Chapter 30

Mergers and Acquisitions;

Diventures

Reporters:
JESSICA BELGA-
RABO
JULY ANN
REAMBON
Nature and types of Mergers and
Acquisition

MERGER ACQUISITION
>A transaction in which two
firms combine to form a single >the purchase
firm.
>occur when two or more of one firm by
companies are involved in the
exchange of securities and
another
only one company survive.
CONSOLIDATIO
N
>another type of
merger in which an
entirely new firm is
created.

X + Y = Z company
Types of Merger and Acquisition
• Combines two companies in the
same industry.
Horizontal • A market extension horizontal
Merger merger combines two firms that sell
the same a
• Combines product in different
firm with a supplier or
market areas.
distributor.
• Reasons: (a) avoidance or reduction
Vertical of fixed cost, (b) elimination of costs
of searching for prices, contracting,
Merger payment collection, advertising, and
coordination; and (c) better planning
of inventory.
• Combines two companies that have no
related products or markets.
Conglomer • Merger combines two companies that
operate in businesses so different that if
ate an event has a negative effect on one
Merger business, the other business and the
overall cash flows of the firm will be
minimally affected.
Product Extension Merger
 A combination of firms that sell different, but
somewhat related products.
 For example, a commercial bank and insurance
company were combined to form “Citigroup”.
 This mergers are something of a hybrid
classification , crossing a horizontal merger and
conglomerate merger.
 The firms involved in a product extension merger
produce different products and sell them with
greater success to the already common set of
customers that the two separate companies share.
 Motives for Business
Combination
Synergy
>main motivation of merger and acquisition.
Financial
>the increased effectiveness that results when two or
Motives
more people or business work together.
1.
1. Maintenance
Maintenance of
rate
rate of
of returns
returns
of the
the firm’s
firm’s
Non-Financial
2.
2. Revenue
3.
Revenue enhancement
enhancement Motives
3. Cost
Cost reduction
reduction
>
> Economies
Economies ofof scale,
scale,
economies
economies of of scope,
scope,
X-
X- efficiencies.
efficiencies. 1. Manager’s personal
4.Tax
4.Tax considerations
considerations incentives
5.
5. Lowering
Lowering the
the cost
cost of
of 2. Possible synergistic
capital
capital
6.
effect
6. Exhaust
Exhaust unused
unused debt
debt
potential
potential
7.Reduction
7.Reduction in
in bankruptcy
bankruptcy
 Valuing a Merger
The net present value (NPV) or discounted cash flow
(DCF) method is the most practical and reliable tool
used to evaluate whether a merger will be a profitable
one.
The NVP method allows bidder and target firm
managers to predict pro forma cash flows of the
merged firm. These forecasted cash flows are then
discounted to a present value based on the merged
firm’s weighted average cost of capital(WACC) to
determine the merged firm’s present value.
Finally, the present value of the merged firm is
compared with the asking price of the target firm to
determine whether the merger is profitable.
Methods Of Payment In Merger Transaction
Cash Purchase
Illustrative Case. Determination of Purchase Price
Assume the Palmera Company is analyzing the
acquisition of the Santan Corporation for P1 million. The
Santan Corp. has expected cash flow of P100,000 per year
for the next 5 years and P150,000 per year for the 6 th
through 20th year. Furthermore, the synergistic benefits of
the merger will add P10,000 per year to cash flow. Finally,
the Santan Corp. has a P50,000 tax loss carry-forward that
can be used immediately by the Palmera Corporation.
Assuming a 40% tax rate, the P50,000 loss carry-forward
will shield P20,000 of profit from taxes immediately. The
Palmera Corp. has a 10 % cost of capital, and this is
assumed to remain stable with the merger.
Analysis:
Cash Outflows:
Purchase price P1,000,000
Less: tax (P50,000 x 40%) 20,000
Net cash outflow P 980,000 The acquisition
appears to represent
Cash Inflows:
Year 1-5 P100,000 Cash inflow a desirable
10,000 Synergistic benefit alternative for the
110,000 Total cash inflow expenditure of cash,
PV of P110,000 x 3.791* P417,010 with a positive net
Year 6-20 P150,000 Cash inflow
10,000 Synergistic benefit present value of
P160,000 Total cash inflow P192,690. In the
PV of P160,000 x 4.723* 755,680 market environment
Total PV of inflows P1,172,690 of the last two
*PV factor for 5 yrs. 3.791 decades, some firms
PV factor for 20 yrs. 8.514 could be purchased
at a value below the
**Isolate the 6 through the 20 yr. 4.723 ( 8.514 replacement
th th
- 3.791) costs
 The NPV of the investment is:
Total PV of inflows P1,172,690 and their assets and
Net cash outflow 980,000 that represented a
NPV P192,690 potentially desirable
capital investment
Stock-for-Stock Exchange
Illustrative Case
Assume that Blue Whale Corp. is considering the acquisition of Green Archer
Corp. Significant financial information on the firms before the merger is as
follows:
Green Archer
Blue Whale
Corp.
Corp.
Total earnings P200,000
P500,000
No. of shares of stock outstanding 50,000
200,000
Earnings per share P4.00
P2.50
Price-earning ratio (P/E) 7.5x
12x
Market price per share P30.00
P30.00

If P50,000 new shares of Blue Whale are traded in exchange for all the old
shares of Green Archer, Blue Whale will then have 250,000 shares outstanding.
At the same time, its claim to earnings will go to P700,000 when the two firms
are combined. Postmerger earnings per share will be P2.80 for the Blue Whale,
as indicated below: