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7/27/2019 Pepsi and Coke Financial Management Mergers Lbos Divestitures and Business
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MERGERS, LBOS,
DIVESTITURES, AND BUSINESS
FAILUREChapter 171
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MERGER FUNDAMENTALSPart 1
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TERMINOLOGIES: Corporate Restructuring
activities involving expansion or contraction of a
firms operations or changes in its asset orfinancial (ownership) structure.
Merger
combination of two or more firms, in which the
resulting firm maintains the identity of one of
the firms, usually the larger one.
MERGER FUNDAMENTALS
3
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TERMINOLOGIES: Consolidation
combination of two or more firms to form a
completely new corporation
Holding Company
corporation that has voting control of one or
more other corporations.
Subsidiaries
the companies controlled by a holding company.
MERGER FUNDAMENTALS
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TERMINOLOGIES: Acquiring Company
firm in a merger transaction that attempts to
acquire another firm.
Target Company
the firm in a merger transaction that the
acquiring company is pursuing.
MERGER FUNDAMENTALS
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TERMINOLOGIES: Friendly Merger
A merger transaction endorsed by the target
firms management (board of directors),
approved by its stockholders, and easilyconsummated.
Hostile Merger (Unfriendly Merger)
a merger not supported by the target firmsmanagement, forcing the acquiring company to
gain control of the firm by buying shares in the
marketplace.
MERGER FUNDAMENTALS
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TERMINOLOGIES: Strategic Merger
a merger transaction undertaken to achieve
economies of scale.
Financial Merger
a merger transaction undertaken with the goal
of restructuring the acquired company to
improve its cash flow and unlock its hiddenvalue.
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MOTIVES FOR MERGING1. Growth or Diversification
2. Synergy of Mergers
3. Fund Raising
4. Increased Managerial Skill or Technology
5. Tax Considerations
Tax loss carry forward
6. Increased Ownership Liquidity7. Defense Against Takeover
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Types of Mergers1. Horizontal Merger
a merger of two firms in the same line of
business.
2. Vertical Merger
a merger in which a firm acquires a supplier or
a customer.
MERGER FUNDAMENTALS
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LBOSAND DIVESTITURESPart 2
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LEVERAGED BUYOUTS (LBOS)
o An acquisition technique involving the use
of large amount of debt to purchase a firm.
PURPOSE:
to allow companies to make large acquisition
without having to commit a lot of capital.
to create a high debt- private corporation with
improved cash flow and value.
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LEVERAGED BUYOUTS (LBOS)
TYPICALLY FINANCED WITH ATLEAST 90%DEBT TO 10% EQUITY:
o the assets of the firm are used to secure the
borrowings of the acquiring company.
o the loans are paid back from the acquired
companies cash flow.
o the lender take a portion of the firmsequity.
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LEVERAGED BUYOUTS (LBOS)
CHARACTERISTICS: Must have a good position in industry with a
solid record of profitability.
Must have a low level of debt, but high level of
assets to use as collateral.
Must have a stable and predictable cash flow
that are adequate for meeting debt obligations
and working capital needs.
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it can increase management commitmentand effort.
It tends to improve the companysproductivity and loyalty.
act to revitalize a mature company andimprove its market position.
tends to create value for variety of parties.
it enhances the value of firm.
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the company may fail and go bankrupt.
Dangerous for companies that are vulnerable
to industry competition or volatility in
the overall economy.
it can cause significant problems for
employees and suppliers.
It can damage a companies credit rating due
to paying high interest rates.
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DIVESTITURES
o Selling of some of a firms assets for various
strategic reasons.
MOTIVE:
To generate cash for expansion of other product
lines, to get rid of a poorly performing
operation, to streamline the corporation, or to
restructure the corporations business in a
manner consistent with its strategic goals.
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LEVERAGED BUYOUTS (LBOS)
APPROACHES:
1. Sale of a product line to another firm2. Sale of the unit to existing management.
3. Spin-off
4. Liquidation of the operating unitsindividual assets.
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ANALYZINGAND NEGOTIATING
MERGERSPart 3
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VALUINGTHE TARGET COMPANY
Estimating the target value of the company byusing Valuation and Capital BudgetingTechniques.
o ACQUISITION OF ASSETS
o Acquiring a firm for collection of assets(generally fixed assets) that the acquiringcompany needs.
o ACQUISITIONS OF GOING CONCERNS
o The methods of estimating expected cash flows
from an acquisition are similar to those used inestimating capital budgeting cash flows.
o Typically,pro forma income statementsreflecting the postmerger revenues and costsattributable to the target company are prepared.
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STOCK SWAP TRANSACTIONS
An acquisition method in which the acquiring
firm exchanges its shares for shares of the
target company according to a
predetermined ratio.
o RATIO OF EXCHANGE (actual)
o = amountpaidper share of the target company
market price per share of the acquiring firm
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STOCK SWAP TRANSACTIONS
EFFECT ON EARNINGS PER SHARE (EPS)
INITIAL EFFECT
If the following conditions are present the mergedEPS will initially remain constant:
1. Ratio of Exchange = 1
2. Acquiring firm premerger EPS = Target firm premergerEPS
3. P/E ratio of acquiring firm = P/E ratio of target firm.
LONG-RUN EFFECT
Often, the effects are quite favorable when an initialdecrease in the EPS of the stock held by the originalowners of the acquiring firm is expected.
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STOCK SWAP TRANSACTIONS
EFFECT ON MARKET PRICE PER SHARE
Factors that affect the Market Price perShare
1. Expected Earnings
2. Dilution of Ownership
3.
Changes in risk4. Other operating and Financial Changes
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STOCK SWAP TRANSACTIONS
EFFECT ON MARKET PRICE PER SHARE
RATIO OF EXCHANGE IN MARKET PRICE Indicates the market price per share of the
acquiring firm paid for each dollar of market
price per share of the target firm.
MPR = ( MPacquiring x RE ) / MPtarget
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MERGER NEGOTIATION PROCESS
FIGHTING HOSTILE TAKEOVERS Takeover Defenses
Strategies for fighting hostile takeovers.
White Knight
A takeover defense in which the target firm finds an
acquirer more to its liking than the initial hostile
acquirer and prompts the two to compete to take
over the firm.
Poison Pill
A takeover defense in which a firm issues securities
that give holders rights that become effective when a
takeover is attempted. These rights make the target
less desirable to acquirer.
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MERGER NEGOTIATION PROCESS
FIGHTING HOSTILE TAKEOVERS Golden Parachutes
provisions in the employment contracts of key
executives that provide them with sizeable
compensation if the firm is taken over.
Shark Repellents
Antitakeover amendments to a corporate charter
that constrain the firms ability to transfer
managerial control of the firm as a result of a
merger.
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HOLDING COMPANIES
Holding Company
A corporation that has control of
one or more other corporations.
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BUSINESS FAILURE FUNDAMENTALSPart 4
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TYPESOF BUSINESS FAILURE
1. Negative or Low Returns
2. Technical Insolvency
3. Bankruptcy
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MAJOR CAUSESOF BUSINESS FAILURE
1. Mismanagement
2. Economic Activity
3. Corporate Maturity4. Lack of Skills
5. Sales
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VOLUNTARY SETTLEMENTS
arrangements between a failedfirm and its creditors that
allow it to bypass some of the
costs involved in legal
bankruptcy proceedingsnormally initiated by the
debtor firm.
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VOLUNTARY SETTLEMENTS
ADVANTAGES simplicity and relatively low cost
no court proceedings as in bankruptcy
general cost of administration are much lower
than in a bankruptcy greater protection of confidential business
matters
less negative publicity in the legal and
business community
less time consuming and usually less expensive
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VOLUNTARY SETTLEMENTS
DISADVANTAGES no protection against secured parties
inability to reject leases and other burdensome
executory contracts
no legal way to compel dissenting creditors to
cooperate contracts
no legal way to compel dissenting creditors to
cooperate with settlements
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VOLUNTARY SETTLEMENTS
STRATEGIES TO SUSTAIN THE
FIRM:
1. Extension2. Composition3. Creditor Control4. Com bination of the three
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REORGANIZATIONAND LIQUIDATION
IN BANKRUPTCYPart 5
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BANKRUPTCY LEGISLATION
Bankruptcy occurs when the firm cannot pay
its bills or when its liabilities
exceed the fair market value of its
assets.
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BANKRUPTCY LEGISLATION
Bankruptcy Reform Act of 1978
Chapter 7. The portion that details the
procedures to be followed when liquidating
a failed firm.
Chapter 11. The portion that outlines the
procedures for reorganizing a failed or
failing firm, whether its petition is filed
voluntarily or involuntarily.
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BANKRUPTCY LEGISLATION
Reasons for Unethical Bankruptcy
1. Although bankruptcy may enable acompany to survive by giving it time torebuild liquidity, the company never hasto make whole.
2. Bankruptcy proceedings take from othersamounts that were agreed upon in good
faith contracts and bargaining3. When a company declares chapter 11
bankruptcy, non- bankrupt competitorsare harmed.
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REORGANIZATIONIN BANKRUPTCY
BankruptcyLegally declared inability or
impairment of ability of an
individual or organization to pay
its creditors.
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REORGANIZATIONINBANKRUPTCY
Allowing the debtor to maintain
operating control, while
restructuring debts and workingout a repayment schedule
acceptable to creditors.
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REORGANIZATIONINBANKRUPTCY
Two types of Reorganization1. Voluntary Reorganization a petition
filed by a failed firm on its own behalf for
reorganizing its structure and paying itscreditors.
2. Involuntary Reorganization a petitioninitiated by an outside party for the
reorganization and payment of creditorsof a failed firm.
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REORGANIZATIONINBANKRUPTCY
Procedures for Reorganization1. A Reorganization Petition is filed in court.
2. A debtor in possession is appointed by the
judge.3. Once the court approved the plan and
disclosure of statement, these are given to the
firms creditors and shareholders for their
acceptance.
4. Once accepted and confirmed by the court,the plan is put into effect as soon as possible.
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REORGANIZATIONINBANKRUPTCY
Role in Debtor in Possession1. Valuation of the firm.
If: a). Value as a going concern < LiquidationValue
b). Value as a going concern > LiquidationValue
2. Recapitalization3. When determined the new capital structure
and distribution of capital, it will submit the
reorganization plan and disclosure statementto the court.
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LIQUIDATIONIN BANKRUPTCY
TRUSTEEappointed by the Securities and Exchange
Commission (SEC) to administer the bankruptcy.
RESPONSIBILITIES:1. Liquidate the firm
2. Keep records
3. Examine the Creditors Claims
4. Disburse Money5. Furnish information required
6. Make final reports on the liquidation
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LIQUIDATIONIN BANKRUPTCY
Priority of Claims1. Unsecured Liabilities with Priority
a. Administering Expenses
b. Unpaid interim expenses
c. Unpaid salaries and wages
d. Unpaid employee benefit plane. Unsecured customer deposits
f. Taxes
2. Creditors
a. Secured
b. Unsecured3. Stockholders
a. Preferred
b. Common
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LIQUIDATIONIN BANKRUPTCY
Example:Assets: (@FMV)
Cash 2,000
Receivables 20,000
Land 10,000
Claims:
Liquidation Expenses 4,200
Unpaid Wages 500
Notes Payable 6,000
(secured by Land)Unsecured Liabilities 19, 000
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GROUP 2
Bang-ud, Abigail T.Balilit, Regine P.
Capsuyen, Pennylyn S.
Dangiw, Elva B.
Dasalla, Roselyn O.
Donato, Kristine Jean
Lumagbas, Lovely
Macayana, Angelica Yoko R.
Maymaya, Connie Calay
Marquez, JomaPanner, Rachell
Quing-A, Remalyn A.
Sab-it, Esther 52
Mergers,LB
Os,Divestitures,andBusiness
Failure