Major Synergies and Other Sources of Value Associated with the Mergers - Assignment Example

Financial analysis Student’s name Institutional name Date Q1 major Synergies and other sources of value associated with the mergers The new company will be uniquely placed to speed the invention of interactive medium through the merging of the two world principal internet and media companies. The merger will combine Time’s Warner wide range of excellent media, news brands and entertainment America Online’s technologically advanced broadband delivery services. Time Warner will provide the new company with unmatched creative and talented journalists, technical expertise, assets, and management experience. America Online will provide the new company with the wide range of internet franchises, plus worldwide consumer brands, infrastructure and technology. This will enable the new company improve clients’ access to the widest selection of first-class content and interactive services. Through the merger, the new company will be able to reach its customers through the existing marketing channels. Time Warner has well established marketing channels, which will be used to market the new company. For instance, the new company will make use of the established networks of Time Warner and InStyle Magazine. Time Warner also interacts with popular artists and live events organisers. It also works with recognised media like CNN and the Time, and this will ensure that the company reaches a wider market through these medias that are watched globally. This will make it easy for the new company to make and establish itself. American Online, on the other hand, is well developed technologically and through e marketing, the company will be able to reach a wider number of customers throughout the world. This in turn means that the new company form the merger will turn global in short while after the establishment. The new company will also benefit from an already established clientele. American Online, which established over 25years ago already, has 20million members and other 2.2million members on CompuServe, one of the internet service providers for American Online Inc. Time Warner, on the other hand, has a wide range of customers in movies, TV and entertainment. This will enable the new company to have a wide range of clients once the merger is complete. In addition, the customers will be able to enjoy a wide variety of services form the under one company, unlike initially when the clients had to visit different companies fro different services. This will also translate to increased customer satisfaction. The merger provides a wide range of growth opportunities. The two companies have the opportunity to combine their assets and resources to establish exclusive services that will drive the company to further growth. The combination of Time Warner’s prestigious music labels and contacts with popular artists and American Online’s online and e marketing will provide an opportunity for the new company to enjoy great growth. In entertainments, Time Warner has a great cable networks and connections with Warner Bros for movie entertainment, combined with American Online’s contacts with Moviefone and AOLTV will ensure valuable programming of TVs and movies for the customers. This will increase the number of customers seeking entertainment and internet services from the new company leading to vast growth for the new company. AOL Warner will continue to offer quality online news coverage in connection with the world’s most recognised news media like Time, and CNN. The company will continue to provide local news through the local stations like the NY1 News. When the two companies merge, there will be growth in revenues for the two companies. Time Warner will enjoy more revenues since American Online has great revenues. Having a 45% stake in the new company, Time Warner is bound to benefit from the merger. The merger will see the revenues for the two companies swell to over $30 billion. American Onlines’ revenues are more than four times the revenues of Time Warner. This means that the shareholders in Time Warner stand to benefit from the 45% shareholding in the merger. Technologically, the company will benefit from American Online’s services like telephony over local cables and instant messaging services. The merger will see a combination of expertise from the two companies. The outstanding staff from the two companies will propel the new company to great heights. The Chief Executive Officer of the new company will be from Time Warner while the chairperson of the Board will be from American Online. Mr Levin, the Time Warner’s CEO will head the new company in technological advancements and policy inventiveness to drive the company into a globally recognized interactive medium. He will work with Mr Case, the chairperson of the board to draw strategies for the expansion of the company. The company will have 16 board members drawn from the two companies. These board members have propelled the individual companies to great success as major media and interaction companies. Therefore, the company stands to benefit a lot from such expertise and management. The merger will also provide an opportunity for the staff of the two companies for promotions. Through the merger, the new company will be able to develop an interactive medium with a high speed. The merger will provide for fresh broadband supply channels for American Online internet services while driving the growth in number of subscribers for Time Warner. The merger will enjoy established networks with major brands like instant messages, CNN, CompuServe, Cartoon network, Fortune. AOL.COM, Warner Music Groups, Looney tunes among others. These brands will ensure the success of the new company formed from the merger. This is because; the two merging companies already have audience with such brands meaning that the new company will not have to re-introduce itself to these brands. The other synergetic benefit arising from the merging of American Online and Time Warner is that there will be efficiency in provision of interactive services, which in turn leads to increased customer satisfaction. The combination of the two companies will pool together resources and assets that will change how people access information, how they communicate, how they get entertained and how the purchase goods and services. The strategic merger between the two companies will accelerate digital transformations and revolution, which will how people get information. This will provide extensive benefits to the clients. When customers are satisfied with the services provided by a company, the company grows, which in turn increases revenues. Increase in revenues will improve the shareholders returns. Question 2 Plans to acquire time Warner for 142 billions Number of outstanding shares= for American Online= 2255 Time Warner= 1301.5 MPS for AOL=72 MPS for Time Warner= 64.75 Revenue for AOL= 26.8billion Revenue for Time Warner= 4.8billion Purchase premium= acquirer’s offer price x targets pre-deal market price Offer price= 142 billion/1301.5=109.1/share The premium is given by subtracting the MPS of the target from the offer price of the predator. In this case, the offer price of the acquirer is 109.1/share while the market price of the target is 64.75. The premium, 109.1-64.75=44.35 The shareholders will therefore benefit from 44.35/share. This translates to 44.35 x 1301.5 million shares=58.2billion From the acquisition, the shareholders of Time Warner stand to benefit a lot. American Online is offering a price of 109.1/share but the shares was trading at 64.75 before the deal leaked to the market. This means that the shareholders stand to benefit since, given the two options, the acquirer will pay 109.1/share, while the market is offering a price of 64.75. This is a gain of 44.35/share Question 3 I think that the additional values created from the acquisition justify the premium being offered. Time Warner stands to benefit a lot form the deal with American Online. This is because; the latter already has a very large number of clients. When the deal is complete, Time Warner will attain these customers without having to invest afresh. Moreover, American Online has well established online marketing and e marketing and this means that the company will have already established marketing channels to expand the business. American online stands to benefit a lot from the merger. This is because, Time Warner already has contacts with very established and prestigious companies like CNN, major celebrities and artists and other marketing channels. The company will also benefit from the expertise of the staff of Time Warner in propelling the growth of the new company. Therefore, it is justifiable that American Online offers the premium it did. American Online also has revenues more than four times the revenues of Time Warner. This means that the deal will enable Time Warner to benefit and enjoy the extra revenues from American Online. This emanates from the fact that the merger is carried out in terms of equal mergers. Time Warner has a 45% stake in the new company, meaning that the company will enjoy a 45% of the combined revenues. This will raise the revenues for Time Warner and the shareholders stand to benefit. In addition, the shareholders of the Time Warner stand a chance to make some money out of the acquisition deal, without necessarily having to sell all their shares (Shim & Siegel, 2008). In fact, the acquirer is offering a higher offer price for the shares than what the market is offering for the each share of the company. Question 4 Calculating the intrinsic values of the AOL with the following assumptions Current year JAN 2010 Current market price = 72 Expected price stock growth rate=10% Expected return on capital= 10% Expected valuation period= 10 years. Current year= 2010 Time frame= 10years End of valuation period= 2019 Expected EPSGR= 10% Expected dividend payout= 5% First step; forecasting the share price. EPS after the tenth year will be given by the current EPS multiplied by the rate of EPS increase. In the American Online case; 0.40 x 1.10^10= 1.04 This shows the estimated EPS after 10 years assuming that the annual growth rate in earnings is 10% per annum. The forecasted stock price for 2020 is EPS after the 10th year x P/E ratio. The forecasted price = 1.04 x 180= 187.2 This means that in 2019, the expected stock prices of American online will be around 187.2, in case the assumptions will have used are correct. The next step is to calculate the worth of the dividends at the end of the projected period. This is very crucial since dividends play a very important role in determining the value of stocks. The next step is to calculate the dividend payout ratio, which is given by total dividends/ total EPS Year projected EPS 2010 0.4 X 1.00 = 0.40 2011 0.4 X 1.10 = 0.44 2012 0.44 X 1.10 = 0.48 2013 0.48 X 1.10 = 0.53 2014 0.53 X 1.10 = 0.58 2015 0.58 X 1.10 = 0.64 2016 0.64 X 1.10 = 0.70 2017 0.70 X 1.10 = 0.77 2018 0.77 X 1.10 = 0.85 2019 0.85 X 1.10 = 0.94 TOTAL EPS= 6.33 Total dividends= total EPS X Dividend payout ratio = 5% x 6.33 = 0.32 Future value = forecasted stock prices in 2019 + total dividends 187.2 + 0.32 = 187.52 From this value, we calculate the intrinsic value of the shares by getting the Net Present Value of the forecasted prices of the shares. NPV = future value of the stocks/ Expected return on investment 187.52/1.10^10 = 187.52/ 2.59 = 72.40 The intrinsic value of AOL= $ 72.40 This shows that the real value of AOL will increase in the next ten years. This indicates improved performance for the company. The current price for the stock is therefore, reasonable. The use of intrinsic valuation method is a reasonable method of evaluating the stock prices because it calculates the prices of the stock based on the future EPS and dividends. It is also based on the on the past performance of a company, how the company is performing currently and the expected future performance. This enables the investors to estimate the expected growth rate of the predator company. This method allows investors to determine whether the company is likely to perform in future regardless of the present and past performance of the company. Question 5 Assumptions Current market price = 72 Expected price stock growth rate=10% Expected return on capital= 10% Expected valuation period= 10 years. Current year= 2010 Time frame= 10 years End of valuation period= 2019 Expected EPSGR= 10% Expected dividend payout= 5% The increase in value= 142 billion Year cash flow pvif (r, t) present value of cash flows 2010 142b 1.10^1 129.09b 2011 142b 1.10^2 117.36b 2012 142b 1.10^3 104.67b 2013 142 1.10^4 96.99 2014 142 1.10^5 88.17 2015 142 1.10^6 80.16 2016 142 1.10^7 72.87 2017 142 1.10^8 66.24 2018 142 1.10^9 60.22 2019 142 1.10^10 54.75 Total 870.52b The net present value from the investment = 870.52-142= Return on investments for 142 billion with a 10% return on capital is 870.52 billion. The new number of shares after the investment will be 4207.55. The intrinsic value of the shares, therefore, will be total value/ number of shares Intrinsic value = 870.52/ 4207.55 = 216.14 The expected return on capital 1.10^10 = 2.59 Therefore, the intrinsic stock price will be given by intrinsic/ expected returns Intrinsic price stock = 216.14/2.59 = 83.45 Question 6 Reconciling the pre-merger and post- merger intrinsic stock prices Pre-merger stock prices 72.40 Add increase in stock prices because of the purchase prices 11.45 Post-merger stock prices 83.45 The zero investment for an acquirer changes the stock prices for a number of reasons. First, after the merger, the real performance of the acquirer changes as a result of earnings and synergetic effects from the target. Accretion changes the EPS of the merger by increasing the EPS from the original EPS of the acquirer before the merger. This means that the price per share changes. Consequently, the value of the firm changes on condition that that the P/E ratio does not change. Question 7 Exchange ratio= A’s offer price/ A’s pre deal market price 109.1/72=1.5 A will issue 1.5x 1301.5=1952.25 shares. Total shares for the new company 1952.55+2255 = 4207.55 The new expected EPS= Combined revenues/ shares of the predator = new shares issued 26.8 billion+4.8 billion/4207.5=7.51 Pre-merger P/E= MPS/EPS = 1.7 /0.40=180 Combined revenues for the two companies. 26.8 billions + 4.8 billion = 31.6 billion. The total number of shares after the merger = 4207.55 The EPS = 31.6/ 4207.55 = 7.51 This is an accretive merger- this is because it increases the AOL’s EPS in the near term relative to the original EPS if the merger had not been completed. This happens when the combined EPS of the merger is greater than the original acquirer’s EPS. Reference Shim, J. K., & Siegel, J. G. (2008). Financial Management. New York: Barron's Educational Series. Read More