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Pertemuan 9
Rabu, 5 Desember 2012
MERGER AND ACQUISITION
Three Basic Legal Procedures
• Merger or consolidation
– Merger  Acquiring firms retains its name and its
identity, and it acquires all the asset and liabilities
of the acquired firm.
– Consolidation  entirely new firm is created
• Acquisition of stock
– Purchase the firm’s voting stock with an exchange
of cash, shares of stock or other securities
• Acquisition of assets
– Buying most or all of acquired company’s assets
Gains from Acquisition
• Synergy
– VAB > VA + VB  ΔV = VAB – (VA + VB )
• Revenue enhancement
• Cost reductions
• Lower taxes
• Reducing in capital needs
Financial Side Effects of Acquisition
• Assume no synergy
Cost of Acquisition
• ΔV = VAB – (VA + VB )
• Total value of firm B to firm A, V*B , is
– V*B = ΔV + VB
• NPV of the merger is therefore
– NPV = V*B – Cost to firm A of the acquisition
• Merger premium
– Kelebihan pembayaran diatas market value
Illustration
• Suppose firm A estimate that firm B will give
incremental value to it by 100.
• Firm B will agree if the price offered is 150,
payable in cash or stock
Illustration
• NPV = V*B – Cost to firm A of the acquisition
• NPV = (ΔV + VB)– Cost to firm A of the acquisition
• (ΔV + VB) = 100 + 100 = 200
• Case 1: Cash Acquisition
• NPV = (ΔV + VB)– Cost to firm A of the acquisition
• NPV = 200 – 150 = 50 (profitable)
• AB still have 25 shares outstanding, value of firm A after
the merger
– VAB = VA + (V*B - cost)
– VAB = 500 +200 – 150 = $550
– Price per share after merger = $550/25 = $22
Illustration
• Case 2 Stock Acquisition  Firm B come in as
new shareholders in the merged firm
• VAB = VA + VB + ΔV = $500 + $100 + $100 = $700
• Firm A should issue additional shares:
– $150/20 = 7.5 additional shares
– After merge, outstanding shares 25 + 7.5 = 32.5 
price per share = $700/32.5 = $21.54
– Firm B received 7,5 shares equivalent with
• 7,5 x $21.54 = $161.55
• NPV = V*B – Cost to firm A of the acquisition =
– $200 - $161.55 = $38.45
Cash or Stock?
• If acquisition results a gain (positive NPV)
– Cash is better than stock
• If acquisition results a loss (negative NPV)
– Stock is better than cash because the loss is
shared between the two firms
• Control  acquisition by paying cash does not
affect the control of the acquiring firm

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Merger and Acquisition

  • 1. Pertemuan 9 Rabu, 5 Desember 2012
  • 3. Three Basic Legal Procedures • Merger or consolidation – Merger  Acquiring firms retains its name and its identity, and it acquires all the asset and liabilities of the acquired firm. – Consolidation  entirely new firm is created • Acquisition of stock – Purchase the firm’s voting stock with an exchange of cash, shares of stock or other securities • Acquisition of assets – Buying most or all of acquired company’s assets
  • 4. Gains from Acquisition • Synergy – VAB > VA + VB  ΔV = VAB – (VA + VB ) • Revenue enhancement • Cost reductions • Lower taxes • Reducing in capital needs
  • 5. Financial Side Effects of Acquisition • Assume no synergy
  • 6. Cost of Acquisition • ΔV = VAB – (VA + VB ) • Total value of firm B to firm A, V*B , is – V*B = ΔV + VB • NPV of the merger is therefore – NPV = V*B – Cost to firm A of the acquisition • Merger premium – Kelebihan pembayaran diatas market value
  • 7. Illustration • Suppose firm A estimate that firm B will give incremental value to it by 100. • Firm B will agree if the price offered is 150, payable in cash or stock
  • 8. Illustration • NPV = V*B – Cost to firm A of the acquisition • NPV = (ΔV + VB)– Cost to firm A of the acquisition • (ΔV + VB) = 100 + 100 = 200 • Case 1: Cash Acquisition • NPV = (ΔV + VB)– Cost to firm A of the acquisition • NPV = 200 – 150 = 50 (profitable) • AB still have 25 shares outstanding, value of firm A after the merger – VAB = VA + (V*B - cost) – VAB = 500 +200 – 150 = $550 – Price per share after merger = $550/25 = $22
  • 9. Illustration • Case 2 Stock Acquisition  Firm B come in as new shareholders in the merged firm • VAB = VA + VB + ΔV = $500 + $100 + $100 = $700 • Firm A should issue additional shares: – $150/20 = 7.5 additional shares – After merge, outstanding shares 25 + 7.5 = 32.5  price per share = $700/32.5 = $21.54 – Firm B received 7,5 shares equivalent with • 7,5 x $21.54 = $161.55 • NPV = V*B – Cost to firm A of the acquisition = – $200 - $161.55 = $38.45
  • 10. Cash or Stock? • If acquisition results a gain (positive NPV) – Cash is better than stock • If acquisition results a loss (negative NPV) – Stock is better than cash because the loss is shared between the two firms • Control  acquisition by paying cash does not affect the control of the acquiring firm