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8/6/2019 Acb-Information to Analyse Acquisition
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INFORMATION
TO ANALYSE ACQUISITION
8/6/2019 Acb-Information to Analyse Acquisition
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INFORMATION TO ANALYSE
ACQUISITION In general, we can evaluate an acquisition in
much same manner and with much the same
kind of information that we use for
evaluating an investment proposal
generated internally.
Investment proposals can consist ofacquisition of a company or part there off.
8/6/2019 Acb-Information to Analyse Acquisition
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8/6/2019 Acb-Information to Analyse Acquisition
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INFORMATION TO ANALYSE
ACQUISITION Acquisition of another company can be
treated as capital budgeting decision.
There is an initial outlay which is expected
to be followed by free cash flows.
These are the cash flows in excess of
necessary investments in working capital
and fixed assets.
8/6/2019 Acb-Information to Analyse Acquisition
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INFORMATION TO ANALYSE
ACQUISITIONMeasuring Free cash flows
The expected future cash flows must be expressed
on a basis consistent with those for investmentproposals generated internally.
The buying company should first estimate thefuture cash income that the acquisition is expected
to add. Synergy Synergy is the economies realized in
the merger through increased revenue or costreductions.
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INFORMATION TO ANALYSE
ACQUISITION In an acquisition there are usual problems in
estimating future cash flows.
The company is acquired as a going
concern.
The acquiring company buys more than
assets, it buys experience, an organization
and proven performance.
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INFORMATION TO ANALYSE
ACQUISITION From EBITDA, we subtract three things
1. Expected taxes to be paid.
2. Likely future capital expenditure.
3. The expected net additions to workingcapital that is receivables and inventory.
The residual represent free cash flow forthe period. For each period, we begin withincremental EBITDA.
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INFORMATION TO ANALYSE
ACQUISITIONPreparing cash flow for analysis
In case of an acquisition investment, the life
of the project is indefinite.
Cash flow into perpetuity is denoted by g
In addition to expected free cash flows, the
acquiring firm may wish to specify other
possible cash series.
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INFORMATION TO ANALYSE
ACQUISITION Such cash flows were discounted at an
appropriate required return to get expected
P.V of the acquisition.
The cash price is subtracted from the
expected P.V to get expected NPV.
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INFORMATION TO ANALYSE
ACQUISITIONNon cash payments and liability assumption
Payment to acquired shareholders may involve
common stock, preferred stock, debt, cash or somecombination.
If securities other than cash are used, it should beconverted into cash-equivalent market values.
In this way, we are able to separate the investmentworth of an acquisition from the way it isfinanced.
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