Takeover of Republic Airways - Assignment Example

Student Name> Takeover The takeover usually happens when the one firm is stronger than the other. The firm use to go for takeover in order to win the specific market the firm wants to deal. This is the reason hat usually on region firm is to takeover the other region firm. This is the one simple and common reason, but usually the reason behind one takeover are many more. The assignment deals with the takeover of Republic Airways that is situated in United States and is listed in the NASDAQ. The assignment elaborates a complete pattern of takeover strategy and financial decision showing that either the takeover decision is right or not. Before explaining the takeover strategy, comprehensive reasons fort he takeover is given below. Mutual goals and objectives The goals and objectives of the two firms were same and this was the major reason or key success factor allowing the takeover. The goals of the Republic Airways were to diversify their services but weren’t gaining any opportunity while the firm holds different expertise and specialist. On the other hand, the buying firm wants to gain the expertise and many resources from the Republic Airways. The motives and objectives of the firms were same as to diversify their operations. Moreover, they want to enhance the tourism field at international level. Therefore, when they firms seek mutual objectives and goals, they find that this takeover will be very beneficiary for the firm in its future. Therefore, the mutual goals and objectives play major roles and are the key success factors compel for the takeover. Access to New technology and resources The other major key factor that play important role in the success of their takeover is the access to the new technology and resources that enables the firm to provide much more satisfactory services to the consumers. Actually the buying firm seek that it lack in technology as with the use of much more enhanced resources and technologies it will be able to provide quality services at acceptable rates. The research & development department of the buying firm were unable to provide much more augmented information at alone. Therefore, they decided that for the better future and better results they two firms should use their resources, expertise and capital to gain what they are unable to gain when single. Improve agility In airline industry, agility is required in each step as the firms should be more responsive and dexterity when working at international level to compete with other firms. Therefore, the buying firm wants to become more agile and responsive in the international market to gain much more benefits. When talking to the manager of Republic Airways, he replied that the major important improvement the firm will gain is the improvement in agility. Researcher’s shows that as the technology advances with time, the air line industry requires much more technologies and techniques not to improve the services rather they need to cut-off their internal cost to achieve maximum quality at minimum price level. Moreover, the quickness is required in the air line industry at international level as this will make them stronger competitor. Quickness in term of more responsive and agile for the customer needs. Pre-empting competition The other major reason for the take over was that they want to gain pre-empt competition. The reason for this pre-empt competition is that many new airline firms emerges in the United States region that causes a great stress on the airline industry. Still the threat of new airline firms is felt by the companies in other different regions. Therefore, buying firm wants to pre-empt the new firms in airline sector as they want to minimize their future threat. Simple the two firms have much unique strength and seek opportunities while working together after the takeover. But on the other hand, they together can overcome their threats to remain strong in the industry. Therefore, pre-empt competition was another major factor causing the takeover. Gain of opportunities The opportunities are the basic reason for any takeover, and when talking takeover strategy of buying firm for Republic Airways then we find that Opportunities are the other major reason for the takeover. The managers of buying firm feels that it open a new way for the firm as the major opportunity they seek together is the gain of tourism that will enhance their productivity. The opportunity of tourism in the near future is the major target for the buying firm. On the other hand, Republic Airways also seeks the same opportunity for the firm. Moreover, different other opportunities were recognized when the firms go for a deep analysis showing positive results. These gaining of opportunities were another major success factor for the takeover of the firms. Increase price of fuel The price of fuel is increasing daily at global level thus this directly increasing the cost of the firms. Therefore, to meet with this problem the firms are restructuring their firms to adopt such mechanisms and tools that can lower their internal cost The price of fuels increases the price of the tickets but this directly shows a negative impact on the yearly sales of the firm. As different new firms are developing in this industry, therefore an increase in the price tags of the tickets will switch off your customer level thus decreasing the retention level. Therefore, firms found that increasing the prices of the tickets is not the ultimate results and they must adopt some other strategies that can help them in lowering their cost. This provides the firms a new way to restructure their firms in a way that it can lower their internal cost. Increase cost of labor The cost of labor outside the boundaries differs than the domestic rates and the firm mostly faces high cost labor at global level. Therefore, the firms felt to change their structure in a way to use minimum level of labor that can ultimately lower their cost. For this firms feels to go for takeover with the host country to gain maximum benefits from them. Among these benefits, the firm also gains maximum advantages from the host government through their takeover and mergers. Demand in international traveling The demand of the international traveling increases and this mostly happen due to enhancement in the tourism field. The level of tourism increases and thus demand in the international traveling increased. Therefore, the customers are now demanded more quality services with low price tag tickets. This pressurize the airline firms to changes their structure and adopt such methodology that can give more productivity while reducing much of their cost. For this, the firms are now restructuring their firms and using different techniques and tools to meet with this demand Terrorism The level of terrorism increases and 9/11 story is one of this event of terrorism. Therefore, the level of security in the airline firm’s increases and especially different firms fails to compete as they were unable to provide secure services. This external force and specially the event of 9/11 switch a huge amount of customers towards other mode of traveling. Thus, this pressurize the firms to change their structures in a way that it can provide much more security and quality services that they capture at least same amount of customers back. The level of terrorism with time increases and especially in many countries this risk is more. Therefore, the airline industry is restructuring their over all firm structures so that they can gain maximum competencies and quality services. Future of the two firms Takeover requires a huge investment of firms and include different other major heavy costs, therefore, this must provide mammoth benefits in the future. Buying firm and Republic Airways analyze that the future of their takeover will provide greater benefits. As the firm want to join with other to achieve the same goals, therefore, they do not find any reason or back draw for this takeover. The future of the two firms will be more enhanced and augmented when together while alone they can not achieve what they want. Thus, the key success factors for the takeover of the two firms are strong enough to bind them together for years. Financial performance of the Republic Airways The republic airways in the united state market from the last few years do not hold enough string position. The price of its share is 17.46 dollar and earning per share is 2.13. The price per earning share of the firm is 8.05 which are lower than other airways. The financial performance of Republic Airways is given as Market Cap (intraday): 610.23M Enterprise Value (6-May-08)3: 2.38B Trailing P/E (ttm, intraday): 7.87 Forward P/E (fye 31-Dec-09) 1: 6.60 PEG Ratio (5 yr expected): 0.59 Price/Sales (ttm): 0.46 Price/Book (mrq): 1.50 Enterprise Value/Revenue (ttm)3: 1.75 Enterprise Value/EBITDA (ttm)3: 6.814 FINANCIAL HIGHLIGHTS   Fiscal Year Fiscal Year Ends: 31-Dec Most Recent Quarter (mrq): 31-Mar-08 Profitability Profit Margin (ttm): 6.12% Operating Margin (ttm): 17.66% Management Effectiveness Return on Assets (ttm): N/A Return on Equity (ttm): N/A Income Statement Revenue (ttm): 1.37B Revenue Per Share (ttm): 35.252 Qtrly Revenue Growth (yoy): 25.30% Gross Profit (ttm): 460.70M EBITDA (ttm): 349.99M Net Income Avl to Common (ttm): 83.63M Diluted EPS (ttm): 2.14 Qtrly Earnings Growth (yoy): 4.50% Balance Sheet Total Cash (mrq): 164.00M Total Cash Per Share (mrq): 4.526 Total Debt (mrq): 1.91B Total Debt/Equity (mrq): 4.491 Current Ratio (mrq): N/A Book Value Per Share (mrq): 11.703 Takeover Strategy The takeover strategy that we have adopted in the assignment is to buy the shares of the firm. The firm is listed in NASDAQ and has share value as 17.46 dollar per share. The total volume of the shares is 354,875. The approximate market capitalization becomes 609.53 million dollar. The takeover requires buying the share of the firm that total make the price of 315 million dollar or more. If the firm buys more than half of the shares from the market, than the management and authority of the firm comes under your supervision. This is the most common type of takeover that the firms adopted in United States. Therefore, the takeover strategy for the firm is to buy the shares of Republic airways. Funding for the takeover The funding decision for the takeover is that the firm will fund the takeover more from their equity and less from their loans. The firm already has enough equity and financing that it can finance the takeover from the equity and that compromises up to 60% of the findings. The 40% of the funding will be provided by taking the bank loan. Capital Budgeting Techniques The capital budgeting technique is adopted in this assignment that will be used in order to calculate that either this takeover will provide the finances in the next coming years or not. The expected cash flows are taken and are discounted at 10%. Before presenting the calculations of takeover, different techniques under capital budgeting technique is given below. Pay Back period Pay back period shows the exact time that is requires by the firm to earn or to return back its initial investment on the project of information security system. These earnings are earned from the cash flows which are earned by the company each year. When we are using the technique of the annuity then the pay back period is calculated by dividing the initial investment by the annual cash flow. Pay back period when using the annuity= initial investment/annual cash flows Similarly if the company using a mixed stream then we have t see the cash flows that are earned by the company each year and the time it took to get back its initial investment by these cash flows. The pay back period technique is the unsophisticated capital budgeting technique as it does not use any specific time value money technique therefore it is consider to be very unsophisticated. The decision criteria on the basis of pay back period Suppose the pay back period is less than the maximum acceptable period of the payment then the company must accept the project. If the payback period of the project is more then the maximum acceptable period of the payment then the company should not accept the project. In above statement we have taken a term “maximum acceptable period”. This term is to be defined by the company who has to declare that what is the maximum time period in which the company has to earn its all initial investment. For instance we took an example that there are two projects in front of the company. Suppose project A need a initial investment of $42,000 and Project B needs initial investment of $ 14,000. Project A is the annuity case where as the project B is the mixed stream. When total calculations are taken in account it was noticed that the project B took 2.5 years and Project A took 3 years to recover. There fore, the company will accept the Project B. Advantages and Disadvantages of Payback period The companies used to take the pay back technique to measure their small projects where as small companies usually sued the technique for most of its projects. The pat back period has advantage that it gives the exact time pay back period when the forecast cash flows are taken in account. The pay back period usually describe the risk exposure associated with the projects and usually forecast in better way. It provides the information that how fast the company ca earn form their investment. The most important disadvantage of the pay back period is that the exact period can not be calculated and thus causes problems for the companies when they sue the technique for their long-term projects. Similarly the technique did not help to inform the wealth maximization of the company. Other major disadvantage of the pay back period is that it is unable to take time period of money in it. Therefore, it does hold importance fore the company but its importance remain to some extent. Average rate of return Average rate of return is actually the ratio of average annual profit. The average rate of return informs that how much rate of profit increases by the use of the security system. Suppose the company is earning the average rate of return as 20% but after launching the security system it was noticed that the average rate of return increases to 23%. This shows that there is the increase in profit equal to 3%. Therefore, the company should continue this security system. The average rate of return is not equal to the net cash inflows. Net cash inflows is treated separately where as the average rate of return informs the total profit earn by the firm. We have chosen Net present Value technique to calculate the takeover profitability index that either the takeover benefits the firm or not. Net Present value of the Takeover The net present value of the project is the capital budgeting technique that uses the difference between eh initial investment and the present value of the cash inflow which is discounted at a rate equal to the companies cost of capital. Net present value= present value of the cash inflows- initial investment The net present value technique uses the time value of the money and informs the company about the overall profit or earnings that are earned by launching the information security system. If the value of the net present value is greater than zero then accept the project as it will provide rate of return more then the firms cost of capital. But if the net present value is less then zero then the firm must reject the project. Usually it was seen that at the initial state the net present value is less then zero. The reason is that most of the firm investment is done and their fore at that year it will show the negative impact but later with time the value of net present value increases from the zero. Therefore, the net present value helps in concluding the result after one year of implementation of the security system. NPV (net present value) is the net value of the project in today’s date while taking expected future cash flows in account. Net present value technique provides explicit consideration to the time value of money therefore, it is consider as the sophisticated technique of capital budgeting in Finance. All the techniques which use to discount the firm’s cash flows at some specific rate is categorized as sophisticated and most accepted technique of capital budgeting. The discounted rate of the project shows the minimum rate of return that is earned on an investment by the firm. It not shows that the interest rate greatly affect the value of money but also provide comparison between different investments. The net present value of the firm is calculated as NPV = present value of the Cash flows-Initial Investment NPV = CF/ (1-i) n - Initial Investment Whereas, i = Interest Rate n = Number of Years Decision Criteria If the Net present value of the project is greater than 0 than accept the project If the net preset value of the project is less than the 0 reject the project Net present Value of the Takeover year Expected Annual Cash flow (1) present value Interest factor (2) Present value of cash inflow ($) 8% 1 2 (1)(2) 1 2808 0.971 2,727 2 2816 0.943 2,655 3 2824 0.915 2,584 4 2391 0.888 2,123 5 1977 0.863 1,706 6 1979 0.837 1,656 7 1933 0.813 1,572 8 1932 0.789 1,524 9 1929 0.766 1,478 10 1719 0.744 1,279 11 1665 0.722 1,202 12 1654 0.701 1,159 13 1643 0.681 1,119 14 1629 0.661 1,077 15 724 0.642 465 16 696 0.623 434 17 667 0.605 404 18 636 0.587 373 19 601 0.57 343 20 330 0.554 183 21 289 0.538 155 22 244 0.522 127 23 197 0.507 100 24 73 0.492 36 25 -660 0.478 -315 present value= 19,948 (initial investment) 609.53 NPV $19,338.47 Conclusion The over financial overview and decision making shows that this takeover will provide benefits to the buying firm. This will not only provide financial strength to the firm will also provide different other economic profits. The takeover will enhance the firms overall efficiency and will increase its market size. Not only this, this will provide the firm with new ways with which the firm can diversify its services. Therefore, the over all financial analysis and financial decision show that the takeover for the firm will be beneficiary for the firm in next 25 years. References Garrison Noreen “Managerial Accounting” 10th Edition James Jiambalvo, Rex A. Schildhouse (2000) “Managerial Accounting” Carl S. Warren, James M. Reeve, Philip F. (2005) “Managerial Accounting” Garrison Noreen and Peter C. Brewer (2007) “Managerial Accounting” Lawrence J. Gitman “Managerial Finance” 9th Edition Read More