Theories Applied

Cash Versus Stock Trade-offs

In Cash Transaction, acquiring shareholders take on the entire risk that the expected synergy value embedded in
the acquisition premium will not materialize. In the stock transactions, that risk is shared with selling the selling
shareholders. In stock transaction the synergy risk is shared in proportion to the percentage of the combined
company the acquiring and selling shareholders each will own.

Fixed Shares or Fixed Value

In fixed shares the number of shares to be offered is certain but the value of the deal may fluctuate between the
announcement of the offer and the closing date. The interests of the two sets of shareholders in the deal’s
shareholder value added do not change, even though the actual shareholder value added may turn out to be
different than expected.

In Fixed Value deal the acquirer has to issue a fixed value of shares. In this type of deal the number of shares to
be issued is not fixed until the closing date and depends on the prevailing price. As a result of which the
proportional ownership of the combined company is left in doubt until closing.

If the acquirer believes that the market is undervaluing its shares, then it should not issue new shares to finance a
transaction because to do so would penalise the current shareholders. The decision to use stock or cash also
sends signal about the acquirer’s estimation of the risks failing to achieve expected synergies from the deal.

Pre-Closing Market Risk Post-Closing Market Risk

All Cash Deal
Acquirer All All
Seller None None
Fixed Share
Deal
Actual Percentage of
Acquirer Expected percentage of Ownership Ownership
Actual Percentage of
Seller Expected percentage of Ownership Ownership
Fixed Value
Deal
Actual Percentage of
Acquirer All Ownership
Actual Percentage of
Seller None Ownership

Shareholder Value at Risk (SVAR)

A useful tool for assessing the relative magnitude of synergy risk for the acquirer is called shareholder value at
risk (SVAR). The index can be calculated as the premium percentage multiplied by the market value of the
seller relative to the market value of the buyer.
Tax Consequences of Acquisition
The way an acquisition is paid for affects the tax bills for the shareholders involved. A cash purchase is the most
tax-favourable for the acquirer to make an acquisition because it offers the opportunity to revalue assets and
hence increase the depreciation expense. Shareholder of the acquired company will face capital gains tax.

Case Analysis
Rational for Cox to be on an Acquisition Spree
12.00

10.00

8.00
Mcap/BV

6.00

4.00

2.00

-
Cox Comcast Media One Time Warner
Major Cable Operator

In cable operator industry we see a general trend of higher Mcap/BV with increase in the total assets.
Acquisitions helped in leveraging the Economies of Scale and Scope.

Current Subscriber Penetration Target Penetration

Analog TV 67% 67%
Digital TV 2 30
High Speed Internet 2 25
Digital Telephony 1 25

Cox expects steep rise in the increase in the Pentration levels of Digital TV, High Speed Internet and Digital
Telephony over a period of 8 years. In order to achieve these levels of growth Cox will have to invest in
technology and acquire existing companies to grow at a faster pace.

Acquisition of companies which could be combined with existing systems could yield substantial market
presence and could also lead to fixed cost savings.

Valuation of Gannet Co.

Average price paid per customer has been $3,483 whereas Cox was contemplating to pay around $5000 per
customer in order to fulfil their long term Strategy.
 6000
Price Paid per Cable Customer
5000
4000
3000
2000
1000
0
0 2 4 6 8 10 12 14 16 18 20
Total Value of Acquisition

Price Per Customer vs Total Acquisition Value

Linear (Price Per Customer vs Total Acquisition Value)

If we regress the price paid per cable customer against Total value of Acquisition we will get the following
equation

Predicted Price paid per Cable Customer = 3436.68 + (Value of Acquisition)*5.5

So as per the above equation for an acquisition value of $2.7 billion the predicted price paid per cable customer
should be $3451.5. However, Cox Communication is willing to pay $5000 per cable customer owing to the
increased competition in the market.

Analysing Cox’s Financing Alternatives

Issuing Common Shares

 CEI does not want its ownership to be further diluted
 By Issuing Common Shares worth $2,700mn CEI economic equity will be diluted from 67.3% to 59%.
 CEI still remains as the majority shareholder in CCI

Issuing Debt
 Reluctance to increase the leverage of the firm
 Wanted to maintain their rating as investment grade
 Wanted Debt/EBITDA to remain below 5
 By Issuance of Debt the leverage ratio(Debt/EBITDA) is expected to be 5.2 for year 1999 and 2000.

Hybrid Security Issuance

$50 $50
CCI Trust PRIDES
Investor
Debt: 7%
Preferred
Coupon
Equity: 7%
payment, Cox
shares
 If the company is financed through a combination of Debt, Equity($680 million) and
PRIDES($720million) then leverage ratio is maintained below 5 and CEI economic equity could be
maintained at 65.1%
Asset Sales
 An alternative to monetize or swap some of the firms non-strategic equity investments.
 It was important to carry out monetization or obtaining equivalent cash in a tax-efficient manner.