. Here, NPV is 4 per share. The result requires reconsideration. This approach does not consider the risk posture of acquisition, i.e., the portfolio effect. The capital assets pricing model considers this aspect as discussed below. Capital assets pricing this approach provide a superior theoretical framework as it also factors the risk. Present value analysis The present value analysis is mostly similar to valuation on the basis of steady-state earnings and/or dividends for listed companies. The earnings or the target firm are 2|Page
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Preservation: There is a great need for autonomy so that the capabilities of the acquired firm are nurtured by the acquirer with judicious and limited intervention such as financial control while allowing. the acquired firm to develop and exploit its capabilities to the full. Holding company: This refers to involving no interaction between portfolio companies, with passive investment by parent more in the nature of a financial portfolio motivated by risk reduction and reduction in capital costs Symbiosis: This refers to two firms initially co-existing but gradual y becoming independent. Symbiosis-based acquisitions need simultaneous protection and permeability of the boundary between the two firms. Absorption: This means full consolidation of the operations, organisation and culture of both the firms over time. Stage 5: Post-acquisition audit and organisational learning Companies trying to grow through acquisitions need to develop acquisition making as a core competence and excel in it. Companies possessing the right growth strategy through acquisition and the necessary organizational capabilities to manage their acquisitions efficiently and effectively can sustain their competitive advantage far longer and create sustained value for their shareholders. For acquisition-making to become a firms core competence, possessing robust organisational learning capabilities is a 7|Page
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MF0011 Mergers and Acquisitions Q5. What are the important forces contributing to mergers and acquisitions?
Ans. 1. Improved ASK financial performance. We are seeing more centers that are doing very well, with high revenues, profits and earnings before interest, taxes, depreciation and amortization (EBITDA) margins. It is not unusual now to see physician-managed centers that have EBITDA margins of 40 percent or more. Many centers have added ancillary services to improve their financial performance and have attended seminars, Such as those sponsored by the Ambulatory Surgery Center Association and ASK Communications, and have implemented the recommendations discussed. However, many have also seen their profit growth slowing and are seeking a sale to take some money off the table; at the same time, they attract a professional management company that will keep their distributions growing. 2. Diversification opportunity. The nation's economic difficulties and the impact this has had on investment assets such as stocks and real estate have increased an awareness of the importance of asset allocation. Many surgeons are overweight in the investments they have in their ASK business and real estate and realize that selling a portion of their interest will help them diversify their assets. This becomes accentuated for senior physicians who are planning their retirement and want to make sure their nest egg is adequately diversified. It is far better to sell an interest well before retiring to avoid significant discounting of a retiring partner's value to the center. 3. Increased deal flow. With more successful centers and more than 30 companies competing to acquire ASK interests, many centers are being bombarded with opportunities to sell a minority or majority share to a corporate partner. There are many good companies willing to buy minority interests and this makes a sale more attractive to many physicians as it allows them to retain a majority interest. For groups that want to take more money off the table, there is strong competition to buy majority interests as well. While it may be increasingly difficult for physicians to make a short list of the best 3-4 companies for them to solicit because of the growing number of companies, firms that specialize in ASK mergers and acquisition consulting can assist them to partner with the best companies and get the highest price. 9|Page
Q6. What is leveraged buyout? Explain the different modes of LOB Financing.
Leveraged Buyouts (LOB) In the realm of ever-increasing globalization, mergers and acquisitions have assumed significance both within the country and across borders. Such acquisitions need huge amounts of finance. In search for an ideal mechanism to finance an acquisition, the concept of Leveraged Buyout (LOB) has emerged. LOB is a financing technique of purchasing a private company with the help of borrowed or debt capital. Leveraged buyouts are cash transactions where cash is borrowed by the acquiring firm and the 10 | P a g e
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