Corporate Finance - Mergers and Acquisitions: Financing Issues

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This document discusses different methods for financing mergers and acquisitions, including cash offers, paper (share-based) offers, and mixed offers. It outlines the key impacts of each type of offer, such as their impact on value, control, gearing, tax, and risk for both the acquiring and target companies. A cash offer provides definitive value to target shareholders but increases the acquirer's debt, while a paper offer dilutes the acquirer's shares but allows target shareholders to defer taxes. A mixed offer balances these tradeoffs. Properly evaluating any offer requires estimating the post-acquisition value of the consideration provided to target shareholders.

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CORPORATE FINANCE
MERGERS AND ACQUISITIONS: FINANCING ISSUES
Dayana Mastura Baharudin

Financing
Acquisitions
and Mergers
Method 1:
Cash Offer
Method 2:
Paper
Offer
(Shares)
Method 3:
Mixed
Offer
Evaluating
an Offer

Impact of a
Cash Offer
Impact on value – Cash has a definitive
value and this will often be attractive
to shareholders in the target company
and may enhance the chances of a bid
succeeding
Impact on Control – Less impact on the
control exercised by the owners of the
bidding company, although any new
debt usedmay carry restrictive
covenants.
Impact on gearing – Gearing may rise if
cash is raised by borrowing, this may
bring benefits in terms of tax savings
on debt finance

Impact of a cash offer contd…….
Impact on Tax – Exposes a shareholder in the target company to capital
gains tax (CGT) although this is not an issue for some investors
Impact on Risk – The risk of problems post-acquisition is borne by the
acquirer – if the share price falls post-acquisition then this only affects
the acquirer as the target company shareholders have received their
definitive cash payment.

• Impact on value – Shares have an uncertain vaue, often a higher
price will have to be offered if the bid is a paper bid than if it was a
cash bid to compensate the target’s shareholders for this
• Impact on control – the percentage of shares owned by the bidding
company’s shareholders will be reduced as more shares are issued,
so their control will be diluted
• Impact on Gearing – Gearing will fall as more equity is issued
Impact of a Paper Offer
(Shares)

Impact of a
Paper Offer
contd….
Impact on tax – Gain is not realized
for tax purposes until shares are sold
– the timing of shares sales can be
staggered across different years to
maximise the use of Capital Gains
Tax allowances
Impact on risk – Post-acquisition risk
is shared between the bidding
company and the target – if the share
price falls post-acquisition then both
are affected

Mixed Offer (Cash and Paper)
CASH MIGHT BE PREFERRED BY SOME
SHAREHOLDERS (DUE TO UNCERTAINTY) AND
PAPER BY OTHERS (DUE TO BE ABLE TO
MAKE GAINS FROM A TAKEOVER)
IT IS NOT UNCOMMON FOR AN ACQUISITION
TO BE FINANCED BY A MIXTURE OF CASH
AND SHARES
REAL LIFE EXAMPLE – IN 2010 THE
ACQUISITION OF CADBURY BY KRAFT WAS
FINANCED BY APPROXIMATELY 60% CASH
AND 40% SHARES.

Evaluating an offer: Cash Offer
• A cash bid can simply be compared against the current market value of the
target company ;
• Against an estimated value of an acquisition
• While a significant premium above the market price is often expected (20%
- 30% is common), it is important (to the buyer) that the amount paid is not
greater than the value that will be generated from the target company
under new ownership.

Evaluating an Offer: Paper / Mixed Offer
How much a paper bid, or a bid that is partly financed by the issue of paper,
is worth can be assessed quickly by looking at the value of the shares of the
bidding company before acquisition.
However, a more accurate valuation would be based on the value of the
shares post-acquisition

• The value of shares post-acquisition will be a matter of concern for
the both bidding company and the target company:
• The bidding company will not want to issue so many shares that its
share price falls post acquisition , and there may also be concerns
about the effect of a paper bid on diluting the control of existing
shareholders
• The target company will want to estimate the likely post acquisition
value of the shares to assess the attractiveness of the takeover bid
Evaluating an Offer: Paper /
Mixed Offer - Contd

Corporate Finance - Mergers and Acquisitions: Financing Issues

* Share price at start of year: RM2.50 per share * Number of shares held: 1000 * Market value at end of year: RM2.82 per share * Dividend paid: RM0.28 per share * Dividend received = 1000 shares x RM0.28 dividend per share = RM280 * Capital gain = 1000 shares x (RM2.82 - RM2.50) per share = RM320 * Total return = Dividend + Capital gain = RM280 + RM320 = RM600 * TSR = (Total return / Value of investment at start) x 100% = (RM600 / RM2500) x 100% = 24%

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This document outlines a study on the relationship between integrated reporting practices and firm performance of oil and gas companies in Malaysia. Specifically, it examines how disclosure levels of the six capitals (financial, manufactured, intellectual, human, social/relationship, and natural) outlined in integrated reports impact return on equity and return on assets. It develops hypotheses that greater six capitals disclosure will positively impact performance and that women board representation will positively moderate this relationship. The methodology involves content analysis of annual reports to develop scoring indexes for six capitals disclosure, and regression analysis. Preliminary results find financial and manufactured capitals are most disclosed while human and natural capitals lag, and that the hypotheses are not supported given low overall disclosure levels in the sample.

Sustainability Accounting and Reporting - Social Cost of Carbon

Dayana Mastura FCCA CA

This document provides an abstract for a study that aims to determine if public listed companies on the Malaysian stock exchange use sustainability accounting and reporting to legitimize themselves to stakeholders by reporting on the Social Cost of Carbon. The introduction provides background on the growth of sustainability reporting and the Global Reporting Initiative framework. The study objectives and research questions are outlined, along with a literature review on sustainability accounting approaches and the theoretical framework of legitimacy theory. A conceptual framework is proposed with hypotheses about how different types of sustainability reporting can lead to organizational legitimacy. The proposed methodology is to examine sustainability reports of 200 public companies over 15 years to test these hypotheses. The significance and anticipated findings are that reporting the social cost of carbon can help companies plan strategically and be sustainable

Corporate Social Responsibility Reporting within the Malaysian Oil and Gas In...

Dayana Mastura FCCA CA

Global Sustainability Best Practices - GRI, IIRC, SASB & VRF

Dayana Mastura FCCA CA

Environmental Audit

Dayana Mastura FCCA CA

Environmental auditing originated in the 1970s in the US and was initially reactive, focusing on end-of-pipe solutions after environmental damage occurred. It is now a more proactive management tool to evaluate environmental performance, compliance, and management systems. Environmental audits are conducted according to standardized procedures and incorporate reviews, inspections, and reporting to facilitate improvement. They provide benefits like ensuring compliance and anticipating risks while demonstrating environmental awareness.

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