The Firm and The Financial ManagerCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
2
1
1
1
1
1
31-*
Proxy Fights, Takeovers, and the Market for Corporate Control
Mergers and the Economy
Sheet1
Sheet2
Industry
Economies of Scale
$
$
$
Over integration can cause the opposite effect.
Pre-integration (less efficient)
Combining Complementary Resources
Merging may results in each firm filling in the “missing pieces” of their firm with pieces from the other firm.
Firm A
Firm B
Mergers as a Use for Surplus Funds
*
Bank of America Family Tree
Note: Ironically, MBNA was once owned by a previous version of Bank of America, which sold it in an IPO.
31-*
Diversification
*
Acquiring Firm has high P/E ratio
Selling firm has low P/E ratio (due to low number of shares)
After merger, acquiring firm has short term EPS rise
*
EPS
$ 2.00
$ 2.00
$ 2.67
$ 0.05
$ 0.10
$ 0.067
Sheet3
31-*
Now
Time
.10
.067
.05
Is there an overall economic gain to the merger?
????
*
Estimating Merger Gains
Example – Two firms merge creating $25 million in synergies. If A buys B for $65 million, the cost is $15 million.
31-*
Estimating Merger Gains
Example – The NPV to A will be the difference between the gain and the cost.
31-*
Accounting for a Merger
Accounting for the merger of A Corp and B Corp assuming that A Corp pays $18 million for B Corp.
3.6
Inflation
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1900
0.61
Inflation
0.61
1.22
1.2
1.79
1.75
0
0.57
3.29
1.11
-1.64
1.67
2.19
1.07
1.99
1.04
1.93
11.6
18.53
20.5
14.79
2.27
-10.65
-2.56
2.63
-0.23
3.85
-1.49
-2.08
-0.97
0.2
-6.03
-9.52
-10.3
0.51
2.03
2.99
1.21
3.1
-2.78
-0.48
0.96
9.72
9.29
3.16
2.11
2.25
18.16
9.01
2.71
-1.8
5.79
5.87
0.88
0.62
-0.5
0.37
2.86
3.02
1.76
1.5
1.48
0.67
1.22
1.65
1.19
1.92
3.35
3.04
4.72
6.11
5.49
3.36
3.41
8.8
12.2
7.01
4.81
6.77
9.03
13.31
12.4
8.94
3.87
3.8
3.95
3.77
1.13
4.41
4.42
4.65
6.11
3.06
2.9
2.75
2.67
2.54
3.32
1.7
1.61
2.68
3.39
1.55
2.38
1.9
1901
1.22
1902
1.2
1903
1.79
1904
1.75
1905
0
1906
0.57
1907
3.29
1908
1.11
1909
-1.64
1910
1.67
1911
2.19
1912
1.07
1913
1.99
1914
1.04
1915
1.93
1916
11.6
1917
18.53
1918
20.5
1919
14.79
1920
2.27
1921
-10.65
1922
-2.56
1923
2.63
1924
-0.23
1925
3.85
1926
-1.49
1927
-2.08
1928
-0.97
1929
0.2
1930
-6.03
1931
-9.52
1932
-10.3
1933
0.51
1934
2.03
1935
2.99
1936
1.21
1937
3.1
1938
-2.78
1939
-0.48
1940
0.96
1941
9.72
1942
9.29
1943
3.16
1944
2.11
1945
2.25
1946
18.16
1947
9.01
1948
2.71
1949
-1.8
1950
5.79
1951
5.87
1952
0.88
1953
0.62
1954
-0.5
1955
0.37
1956
2.86
1957
3.02
1958
1.76
1959
1.5
1960
1.48
1961
0.67
1962
1.22
1963
1.65
1964
1.19
1965
1.92
1966
3.35
1967
3.04
1968
4.72
1969
6.11
1970
5.49
1971
3.36
1972
3.41
1973
8.8
1974
12.2
1975
7.01
1976
4.81
1977
6.77
1978
9.03
1979
13.31
1980
12.4
1981
8.94
1982
3.87
1983
3.8
1984
3.95
1985
3.77
1986
1.13
1987
4.41
1988
4.42
1989
4.65
1990
6.11
1991
3.06
1992
2.9
1993
2.75
1994
2.67
1995
2.54
1996
3.32
1997
1.7
1998
1.61
1999
2.68
2000
3.39
2001
1.55
2002
2.38
2003
1.9
10,000
8,967
8,122
8,511
8,557
5,666
2,502
- 0
6
Sales
523
12,887
32,610
48,901
35,834
19,717
7
(2,600)
(1,080)
3,120
8,177
12,314
8,829
4,529
6
(12,600)
(1,630)
2,381
6,205
10,685
10,136
6,110
3,444
9
Table 6.4
Year(s)
3-Year
5-Year
7-Year
10-Year
15-Year
20-Year
1
33.33
20
14.29
10
5
3.75
2
44.45
32
24.49
18
9.5
7.22
3
14.81
19.2
17.49
14.4
8.55
6.68
4
7.41
11.52
12.49
11.52
7.7
6.18
5
11.52
8.93
9.22
6.93
5.71
6
5.76
8.92
7.37
6.23
5.28
7
8.93
6.55
5.9
4.89
8
4.45
6.55
5.9
4.52
9
6.56
5.9
4.46
10
6.55
5.9
4.46
11
3.29
5.9
4.46
12
5.9
4.46
13
5.91
4.46
14
5.9
4.46
15
5.91
4.46
16
2.99
4.46
17-20
4.46
21
2.23
(2,600)
(934)
3,686
8,295
12,163
8,678
4,176
(682)
6
(12,600)
(1,484)
2,947
6,323
10,534
9,985
5,757
3,269
9
(12,600)
(1,237)
2,047
3,659
5,080
4,013
1,928
912
7.1
Year 0
Years 1-10
TABLE 10.2
TABLE 10.2 To undertake a sensitivity analysis of the electric scooter project, we set each variable in turn
to its most pessimistic or optimistic value and recalculate the NPV of the project
Operating cash flow (yen bn) =
Range
NPV (billions of yen)
4
3
2
2.8
3.5
4.1
2.2
6.2
10.2
TABLE 10.3
TABLE 10.3 How the NPV of the electric scooter project would be affected
by higher oil prices and a world recession
Cash Flows, Years 1- 10, billions of yen
Base Case
Revenue
37.5
44.9
Market size (million)
3
3.5
TABLE 10.4
TABLE 10.4 NPV of electric scooter project under different assumptions about unit sales
(figures in billions of yen excepted as noted)
Outflows
3
TABLE 10.5 The electric scooter project's accounting profit under different assumptions about unit sales
(figures in billions of yen excepted as noted)
Unit Sales,
3
Base Case
1
Revenue
37.5
44.9
2
3.0
3.5
Market size
1 million
.8 million
Market share
4.00
0
0
40
80
Table 11.2
Year 0
Year 1
Year 2
Year 3-10
0
0
40
80
Table 11.3
0
0
40
80
80
80
Table 11.4
1770
75
1000
833
667
500
333
167
Book depreciation
1000
1000
901
741
517
271
Economic depreciation
-0.067
-0.019
0.02
0.06
0.093
0.126
69.33
Depreciation
4.5
$108
Underwriter
94
5.0%
5
0.05
Seasoned
- 0
Raytheon
500
0.6%
0.625
0.01
General Motors
-30
-30
-30
$1500 to
$1,000
$1,000
$0+650=$650
$80+598=$678
$0
$28
0
0.35
0.35
0.068
17.2
13.4
13.8
14.8
14.9
15.4
15.5
15.4
6
Tax
6
4.7
4.8
5.2
5.2
5.4
5.4
5.4
7
2.5
3.5
3.2
3.4
5.9
6.1
6
6.8
20.3
PV Horizon value
Gross fixed assets
2.5
3.5
3.2
3.4
5.9
6.1
6
6.8
19.7
9%
324.5 million
11260.1
Fig 21.1
Upside
Downside
a
a
3.92
3.92
5.26
7.4
3.81
5.95
100
159
295
185
0
0
50
100
100
-125
-125
Year
1982
1
55
53.53
0.049
0.0449
2
55
52.1
0.047
0.094
3
55
50.7
0.046
0.138
4
1055
946.51
0.858
3.433
Table 24.3
1 Year after issue
5 Years after Issue
10 Years after Issue
Start of year, %
Implied percentage change in price for Alcan bonds
AAA
4.43
2.9
AA
4.56
1.9
A
4.8
0.2
BBB
5.4
-4
BB
9.45
-27.5
B
11.7
-37.3
CCC
15.15
-49.4
Default
Fig 24.3
Rights of default
The trustee or 25% of debenture holders may declare the principle due and payable
Registered
26-Aug-1992
Offered
Issued at a price of 99.489% plus accrued interest (proceeds to company 98.614%) through First Boston Corporation
Interest
At a rate of 8.25% per annum, payable February 15 and August 15
Seniority
Security
Not secured. Company will not permit to have any lien on its property or assets without equally and ratably securing the debt securities
Maturity
15-Aug-2022
Sinking fund
Annually from August 15, 2003, sufficient to redeem $12.5 million principal amount, plus an optional sinking fund of up to $25 million
Callable
At whole or in part on or after August 15, 2002, at the option of the company with at least 30 days, but not more than 60 days notice to each August 14 as follows: schedule inserted here
Moody's rating
Puttable, callable, convertible zero coupon debt
Floating-price (death spiral) convertibles
Convertible debt where the bondholder can convert into a fixed value of shares
Asset backed securities
Many small loans are packaged together and resold as a bond
Catastrophe (CAT) bonds
Payments are reduced in the event of a specific natural disaster
Reverse floaters (yield curve notes)
Floating rate bonds that pay a higher rate of interest when other interest rates fall and a lower rate when other rates rise
Equity linked bonds
Payments are linked to the performance of a stock market index
Pay-in-kind bonds (PIKs)
Issuer can choose to make interest payments either in cash or in more bonds with an equivalent face value
Rate sensitive bonds
Ratchet bonds
Floating rate bonds whose coupons can only be reset downwards
Table 26.1
-12
-12
-12
-12
-12
-12
-12
17.02
17.02
17.02
17.02
17.02
17.02
5.92
5.92
5.92
5.92
5.92
5.92
5.92
5.92
89.72
-17.99
-22.19
-17.71
-15.02
-15.02
-13
-10.98
+90.91
-100
-90.91
-114.04
66.67
-4
-4
-4
-4
-70.67
-66.67
.5x66.67
9.94
9.13
8.23
7.22
6.08
4.81
3.39
1.79
2
2
2
2
2
2
2
2
Frozen quiche
$.5 per pound
$.514 per pound
Six months' storage costs=$.1 per pound; six months' convenience yield= $.05 per pound.
Nevada Hydro 8s of 2002
77
78.39
4% semi-annual cupon payment is due just before futures contract expires.
Costaguanan pulgas (currency)
9300 pulgas=$1
6900 pulgas =$1
Establishment Industries common stock
$95
$97.54
Establishment pays dividends of $2 per quarter. Next dividend is paid two months from now.
Cheap white wine
Six months' convenience yield= $250 per tank. Your company has surplus storage and can store 50000 gallons at no cost.
Table 27.6
Oat barn
Biotech stock index
$58
5-year Treasury note
Table 28.1
Forward Rate *
Spot Rate *
1 Month
3 Months
1 Year
* Rates are per $US, other than Euro and UK Pounds
Table 28.2
Country
Canada
2.33
Philippines
1.23
China
1.26
Russia
1.45
Denmark
4.46
-13.07
27.13
Seychelles
18.67
2.57
Dec
Dec
2001
2002
diff
Assets
Dec
Dec
2001
2002
diff
96.6
100.0
3.4
Payable
349.9
360.0
10.1
0.5
0.74
83
Fig 30.3
7.3
Excellent secondary market
FHLB, "Fannie Mae," Sallie Mae," Freddie Mac," etc.
Overnight to 360 days
Very good secondary market
Benchmark bills by regular auction; discount notes sold through dealers
Tax-exempt municipal notes
Good secondary market
Tax-anticipation notes (TANs), revenue anticipation notes (RANs), bond anticipation notes (BANs), etc.
Tax-exempt variable-rate demand bond (VRDBs)
Municipalities, states, universities, etc.
Investment
Borrower
Commercial banks, savings and loans
Usually 1 to 3 months; also longer-maturity variable-rate CDs
Fair secondary market for negotiable CDs
Interest-bearing with interest at maturity
Receipt for time deposit
Maximum 270 days; usually less than 10 years
Dealers or issuer will repurchase paper
Usually discount
Unsecured promissory note; may be placed through dealer or directly with investor
Medium-term notes (MTNs)
Minimum 270 days;usually less than 10 years
Dealers will repurchase notes
Interest-bearing; usually fixed rate
Bankers' acceptances (Bas)
Major commercial banks
Demand to pay that has been accepted by a bank
Repurchase agreements (repos)
Overnight to about 3 months; also open repos (continuing contracts)
No secondary market
Repurchase price set higher than selling price; difference quoted as repo interest rate
Sales of government securities by dealer with simultaneous agreement to repurchase.
Fig 30.4
139.3
Money-market funds
Commercial paper
Sales, income and assets of L.A.Gear 1989-1996 (figures in $ millions)
1989
1990
1991
1992
1993
1994
1995
1996
Sales
617
820
619
430
398
416
297
196
65
76
95
115
65
76
70
88
8
30
32.5
30.7
38.2
104.8
23.2
32.5
30.7
38.2
41.2
30
30
30
30
1. Cash at start of period
5
-41.5
-56.5
-30.5
-46.5
-15
26
35
-41.5
-56.5
-30.5
4.5
5
5
5
5
46.5
61.5
35.5
0.5
0
0.1
0.1
0.1
46.5
15
-26
-35
UFJ Holdings (Japan)
$4,000,000
$2,000,000
46000000
7. current earnings per dollar invested in stock (line 1/ line2)
$0.05
$0.10
$0.07
NWC
21
30
D
FA
89
88
E
Goodwill
8
118
118
Captain B must recognize a $30000 capital gain.
Capital gain can be deferred until Captain B sells the Baycorp shares.
Impact on baycorp
Boat is revalued at $280000. Tax depreciation increases to $280000/10=$28000 per year (assuming 10 years of remaining life)
Boat's value remains at $150000, and tax depreciation continues at $15000 per year.
Table 32.5
Quest Dex
Yellow pages
Burger King
Fast food
Lost Depr tax shield(7.00) (11.20) (6.72) (4.03) (4.03) (2.02) -
Lease payment(16.90) (16.90) (16.90) (16.90) (16.90) (16.90) (16.90) (16.90)
Tax shield of lease5.92 5.92 5.92 5.92 5.92 5.92 5.92 5.92
Cash flow of lease89.02 (17.98) (22.18) (17.70) (15.01) (15.01) (13.00) (10.98)
Year
0123456
66
LTV
18
Proxy Contest
Takeover Defenses
White Knight - Friendly potential acquirer sought by a target company threatened by an unwelcome suitor.
Shark Repellent - Amendments to a company charter made to forestall takeover attempts.
*
Internet connection required
P/E Ratio201015
Total earnings200,000$ 200,000$ 400,000$
Current earnings
PV(AB)
8