This desribe the rwlationship between two or more campanies

1. VALUATION OF COMPANIES
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VALUATION BY MERGERS
AND ACQUISITION

2. MERGERS
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 Merger may be defined as the combination of two
or more independent business corporations into a
single enterprise, usually involving the absorption
of one or more firms by a dominant firm.
 A corporate merger is the combination of the
assets and liabilities of two firms to form a single
business entity. And the combination is portrayed
to be between equals.

3. ACQUISITIONS
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 Is characterized by the purchase of a smaller company by a
much larger one.
 This combination of "unequal's" can produce the same
benefits as a merger, but it does not necessarily have to
be a mutual decision (Hostile takeovers).
 Acquisition may be defined as an act of one enterprise of
acquiring, directly or indirectly of shares, voting rights,
assets or control over the management, of another
enterprise .
 In an acquisition, both companies may continue to exist.
In everyday language, the term "acquisition" tends to be
used when a larger firm absorbs a smaller firm.

4. MERGERS AND ACQUISITIONS
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 Throughout this theme we will loosely refer to
mergers and acquisitions (M&A) as a business
transaction where one company acquires another
company.
 The acquiring company will remain in business and
the acquired company (which we will sometimes
call the Target Company) will be integrated into
the acquiring company and thus, the acquired
company ceases to exist after the merger.

5. CATEGORIES OF MERGERS & ACQUISITIONS
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 Horizontal: Two firms are merged across similar products or
services; the merged firms are former competitors.
 Horizontal mergers are often used as a way for a company to
increase its market share by merging with a competing company. For
example, the merger between Exxon and Mobil will allow both
companies a larger share of the oil and gas market.
 Vertical: Two firms are merged along the value-chain, such as
a manufacturer merging with a supplier.
 Vertical mergers are often used as a way to gain a competitive
advantage within the marketplace. For example, Merck, a large
manufacturer of pharmaceuticals, merged with Medco, a large
distributor of pharmaceuticals, in order to gain an advantage in
distributing its products.

6. CATEGORIES OF MERGERS & ACQUISITIONS…
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 Conglomerate: Two firms in completely different industries
merge, such as a gas pipeline company merging with a high
technology company.
 Conglomerates are usually used as a way to smooth out wide
fluctuations in earnings and provide more consistency in long-term
growth. Typically, companies in mature industries with poor
prospects for growth will seek to diversify their businesses through
mergers and acquisitions. For example, General Electric (GE) has
diversified its businesses through mergers and acquisitions, allowing
GE to get into new areas like financial services and television
broadcasting.
 In general, conglomerate merger involves companies in
unrelated lines of business.

7. REASONS FOR M&A
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NOTE
 A merger makes sense only if it adds value.
 Value may be added by better management, or by synergies,
and other changes, which make the two firms worth more
together than they were apart:
 The underlying principle behind mergers and acquisitions is
simple: 2 + 2 = 5. The value of Company A is Tzs 2 billion
and the value of Company B is Tzs 2 billion, but when we
merge the two companies together, we have a total value of
Tzs 5 billion.
 The joining or merging of the two companies creates
additional value which we call "synergy" value.

8. REASONS FOR M&A…
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 Achieve greater market power-this is because
the merged company reduce competition in the
market and hence will be able to influence the
market price.
 Complementary resources - If two firms have
complementary resources, it may make sense for
them to merge. For example, a small firm with an
innovative product may need the engineering
capability and marketing reach of a big firm.

9. REASONS FOR M&A…
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 Tax shield-When a firm with accumulated losses
and/or unabsorbed depreciation merges with a profit
making firm, tax shields are utilized better.
 A profitable company can buy a loss maker to use the
target's loss as their advantage by reducing their tax
liability.
 Utilization of surplus funds-A firm in a mature
industry may generate a lot of cash but may not have
opportunities for profitable investment. Such a firm
ought to distribute generous dividends and even buy
back its shares, to the same is possible.

10. DUBIOUS REASONS
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 Diversification:
 Diversification reduces risk
 This is beneficial.
 However, diversification is easier and cheaper for
shareholders to accomplish than it is for companies to
do by combining their operations.
 HOW?
 Shareholders just have to buy shares of company A and
company B to diversify their portfolio.
 Thus, they will not pay a premium for managers to combine
company A and company B merely for the sake of diversification.

11. METHODS OF SETTLING M&A
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 Cash offer
 Share offer

12. EVALUATING MERGER
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B
A
AB PV
+
PV
>
PV
Synergy
PV
PV
PV B
A
AB 


)
(
)
( s
CostSaving
PV
Synergy 

13. SHARE ISSUE
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NetCost
s
Costsaving
PV
NetGain 
 )
(
et
T
PV
GrossCost
NetCost arg


)
(
0
AB
V
N
N
N
GrossCost 





14. CASH OFFER
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Conclusion:
For the merger to proceed the net gain for a proposal
should be positive i.e. NPV should be positive for the
merger to be on interest of acquiring company.
NetCost
s
Costsaving
PV
NetGain 
 )
(
et
T
PV
Cashoutlay
NetCost arg



15. Example 1
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 ABC plc has been evaluating XYZ plc as a takeover
candidate. It has been estimated that cost savings of
TZS4000 million per annum can be achieved,
estimated to be worth TZS48,000 million on a present
value basis by merging the companies. ABC’s
management are concerned that XYZ’s share price has
recently increased from TZS 200 to TZS250 as a result
of speculation that a bid would occur. With ABC shares
currently trading at TZS500, ABC’s finance director has
proposed that one of its shares should be offered for
every two of those of XYZ. While the market will not
be surprised by a bid from some source there has no
speculation that ABC is interested in XYZ. ABC has 600
million shares outstanding and XYZ 500 million.

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 Required:
1. Identify the net cost of the takeover on the
proposed terms
2. Given the expected cost savings would this be a
profitable takeover for ABC on the terms
specified
3. Estimate the value of ABC’s shares immediately
following the takeover, assuming the market
also anticipates cost savings of TZS48,000
million.
Example 1…

17. Example 1…
1. Net cost = Gross cost – PV Target
Gross cost = New shares/New +Existing shares
*PV (ABCXYZ)
BUT
PV (ABCXYZ) = 500*600m + 250*500m +
48,000m = 473,000m
New Shares will be at 1:2
=1/2*500m = 250m
Total shares = 250m + 600m = 850m
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18. Example 1…
Gross cost = 250m/850m * 473,000m
= 139,117m
Net cost = 139,117m- 125,000m
= 14,117m
2. Net Gain = PV (Cost saving) – Net cost
= 48,000m -14,117m = 33,883m
Since the present value of the cost saving is higher than the
net cost which results into net gain of 33,883m is an
indication that, the take over is profitable .
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19. Example 1…
3. The value of a share after takeover can
be determined as follows;
Share value = PV(ABCXYZ)/Total
number of shares
= 473,000m/850m
= Tzs 556 per share.
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20. 1/23/2024 4:10 PM
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 JOAN plc has been evaluating JOVIN plc as a takeover
candidate. It has been estimated that cost savings of £12
million per annum can be achieved, estimated to be worth
£90 million on a present value basis by merging the
companies. JOAN’s management are concerned that
JOVIN’s share price has recently increased from £3 to £3.2
as a result of speculation that a bid would occur. With
JOAN shares currently trading at £7.00, JOAN’s finance
director has proposed that one of its shares should be
offered for every four of those of JOVIN. While the market
will not be surprised by a bid from some source there has
no speculation that JOAN is interested in JOVIN. JOAN has
100 million shares outstanding and JOVIN 80 million.
Example 2

21. Example 2…
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 Given the expected cost savings would this be a
profitable takeover for shareholders of JOAN on
the terms specified?
 Estimate the value of JOAN’s shares immediately
following the takeover, assuming the market also
anticipates cost savings of £90 million.
 Would a cash takeover bid of £3.40 per share be
more profitable?

22. CLASS ACTIVITY
 Read on settling M&A by cash offer
 Why M&A are less common in the developing
economies such as Tanzania?
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23. References
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Richard A. Brealey, and Stewart C. Myers, 2003, Principles of Corporate
Finance (Seventh edition) McGraw-Hill Irwin Limited.
Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe, and
Gordon S. Roberts, 2003, Corporate Finance (Third Canadian Edition)
McGraw-Hill Ryerson Limited.
Mark Grinblatt and Sheridan Titman, 2002, Financial Markets and
Corporate Strategy, (Second edition, McGraw-Hill Irwin Limited.
Aswath Damodaran, 2001, Corporate finance: Theory and practice
(Second edition), John Wiley, New York.