Under
what conditions will shareholders of a bidding
firm have the chance of realizing a gain ?
Shareholders
of a bidding firm have the chance of realizing
a gain when :
NPV
(B + T) > [ NPV B + NPV T ]
N.B.
: B : bidder ; T : target firm ; P : price
of target firm T
Shareholder value
is created for bidder only if :
Price
of T < NPV (B + T) - NPV (B)
M & A has
no impact on shareholder value if :
Price
= NPV (B + T) - NPV (B)
M & A results
in a large loss for the shareholders of the
bidding firm if :
Price
> NPV (B + T) - NPV (B)
Example
: Case Study
International Catering
Services (ICS) plans the acquisition of Food
Services FS) for the price of 3 million euros.
Informations
concerning ICS (bidder) :
| D/E ratio |
1,5 |
| Value of asset |
6 million € |
| Tax rate |
50 % |
| Interest rate |
10 % |
| Return required for shareholders |
14 % |
Below The FCF projected
for the next 3 years. For the following years,
ICS estimates an increase in FCF at 1% (g)
per year (infinited growing perpetuity) .
The new company (ICS + FS) will maintain the
same capital structure.
| |
Year
1 |
Year
2 |
Year
3 |
FCF |
350 |
425 |
500 |
Information
concerning FS ( (target)
:
| D/E ratio |
1,5 |
| Value of asset |
3 million € |
| Tax rate |
50 % |
| Interest rate |
10 % |
| Return required for shareholders |
14 % |
Below are the FCF projected
for the next 3 years. For the following years,
FS estimates an increase in FCF at 1% (g)
per year (infinited growing perpetuity).
| |
Year
1 |
Year
2 |
Year
3 |
FCF |
200 |
220 |
250 |
The new company :
The FCF forecasted for the new
company over the next 3 years is as follows
:
| |
Year
1 |
Year
2 |
Year
3 |
FCF,
including TV |
600 |
700 |
11.000 |
Solution
Financial structure with
a
D/E ratio of 1,5
| Debt |
15 |
3
|
Equity |
10 |
2 |
Value |
25 |
5 |
Calculation of the
WACC : 14 % . (2/5) + (10 %
- 50 % Tax) . (3/5) = 8,6
%
Calculation of the Terminal
Value (TV) at the end of year 3 :
[ FCF / (WACC - g) ]
TV of ICS = (500
. 1,01) / (8,6 % - 1 %) = 6'645
TV of FS = (250
. 1,01) / (8,6 % - 1 %) = 3'322
| |
|
FCF |
|
Investment |
Year
1 |
Year
2 |
Year3 |
ICS |
- 6.000 |
350 |
425 |
7145 |
FS |
- 3.000 |
200 |
220 |
3572 |
New
company |
- 9.000 |
600 |
700 |
11.000 |
Calculation
of the value (NPV) created (or destroyed)
:
NPV (ICS)
= - 6000 + 350 (1,086)-1 + 425
(1,086)-2 + 7145 (1,086)-3
= 261
NPV (FS)
= - 3000 + 200 (1,086)-1 + 220
(1,086)-2 + 3572 (1,086)-3
= 160
NPV ( ICS)
+ NPV(FS) = 421
NPV New
Company = - 9000 + 600 (1,086)-1
+ 700 (1,086)-2 + 11000 (1,086)-3
= 734
| |
|
ICS (Bidder) |
261 |
FS (Target) |
160 |
ICS +FS |
421 |
New Company |
734 |
| |
313 |
Sources
:
Strategic Management, Raphael Amit, Professor at Wharton University of Pennsylvania, US
Returns to Bidding in Mergers and Acquisitions, Jay. B. Barney, Strategic Management Journal
Corporate Finance
Course, Bernard Jaquier, Professor in
Economics & Finance, Lausanne (Suisse), 2020
