Acb-Information to Analyse Acquisition

8/6/2019 Acb-Information to Analyse Acquisition

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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.


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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.


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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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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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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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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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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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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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Acb-Information to Analyse Acquisition