Exam 14: Mergers, Acquisitions, and the Valuation of Shares

When a large multinational packaged goods company purchased the advertising agency it has used for the past five years, its net savings after increases to salaries and overhead was equal to 12% of its media purchases and advertising production costs. There was no loss of the agency's client base and creative success increased as revenue-generation concerns diminished. What is this an example of?

PeopleLife's share price was below book value for about a year after the recent financial crisis. What circumstances would make this a good time for an investor to buy stock in PeopleLife?

Sarasota Co. Ltd. is an unlisted company with ownership concentrated in relatively few hands. It has experienced steady growth and forecasts dividend paid out to its 75,000 shareholders to grow by 5% per year from the base of $558,000 this year. If the company's cost of capital is 9%, what is the value of a Sarasota share?

Accounting rules now require that M&A investment banking and legal fees be expensed in the year they are incurred. These fees amount to 1% of the size of the deal, and at year end an all cash deal closed for $50 billion for Arch Ltd. to acquire Coal Inc. Arch has one billion shares outstanding and earned $2 billion excluding the merger costs mentioned above. How would this affect Arch's earnings per share?

What is the concept underlying the term "market for corporate control"?

Live in Colour! Inc. is a steadily growing regional company-owned chain of home decorating stores with two million shares outstanding. Its share price at the start of the year was $31.50 with a P/E of 10. The founder and president, an award winning designer, retained 15% of the shares. The rest traded sporadically on the TSX and were held principally in lots of less than 500 by small investors. Peri Paint and Wallpaper is a US-based chain looking for entry into Canada and at Live in Colour!'s mall locations. It purchased 20% of Live In Colour! shares causing a flurry on the TSX and a price gain to $42.25 a share. Live in Colour!'s president purchased another 100,000 shares and gained assurances from shareholders who own another 15% of shares that they would not sell or vote out the current Board of Directors who are opposed to the takeover. Assuming analysts are right and they believe that the P/E ratio will go to 25 before ownership of the company is decided, what would the maximum cash outlay that a white squire would have to be prepared to pay?

What are managers who pursue merger and acquisition activities for personal goals or interests at the expense of maximizing shareholder wealth demonstrating?

Why are the values of past dividends not included in the dividend valuation method for the price of a share?

Shareholders of a company being merged with another may take bonds from the acquiring company in exchange for their shares instead of common shares in the new company. What advantage does this have for the acquired company shareholders?

Bryceland Market Garden has current assets of $900,000, capital assets of $6 million, accumulated depreciation of $1.5 million, intangible assets of $250,000, current liabilities of $500,000, a mortgage for $1 million and a bank loan of $150,000. Common shares, at an issue price of $20 a share, provided $4 million of cash. Using the balance sheet (or net book value) method, what is the value of the business per share?

Which group most consistently benefits from the process of one business acquiring another business?

Which of the following situations may make the business valuation by the dividend yield method unreliable?

Central Electric Ltd. (CEL), cost of capital of 9%, net income after tax of $140 million and 10 million common shares outstanding. It wishes to spin off its higher risk Wi-Fi business unit. Earnings from the business unit represent 20% of CEL net income. The Wi-Fi unit has a cost of capital of 12% and would issue one million common shares. To accomplish the spin-off, what will CEL most likely have to do?

Why is the dividend valuation method based on the concept that the present value of the future stream of dividends is an appropriate measure of a business's value?

Dominion Brands Inc., a packaged goods firm, has ten factories, total value of $150 million, that have been operating at an average capacity of 54%. The net income before tax and amortization (EBITDA) is $36 million annually. The company is considering the purchase of a regional manufacturer that went up for sale for $110 million. The assets of the acquisition would be broken up and sold and the production rolled into the Dominion facilities. It would provide an overall improvement in capacity to 70% and increase annual income to $47 million. The sale of assets, net of all transactions cost, would yield $40 million. Considering an investment horizon of 10 years with no residual value at the end and a cost of capital for Dominion of 10%, should the company go forward with the acquisition?

Canadian Adventurers Ltd., an unlisted company, provides equipment and guides for out-trippers, resource companies and emergency crews into the Canadian wildness. The 500 shares at an initial price of $750 each were divided equally between the bush pilot and a former forest ranger who operated the company. A year after the company was incorporated, when business was beginning to break-even, and several long-term contracts had just been signed, one of the owners died. The other owner would like to purchase the shares from the estate to continue the business. What is the most appropriate share valuation method?

Free cash flows for next year are expected to be $500 million at Banana Inc. They are expected to grow at 4% per year. Banana's cost of capital is 11%. What is terminal value of Banana?

Kiromi Inc. has reported income after tax of $3.2 million. It has 500,000 preferred shares outstanding at a value of $21.30 each and paying a dividend of $1.40. The company has one million common shares outstanding currently trading at $48.00 each. Breeson-Lee is not traded on the stock exchange but is comparable to Kiromi. If Breeson-Lee's year-end earnings are $2.8 million, using P/E ratios as a guide, what is the company's market value?

Aggressive Capital Inc. is known as an asset stripper. How should Aggressive value potential target companies?

The accounting authorities are considering changing the rules for accounting for pensions. Previously actuarial gains and losses in obligations and experience gains and losses in pension fund assets were amortized over many years. Current thinking is to require these gains and losses to be reported in the year incurred. How might this rule change affect a company's share price?