Marketing research - Assignment Example

?Report Executive Summary: A friendly takeover of Delta plc by Alpha plc is proposed. The acquisition is confirmed by the Board of directors of both the firms informally, and a transaction value of ?12.00 per share of Delta plc stocks is offered. There are some alternative forms of payment by Alpha Plc to Delta Plc. It is related below: 1) Cash Offer: Alpha plc will pay?12.00 per share to Delta plc 2) Stock Offer: Alpha plc will give Delta plc share holders, 0.80 shares of Alpha plc as per the share of Delta plc stock. 3) Mixed Offer: Alpha plc will pay ?6.00 plus 0.40 shares of Alpha plc stock per shares of Delta plc. It has been agreed by the two companies, that the merger will result in economies of scale with a net present value (NPV) of ?90.00 million. The report aims at finding out the better option among the alternatives to fix the deal, that is, which option will act better for Alpha plc, and which for Delta Plc. To find out the answers for these questions, the net present net value is calculated, and searched for any other option to be suggested. In this report, the first step is gathering the financial information (given in the case itself) and combining it appropriately. Then the present net value and the market value of each share are taken into consideration. The findings from the calculation is, The Delta plc team chooses every stock offer for the reason that, the alternative gives Delta plc the highest premium. Introduction: A capitalist needs to develop his business, either by internal or external development. The internal expansion of a firm grows gradually, taking its own time in the normal course of the business. This cycle includes attainment of new assets, substitute of the technologically outdated equipments, and the diversification for new lines of products and services. In external expansion, a company takes over an existing business firm which is comparatively smaller and grows quickly through corporate combinations. These corporate combinations are varied in the form of amalgamations, mergers and acquisitions (takeovers). These are now significant features of corporate restructuring. In accordance with the varied strategies of companies, they have been playing a vital role in the external expansion of a number of top companies’ world wide. This corporate combination has become popular because it enhances competition, limiting of trade barriers and free flow of resources across countries. Acquisition or takeover even enhances the globalization of business also. Takeover or acquisition is a strategic decision taken by the think tanks of the company, for optimizing the growth of the company, enhancing its production and marketing operations. When the acquisition is forced or unwilling in the sense of the term, then it is called take over. Acquisition: Acquisition means taking control of the target firm by another firm. This corporate action is now a part of company strategy. The control is accessed by buying the most of ownership stakes of the targeted company. Acquisition is also called takeover, which is a “process through which one company takes over the controlling interest of another company. Acquisition includes obtaining supplies or services by contract or purchase order with appropriated or non-appropriated funds, for the use of federal agencies through purchase or lease” (Venture Capital Glossary: Definition of Acquisition 2001). Friendly Acquisition: In some cases, the board of directors approves a buyout offer from an acquiring firm. The stakeholders of the company may vote, to pass the decision as well. The most important matter is whether the buyout will happen at the price offered per share. The acquiring company (The company which offers the buyout) will recommend a premium to the existing market price, but the amount of this premium will be settled on the overall support for the buyout, from the shareholders within the target company. In friendly acquisition, the managers of both companies hold a meeting in order to take decisions. “The acquisition of one company by another is with the full knowledge and consent of the target company's board of directors. Generally speaking, a friendly takeover requires the approval of shareholders, in addition to the board of directors, but, in this case, shareholders tend to follow the board's lead. This is because, in a friendly takeover, the acquiring company offers a premium to the current stock price for each share” (Friendly Takeover 2012). There are some steps to be followed for the acquisition or take over. These are: 1) Planning 2) Search and screening 3) Financial evaluation 4) Permission for merger 5) Information to the stock exchange 6) Approval of board of directors 7) Shareholders meeting 8) Transfer of assets and liabilities 9) Payment by cash or securities Aims and Objectives: A friendly acquisition of Delta plc by Alpha plc is proposed. “In economics or business sense of the term, merger may be referred to as the establishment of a larger company as a result of the amalgamation of two companies. Mergers comprise the process of "stock swap". "Stock swap" is a process, in which the risk undertaken by the shareholders is equally borne by the shareholders of both the companies” (Mergers and Acquisitions 1999). The acquisition is confirmed by the Board of directors of both the firms informally and a transaction value of ?12.00 per share of Delta plc stocks is offered. There are three other alternatives for this acquisition; the objectives of this study are, 1) Finding out the better alternative which optimize the deal among the suggested options 2) Suggest any other option which can act better to the demands 3) Find out the NPV for the shares of each company. Calculations of Three Alternatives: The management teams of each company have casually agreed upon an operation value of ?12.00 per share of delta plc stock other than is currently negotiating alternative forms of payment. There are three alternative types of payment by Alpha Plc for Delta Plc which is being considered is as follows: Alternative 1 is Cash offer of alpha plc will disburse ?12.00 per share of Delta plc: Alternative 2 is stock offer of 0.80 shares of Alpha plc per share of Delta plc stock; Alternative 3 is mixed offer of ?6.00 in addition 0.40 shares of alpha plc stock per share of Delta plc. It has been arranged by the two companies that the merger will outcome in financial systems of scale with a NPV of ?90 million. Following are the financial data on the two companies: Alpha plc Delta plc Pre merger stock price (?) 15.00 10.00 Number of shares outstanding (million) 75 30 Pre-merger market value (?million) 1125 300 Alternative 1: Cash offer of alpha plc will pay ?12.00 per share for the shares of Delta plc: Acquirers have to naturally pay a premium to contain the owners of the target company to surrender control. In an M&A contract, the premium is the part of the advantages received by the target company’s shareholders that is to say in excess of the pre-merger market price of their shares. “Often used in risk arbitrage firm chosen as an attractive takeover candidate by a potential acquirer. The acquirer may buy up to 5% of the target's stock without public disclosure, but it must report all transactions and supply other information to the SEC, the exchange the target company is listed on, and the target company itself once the 5% threshold is hit” (Target Company Investment and Finance Definition 2010). The target company manager’s are effort to negotiate the maximum probable premium relative to the target company. Target share holders gain = Pt-Vt Price paid for the target company (Pt) = ?1125 Pre merger value of the company (VT) = ?300 So the target share holders gain = ?1125- ?300 = ?825 Acquires gain = S- (Pt- Vt) Synergies created by the business combination (S) = ?90. So, Acquires gain = ?90 - ?825 = -735. Alternative 2: stock offer of 0.80 shares of Alpha plc per share of Delta plc stock; A stock offer 0.80 share might appear at first balance to be equal to a cash offer ?12.00 for the reason that Alpha plc share price is ?15.00 (0.80*?15=?12). Alpha plc have to issue 24 million shares (30*0.80) The post merger value of the combined companies: “Post-merger integration teams should be focused on value drivers and not just cost functions. These drivers include core processes such as product design, marketing and supply chain management. There should also be a revenue team. Accenture M&A professionals have found that unless there is a dedicated plan for revenue retention, companies can lose one percent to two percent of their planned growth during integration—and it is very rare for this to be taken into consideration in the deal financials” (Chanmugam et al. 2004, p. 2). Following are the equation: VA* = VA +VT + S –C VA* = Post merger value of the combined companies VA = Pre merger value of the acquirer C = Cash paid to target shareholders So the VA* = ?1,125 +?300+?90-?0 = ?1,515 million Then, the team separates Alpha plc’s post merger cost by the post merger amount of shares outstanding. For the reason that Alpha plc issued 24 million (30*0.80) shares to complete the transaction. We add 24 million to the 75 million shares outstanding to turn up at 99 million. Separating the post merger market price by the post merger amount of shares outstanding, it decides that the value of both share given to Delta plc’s shareholders is essentially worth ?1,515 million/99 million = ?15.30 and the total value paid to Delta plc is ?15.30*24= ?367 million. The premium is thus ?367-300=?67 million, which is ?7 million more than it was for the cash offer. Since the target shareholder receives ?7 million more than in the cash offer, the Alpha plc’s gain is likewise less. For the reason that the synergies are valued at ?90 million and the premium is ?67 million, the Alpha plc’s gain under a stock transaction with these terms is ?23 million. 1. Alternative 3: Mixed offer of ?6.00 plus 0.40 shares of alpha plc stock per share of Delta plc. A mixed offer still outcomes in some strength, though not as much as a clean stock offer. In this section business inserts ?180 million for C for the reason that the company is paying ?6 per share for 30 million shares. VA* = VA +VT + S –C = ?1,125 +?300+?90-?180 = ?1,335 million. Then, we conclude that alpha plc have to issue 12 million shares to complete the transaction. 0.40*30 million = 12 million. Joined with the original 75 million shares exceptional will be 87 million. We separate ?1,335 million by 87 million and finds that both share likely to the Delta plc shareholders value is ?15.35. The whole value paid to Delta plc shareholders contains a cash factor, ?6.00*30 million = ?180 million and a stock aspect, 12 million shares issued with a worth of ?15.35 each, equaling ?184 million. When these are additional, the total price is ?180+184 =?364 million and the premium is consequently ?364 million-300 million. The acquirer’s gain is $26 million. Conclusion: This report focused to observe the better option between the alternatives to fix the deal. Which alternative will act improved for Alpha plc and which alternative will act better for Delta Plc. To observe the answers for these questions the NPV is calculated and searched for any other alternative which can be recommended. In this report the opening step is gathering the economic data (given in the case itself) and joining it correctly. It should recommend that the Delta plc team choose for the every stock offer for the reason that that alternative gives Delta plc the highest premium. Reference List Chanmugam et al. 2004. Post - Merger Integration Myths Versus High – Performance Realities. Accenture. Available at < http://www.imaa-institute.org/docs/m&a/accenture_04_Post-merger%20Integration%20Myths%20Versus%20High-performance%20Realities.pdf> [Accessed on 10 February 2012] Friendly Takeover. 2012. Farlex, Inc. [Online] Available at [Accessed on 10 February 2012] Mergers and Acquisitions. 1999. Mapsofworld.com. [Online] Available at [Accessed on 10 February 2012] Target Company Investment and Finance Definition. 2010. Wiley Publishing, Inc. Available at < http://invest.yourdictionary.com/target-company> [Accessed on 09 February 2012] Venture Capital Glossary: Definition of Acquisition. 2001. Second Venture Corporation. [Online] Available at [Accessed on 10 February 2012] Read More