There are 7 vital parts to completing this comprehensive analysis of whether Nina’s Fashions and their management should acquire the Chic Company. 1) Gather information regarding mergers and present it to Nina’s board of directors. 2) Discuss reasons and factors justifying mergers, including their benefits to society and each company. 3) Discuss the Pro’s and Con’s of a hostile versus friendly mergers, along with some data on how shareholders from each side have fared in past mergers. ) Do a sensitivity analysis of all data that was estimated and used in the merger analysis.
How to start negotiations, the beginning offer, and the max price per share. 6) Try to justify buying Chic Company using only Nina’s Fashions stock. 7) Recommend whether to proceed with the acquisition. I. Gather information regarding mergers and present it to Nina’s board of directors. There are several reasons mergers are appealing to companies. Mergers can diversify company’s interests similar to an individual’s stock portfolio thus reducing its overall risk.
Mergers also can serve as a source of growth for a company, instead of a company reinvesting its returns into growing its own company at a rate in which the company can’t handle it can acquire one that has steady growth like itself and grow them both at a reasonable rate. It is also beneficial to companies that merger because they create added value through synergies, economies of scale, and better management. II. Discuss reasons and factors justifying mergers, including their benefits to society and each company. Several reasons have been proposed to justify mergers.
Among the more prominent are (1) tax considerations, (2) risk reduction, (3) control, (4) purchase of assets at below-replacement cost, (5) synergy, and (6) globalization. Economically justifiable reasons include Synergy: Value of the whole exceeds sum of the parts, Operating economies, financial economies, Differential management efficiency, Taxes (use accumulated losses). Questionable reasons for mergers; Purchase of assets at below replacement cost, acquire other firms to increase size, thus making it more difficult to be acquired.
III. Discuss the Pro’s and Con’s of a hostile versus friendly merger, along with some data on how shareholders from each side have fared in the past. The differences between a hostile merger and a friendly merger are a friendly merger is one that is supported by the targets management. A hostile merger is resisted by the targets management, and the acquirer must go directly to stockholders and tender 51% of the share, often mergers that start out hostile end up friendly when the offer price is raised.
The Pros of a friendly merger is less stress and animosity between the two companies post merger, target management is less likely to take the poison pill route. The Pro’s of a hostile merger include on average a 30% increase in the targets stock price versus a 20% increase from friendly mergers. The cons of a friendly merger target companies stockholders receive on average only a 20% increase in their stock when being acquired in a friendly manner. Con’s of a hostile takeover are they usually fail. Also increased regulation in the area of turnovers has even reversed some recent hostile takeovers due to anti trust issues.
IV. Do a sensitivity analysis on all statistical data pertaining to estimates used in the merger analysis. When the capital structure is changing rapidly, as in many mergers, the WACC changes from year-to-year and it is difficult to apply the corporate valuation model in these cases. The APV model works better when the capital structure is changing. The steps are 1. Project FCFt ,TSt until the target is at its target capital structure for one year and is expected to grow thereafter at a constant growth rate.
Should the Chic Company be completely against the idea of the acquisition I would not attempt a hostile takeover, the reason being the major reason for this acquisition is to utilize disposable cash for the greatest return on that money and a hostile takeover usually increases the cost an additional 10% versus a friendly takeover, and I believe there are enough other companies out their that would agree to a friendly merger instead of spending an extra 10% on one that is resisting and could potentially sabotage your efforts post merger.