Mergers and Acquisitions -2

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ASSIGNMENT- A

Attempt these five analytical questions

Q.1 Mention the Difference between – Leverage Buy out, Venture capital & growth fund?

Q.2 what do you mean by corporate control? Explain the how shares buy back work out?

Q.3 Write notes on the following:-

A) Split off.

B) Amalgamation.

C) Hostile Takeover Bid.

Q.4 Explain the Net Asset Value method of valuation of firm?

Q.5 Mention the types of merge & acquisition?

Q.6 what are the advantage of disinvestment in the Public Sector Units?

Assignment B

Q.7 Explain the Discounted Cash Flow method in details, with the help of suitable example?

Q.8 what do you mean by Leverage Buy out (LBO)? How Leverage Buy Out deals take place?

Q.9 what are the reason of Merger & Acquisition?

 

CASE STUDY

Tata Motors: Acquisition of Jaguar &

Land Rover

Ford Motors Company

Location: Dearborn, Michigan; Founded: 1903 by Henry Ford; Competitors: General Motors, Toyota; Brand names: Lincoln, Mercury, Volvo, Mazda, Jaguar and Land Rover, CEO: Alan Mulally.

1913 – Assembly Line: “low priced, mass-produced automobile with standard interchangeable parts.” Hiring of African Americans, Virtual manufacturing, focus on safety, Advantage through fuel efficiency.

Jaguar: The ups and downs:

1922 – Founded in Blackpool as Swallow Sidecar Company

1960 – Jaguar name first appeared in 1935

1975 – Nationalized in due to financial difficulties

1984 – Floated off as a separate co in the stock market

1990 – Taken over by Ford

A statement of ultra luxury, Holds Royal warrants, Rarely advertised Ford’s formula one entry since 1990s.

1948: Land Rover is designed by the Rover Car co

1976: One millionth Land Rover leaves the production line

1994: Rover Group is taken over by BMW

2000: Sold to Ford for £1.8 billion.

The case of Land Rover:

Known for superior off-road performance, Used by military for projects and expeditions, Safe but less reliable, Makeover in recent times

Key issues:

• Ford acquired Jaguar for $2.5 billion in 1989.

• Ford acquired Land Rover for $2.75 billion in 2000.

• But the US auto major put the two marquees on the market in 2007 after posting losses of $12.6 billion in 2006 – the heaviest in its 103-year history.

The Deal Process: – 12/06/2007- Announcement from Ford that it plans to sell Land Rover and Jaguar. August 2007 – Major bidders are identified

Likely buyers: Tata Motors, M&M, Ceribrus capital Management, TPG Capital, Apollo Management

• India?s Tata Motors and M&M arrive as top bidders ($ 2.05b & $ 1.9b)

• 03/01/2008 – Ford announces Tatas as the preferred bidders

• 26/03/2008 – Ford agreed to sell their Jaguar Land Rover operations to Tata Motors.

• 02/06/2008 – The acquisition is complete

TATA MOTORS – A SNAPSHOT

TATA GROUP is 150 year old, Previously Tata Engineering and Locomotive Company, Telco.

Tata Motors?s break-even point for capacity utilization is one of the best in the industry worldwide

Listed on the New York Stock Exchange in 2004.

Making Waves Internationally

NANO will mark the advent of India as a global centre for small-car production and represent a victory for those who advocate making cheap goods for potential customers at the ‘bottom of the pyramid’ in emerging markets.

International praise came from Standard & Poor’s, which in December 2006 expressed the view that the “policy to support its companies and the improved financial profile of its entities also enhances the overall financial flexibility of Tata Motors.”

Why is Ford selling?

• Reports said losses at Jaguar stood at USD 715 million in 2006. Jaguar has been a dog i.e. it has not been able to provide any profit for ford because of the high manufacturing costs provided in the United Kingdom.

• The strong boy Land Rover’s profit, on the other hand, was driven by the record sale of 2.26 lakh vehicles, an 18% YoY growth in 2007..

• Bringing down production costs and turning around the company successfully will be the challenge,” analysts said. It?s a test that Ford failed.

• Ford is combining both the brands since the products and manufacturing of vehicles for Land Rover and Jaguar is so intertwined.

Ratan Tata says?

• We aim to support their growth, while holding true to our principle of allowing the management and employees to bring their experience and expertise to bear on the growth of the business.”

• ‘We have enormous respect for the two brands and will endeavor to preserve and build on their

• Heritage and competitiveness, keeping their identities intact,’ he said in a statement.

Advantages to acquire JLR?

• Long term strategic commitment to automotive sector.

• Opportunity to participate in two fast growing auto segments.

• Increased business diversity across markets and products.

• Land rover provides a natural fit for TML?s suv segment.

• Jaguar offers a range of “performance/luxury” vehicles to broaden the brand portfolio.

• Benefits from component sourcing, design services and low cost engineering

Tata and the dream

NEED FOR GROWTH

• In the past few years, the Tata group has led the growing appetite among Indian companies to acquire businesses overseas in Europe, the United States, Australia and Africa – some even several times larger – in a bid to consolidate operations and emerge as the new age multinationals.

• Tata Motors is India’s largest automobile company, with revenues of $7.2 billion in 2006-07. With over 4 million Tata vehicles plying in India, it is the leader in commercial vehicles and the second largest in passenger vehicles.

COMPETITIVE ADVANTAGE

• Tata Motors is vulnerable to greater competition at home. Foreign vehicle makers including Daimler, Nissan Motor, Volvo and MAN AG have struck local alliances for a bigger presence.

• Tata Motors, which has a joint venture with Fiat for cars, engines and transmissions in India, is also facing heat from top car maker Maruti Suzuki India Ltd, Hyundai Motor, Renault and Volkswagen.

Analysts pick

• Analysts indicate that Tata Motors can comfortably finance the acquisition of Jaguar and Land Rover. The Indian automaker is sitting on a cash pile of over Rs 6,000 crore and generated free cash of over Rs 1,000 crore during FY07. It can easily use these reserves to raise more funds without endangering its finances. At the end of last financial year, Tata Motors? debt-to-equity ratio was a low 0.56, giving it ample head room to raise more funds.

• Over the next 3-4 years, Tata Motors plans to invest Rs 12,000 crore in setting up new units for a small car, trucks and SUVs and also to expand the capacity of its existing units.

• challenge for Tata Motors. These marquee brands have very high production costs and require phenomenally high engineering and research capabilities as they compete with likes of BMW and Audi. “Taking over the brand is easy, bringing down production costs and turning around the company successfully, will be the challenge,” analysts said. It?s a test that Ford failed.

WHAT IS TATA PAYING FOR????

FINANCING WAYS

• Low leverage of the auto biz provides funding flexibility

• Currently financed the purchase through a $3bn, 15month bridge loan

– It intends to refinance the loan through long-term funds

• valuable stakes in group companies

– owns $400m of Tata Steel at current prices

– owns stake in Tata Sons (Tata Group?s holding company) worth at least $600m

2. Tata Group has multiple levers

ü Tata Auto Comp (TACO) – TATA group has a a rich ecosystem of JVs with leading players in Auto ancillary space held through TACO.

ü TCS, Corus and Tata Technologies have varied competencies in the Auto space

ü We believe an improvement of 50-70bps in EBITDA margin possible in JLR over the next 2 years (current EBITDA margin)

– We estimate CY2007 EBITDA margin of JLR at around 6.5% – This could make the acquisition PAT accretive in CY2009/FY10E

TAMO + JLR: Leverage and Valuation ratios

Leverage increases but coverage ratios reasonable

• Headline Debt/Equity of TAMO would increase to 2.5x from 1x

• Excluding the vehicle finance biz, leverage would go to 1.2x

• EBITDA/Interest remains at 5.0

TAMO is trading inline/modest discount to global peers

• EV/Sales (1-yr forward) of 0.5x against 0.4x for global peers

• P/E (1-yr forward) of 6.5x against 8.5x for global peers

Q.10 a)Write your observation regarding the JLR deal? Mention its advantages & disadvantages of this deal?

b) why Ford Sell out these two iconic brands? Mention the reasons?

c) what are the consequences of this deal financing on TATA group and its market position?

ASSIGNMENT -C

MULTIPLE CHOICE QUESTIONS

1. ________is equal to the total market value of the firm’s common stock divided by (the replacement cost of the firm’s assets less liabilities).

A) Book value per share

B) Liquidation value per share

C) Market value per share

D) Tobin’s Q

E) None of the above.

2. High P/E ratios tend to indicate that a company will _______, ceteris paribus.

A) grow quickly

B) grow at the same speed as the average company

C) grow slowly

D) not grow

E) none of the above

3. ________ are analysts who use information concerning current and prospective profitability of a firms to assess the firm’s fair market value.

A) Credit analysts

B) Fundamental analysts

C) Systems analysts

D) Technical analysts

E) Specialists

4. _______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.

A) Book value per share

B) Liquidation value per share

C) Market value per share

D) Tobin’s Q

E) None of the above

5. The ______ is a common term for the market consensus value of the required return on a stock.

A) dividend payout ratio

B) intrinsic value

C) market capitalization rate

D) plowback rate

E) none of the above

6. . Net profit is equal to:

(a) Sales less cost of sales and operating expenses

(b) Gross profit less operating expenses

(c) Sales less operating expenses

(d) Both (a) & (b)

7. In the long run, a successful acquisition is one that:

A) enables the acquirer to make an all-equity purchase, thereby avoiding

additional financial leverage.

B) enables the acquirer to diversify its asset base.

C)increases the market price of the acquirer’s stock over what it would have been without the acquisition.

D) increases financial leverage.

8. A tender offer is

A) a goodwill gesture by a “white knight.”

B) a would-be acquirer’s friendly takeover attempt.

C) a would-be acquirer’s offer to buy stock directly from shareholders.

D) viewed as sexual harassment when it occurs in the workplace.

9. You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $2.50 in dividends and $28 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 15% return.

A) $23.91

B) $24.11

C) $26.52

D) $27.50

E) none of the above

10. The public sale of common stock in a subsidiary in which the parent usually retains majority control is called

A) a pure play.

B) a spin-off.

C) a partial sell-off.

D) an equity carve-out.

11. One means for a company to “go private” is

A) divestiture.

B) the pure play.

C) the leveraged buyout (LBO).

D) the prepackaged reorganization.

Q.12 Hindrance for going in the international business is known as

  1. Synergy
  2. Turn key point
  3. Trade barrier
  4. Minority interest

Q.13. ___________________ is the combination of at least two firms doing similar businesses at the same market level.

a) Diversified activity Merger

b) Horizontal Merger

c) Joint Venture

d) Vertical Merger.

Q.14. Which of the following is NOT recognized as a misconception about entrepreneurship?

a) Entrepreneurship is found only is small businesses.

b) Entrepreneurship is easy.

c) Successful entrepreneurship needs only a great idea.

d) Entrepreneurial ventures and small businesses are different.

Q.15. An entrepreneur’s primary motivation for starting a business is

  1. To make money
  2. To be independent
  3. To be famous
  4. To be powerful

Q.16. Entrepreneurs typically form

  1. Service businesses
  2. Manufacturing companies
  3. Constructive companies
  4. A variety of ventures

Q.17. Joint ventures have been used by entrepreneur:

  1. When the entrepreneur wants to purchase local knowledge
  2. When rapid entry in to the market is needed
  3. Both of the options given
  4. None of the above

Q.18. The _________ of a venture could be that the company has experience in related

business.

a. Strength

b. Weakness

c. Opportunity

d. Threat

Q.19. Franchising is :-

a). Purchase all part of company.

b) Allowing another party to use a product or services under the owner’s name.

c). Joining two or more companies.

d). A company acquiring another company against its will.

20. Many mergers begin through a series of negotiations between the two companies. If the two companies decide to seriously investigate the possibility of a merger, they will launch Phase II Due Diligence and execute a:

a. Post Merger Contract

b. Formal Joint Conference

c. Merger & Acquisition Agreement

d. Letter of Intent

21. Either party in a merger and acquisition may be entitled to indemnification because of a significant misrepresentation. Indemnification is usually not due until a certain threshold has been reached. This threshold amount is often called the:

a. Reciprocal Amount

b. Basket Amount

c. Striking Price

d. Closing Rate

22.On March 3, 1998, Miser Steel made a tender offer to acquire Reliance Steel. Miser’s tender offer is set to expire on March 23, 1998. On March 21, 1998, another company called Ohio Steel made a tender offer to acquire Reliance Steel. Based on consideration of Ohio Steel’s tender offer, the closing date for Miser Steel’s tender offer is:

a. March 21, 1998

b. March 23, 1998

c. March 25, 1998

d. March 31, 1998

23.Due diligence requires the collection of a lot of information. Which of the following information types would be least important for due diligence to work properly?

a. Employment Records of Target Company

b. Property Records of Competing Companies

c. Financial Records of Target Company

d. Property Records of Target Company

24.Due diligence will attempt to restate financial statements in relation to what will take place after the two companies merge. One area of particular concern as it relates to the Balance Sheet is:

a. Proper Valuation of Cash

b. Par Value Assigned to Stock

c. Selection of Depreciation Methods

d. Possible Understatement of Liabilities

25.Due diligence is particularly important in the case of a reverse merger since it is necessary to “clean the Shell Company.” One important aspect of cleaning the Shell Company is to:

a. Confirm ownership of the Shell Company

b. Identify cultural and social issues

c. Plan for long-term integration

d. Evaluate human resource capital

Q.26. he following are examples of changes in corporate control except:

(a)Merger & Acquisition

(b) Leverage Buy Out (LBOs)

(c)Proxy fights

(d)Spin-Off & carve-outs

Q.27 Leveraged buyouts (LBOs) almost always involve:

(a)AAA grade debt

(b)Issuance of new shares of stock to many investors.

(c)Junk grade debt

(d)……All of the above

Q.28. Which of the following tactics completely eliminates the possibility of a takeover via tender offer?

(a) Leverage Buy Out (LBOs)

(b)Exclusionary sekf-tender

(c) Targeted repurchase

(d) Super majority amendment.

Q.29. Big gainers from LBOs were:

(a) Junk bond holder

(b) Raiders

(c) Selling stockholders.

(d) Investment banking firm.

Q.30. Junk bonds are bonds with:

(a) AAA or Aaa ratings

(b). BBB or Baa ratings

(c). BB or Ba ratings.

(d). D rated bonds.

Q.31. In case of carve-outs:

(a). Shares of the new company are given to the shareholders of the parent company

(b). Shares of the new company are sold in a public offering

(c) . Shares of the new company are bought by borrowing or issuing junk bonds

(d). None of the above.

Q.32. A privatization is a:

(a) Sale of a government-owned company to private investor

(b). Sale of private companies to the government.

(c). Sale of a publicly traded company to private investors.

(d). None of the above.

Q.33. Which of the following statements regarding spin-offs and carve-outs is not true?

(a). Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company.

(b). Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company.

(c). Gains or losses from carve-outs are taxed at the corporate tax rate.

(d). none of the above.

Q.34. The following are important motives for privatization except:-

(a). Revenue for the government.

(b). Increased efficiency.

(c). Conglomerate merger.

(d). Privatization.

Q.35. “Effective” control of a firm requires approximately:

(A). 100% ownership.

(b). 51% ownership.

(c). 50% ownership.

(d). 20% ownership.

Q.36 Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:

A) .667

B) 1.0

C)1.125

D) 1.5.

Q.37 The restructuring of a corporation should be undertaken if

A).the restructuring can prevent an unwanted takeover.

B) the restructuring is expected to create value for shareholders.

C) the restructuring is expected to increase the firm’s revenue.

D) the interests of bondholders are not negatively affected.

Q.38 The “information effect” refers to the notion that

A).a corporation’s actions may convey information about its future prospects.

B).management is reluctant to provide financial information that is not required by law.

C).agents incur costs in trying to obtain information.

D).the financial manager should attempt to manage sensitive information about the firm.

Q.39 In the long run, a successful acquisition is one that:

A). Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.

B). Enables the acquirer to diversify its asset base.

C). Increases the market price of the acquirer’s stock over what it would have been without the acquisition.

D). Increases financial leverage.

Q.40Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders

A).have too little information to make an optimal decision.

B).have big egos and this impedes rational decision-making.

C). have difficulty in thinking strategically over the long-term.

D).Are overly influenced by the tax consequences of an acquisition.

 

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