Merger & Acquisition Analysis: Apple & IBM - Case Study Example

Merger & Acquisition Analysis: Apple & IBM Student’s Name Institutional Affiliation A. Introduction The purpose of this paper is to establish whether a merger and acquisition should be conducted between an acquiring company: Apple Incorporated and a target company: IBM. The merger is set to combine the two firms so that Apple can go ahead and sustain the entire identity. In doing this, the paper conducts a step by step analysis of the two firms before providing a suggestion. B. Acquiring Company Profile Information: Apple Incorporated Apple Inc is a US-based technology company that designs, produces and markets such products as mobile communication and distinctive media services, personal computers and recently launched smart watches (Yahoo Finance, 2014). It also engages in the production and distribution of digital content music players across the international platform. Through its online and physical store presence, Apple sells such products as iPod, iPads and Apple Smart-watches. Other notable ways for which Apple conducts selling include; direct sales force as well as third-party cellular network carriers (Yahoo Finance, 2014). C. Industry Analysis Both Apple and Samsung operate under the global electric equipment industry. The industry is made of firms that produce a significant number of digital products and services for the already existing IT-savvy customers positioned across the different world markets. The industry is highly competitive with customers purchasing behaviours highly attributed to aspect of brand loyalty. The growth within the industry is associated with the recent expansion projects for their respective manufacturing processess into different economies such as the larger Asia-Pacific region in countries like Taiwan and China (MacWilliams, 2012). Given the intensive R&D activities in the North US section, the industry is set to grow exponentially hence contributing a lot to the overall GDP position. It is set to create even more jobs in the future as the demand for technological-based equipments continues to increase across the globe. The North American industry is further characterized by the aspect of job outsourcing especially to China where labor costs are quite effective and affordable for that matter (MacWilliams, 2012). D. Merger Valuation Reviews Bouwman, Fuller & Nain, (2003) argue that the activities of mergers and acquisition has continued to attract more attention especially because of the significant volumes involved; the United States of America M&A activities have continued to increase to 16% of the overall GDP by the end of 1999 while the value of global mergers and acquisition attaining a peak of more than $3.5 trillion in 2000 (Bouwman, Fuller & Nain, 2003). The authors propose three different forms of measures that could be used to indicate whether mergers indeed create value. First, they propose a short-run stock performance of the acquirer, the target or even the combined firms that are associated with the acquisition activity. Secondly, the propose a long run stock performance of the acquiring entity for a period extending between 3 and 5 operations years immediate after the announcement acquisition. Thirdly, they argue that by examining possible accounting measures of profitability like ROE and ROA or even cash flow performances, it is probable to measure value creation (Bouwman, Fuller & Nain, 2003). According to Berger (2015), the M&A activities has continued to face imminent level of challenges like complicated cases being brought forward by investors in order to improve on their relative payouts. The author notes that in Delaware alone, merger litigations have increased substantially in the recent years by at least 17% in 2013 (Berger, 2015). These investors especially hedge funds firms engage in the purchasing of enormous stakes of a given target entity immediately after announcement of a deal before placing appraisal actions later. They file for these litigations seeking a higher stock price as compared to what was originally incurred in the course of the merger. They also expect to enjoy imminent considerations in form of a statutory interest rate of more than 5% high and above the federal discount rates, compounded in a quarterly basis (Berger, 2015). These litigations are expected to grow even further in future hence increasing the risks associated with M& A activities. Murray & Burch (2014) notes that the activities of M&A have become rampant in Academic Medical Center(AMC), which is basically the fundamental cornerstone of the US health system. The existing developments as well as alterations within the overall healthcare platform has necessitated the AMCs to reevaluate their respective business models while at the same time replacing them with newer operational strategies in order to guarantee of a sound financial future. Given the ever-changing operational environment as a result of new healthcare reforms, AMCs have sought to explore strategic partnerships that provide the capacity to restructure the manner for which patients receive care while ensuring to lower costs involved in the process (Murray & Burch, 2014). Mergers and acquisitions is emphasised between AMC and community-based hospitals in order to get an opportunity to create referral networks while also provide high quality and low-specialised care to patients. Ketz (2000) argues that firms can enjoy real values through engaging in mergers, acquisitions or even other restructuring processess. The process involves the application of a discounted cash flow model before going ahead to adopt a more academic or practical model (Ketz, 2000). The author notes that all of these models indeed provide economic value especially when the combination results to some form of gains. Sorescu, Chandy, & Prabhu, (2007) notes that some acquisitions are successful as opposed to others because they focus more on firm-specific as opposed to deal-specific variables in expounding performances differences. The authors note that firms with a higher product capital; those portraying greater product creation and support asset-base, make successful and smart acquisitions moves (Sorescu, Chandy, & Prabhu, 2007). These firms are deemed to be perfect in the selection of targets with innovation-based potentials and thereby, deploying the potential to access and explore competitive advantages. E. Analysis Acquiring Company: Apple Inc Target Company: IBM Step 1: Net worth of the Firm Net worth= total assets- long term debt-preferred stock Apple Inc IBM Total Assets Long term debt Preferred stock 231,839 28,987 0 117,532 35,073 0 Net worth 202,852 82,459 Calculate No. of shares: Apple Inc: 286,512/98.46= 2,909.93 IBM: 52,666/162.34= 324.42 Calculation of Net worth/ Share= net worth/no. of shares Apple Inc: 202,852/2,909.93= $69.71 IBM: 82,459/324.42=$254.17 SER (Share Exchange Ratio) = net worth/share of target (IBM)/ net worth/share of acquirer (Apple) SER=$254.17/$69.71= 3.65 No. of new shares to be issued: SER* no. of shares of IBM = 3.65*324.42 = 1,184 shares Earnings per Share after Merger EPS after Merger= net income/ No. of shares Apple IBM Total Net income 39,510 12,022 51,532 No of shares 324.42 1,184 1,508.42 Therefore; EPS after Merger: 51,532/1,508.42= $ 34.16/share EPS Equivalent = EPS* SER = 34.16*3.65 = $124.68 Step 2: Calculate the Expected Market Price Expected Market Price = EPS after Merger*P/E ratio of acquirer company = 34.16*1.4 = $47.82 Apple IBM Net income 39,510 12,022 No of shares 2,909.93 324.42 EPS before merger= net income/ no of shares 13.58 37.05 Market price per share before merger 19.02 13.71 P/E ratio = MPS before merger/ EPS before merger 1.40 0.37 Market value= market price * no. of shares 19.02*2,909.93 =55,346.9 13.71*324.42 =4,447.8 Step 3: Calculate Market Value of merged firm Apple IBM(SER*No of shares) Merged (Apple + IBM) No of shares 2,909.93 (324.42*3.65) = 1,184.13 4,094.06 Expected market price after merger ( P/E ratio of acquiring firm * EPS after merger 1.40*34.16 = $47.82 Market value of merged firm = 47.82* 4,094.06 = $195,777.95 Step 4: Calculate the Profits Accruing to Shareholders Apple Inc (Acquirer Firm) IBM (Target Firm) Totals Expected Market Price 47.82 47.82 47.82 No of shares 2,909.93 324.42 3,234.35 Market value after merger (47.82+2,909.93) 139,152.85 (47.82*324.42) 15,513.76 154,666.61 Market value before merger (19.02*2,909.93) 55,346.87 (13.71*324.42) 4,447.80 59,794.67 Profits Accrued (Market value after merger less market value before) 83,805.98 11,065.96 94,871.94 Conclusion & Recommendation Given the fact the profits accrued by the underlying acquiring company: Apple Incorporated is significantly higher than the level of profits accrued to shareholders by the target company: IBM, then a merger should be conducted. The profits accrued for shareholders by the acquiring company are 86.79% more than the figures accrued by the target company hence a need for a merger. References Bouwman, C. H., Fuller, K., & Nain, A. S. (2003). Stock Market Valuation and Mergers. MIT Sloan Management Review, 45(1), 9-11. Berger, D. (2015). Appraisal litigation raises merger costs. International Financial Law Review, 1. Ketz, J. E. (2000). Do Mergers and Acquisitions Add Any Real Value? Journal of Corporate Accounting & Finance (Wiley), 11(2), 31-33. Murray, J., & Burch, K. (2014). Recent Trends in Academic Medical Center Mergers, Acquisitions and Affiliations. Health Lawyer, 26(3), 29-34. MacWilliams, J. (2012). US electronic industry faces major challenges. Retrieved from http://www.electroline.com.au/content/business/article/us-electronics-industry-faces-major-challenges-1377348905 Sorescu, A. B., Chandy, R. K., & Prabhu, J. C. (2007). Why Some Acquisitions Do Better Than Others: Product Capital as a Driver of Long-Term Stock Returns. Journal of Marketing Research (JMR), 44(1), 57-72 Yahoo Finance! (2014). Apple Company profile. Retrieved from http://finance.yahoo.com/q/pr?s=AAPL+Profile Appendices IBM Financials: Read More