Chapter-10收購、兼并和重組課后題目

AnalyzingPrivatelyHeldCompaniesMaier’sLaw:Ifthefactsdonotconformtothetheory,

theymustbedisposedof.Exhibit1:CourseLayout:Mergers,Acquisitions,andOtherRestructuringActivitiesPartIV:DealStructuringandFinancingPartII:M&AProcessPartI:M&AEnvironmentCh.11:PaymentandLegalConsiderationsCh.7:DiscountedCashFlowValuationCh.9:FinancialModelingTechniquesCh.6:M&APostclosingIntegrationCh.4:BusinessandAcquisitionPlansCh.5:SearchthroughClosingActivitiesPartV:AlternativeBusinessandRestructuringStrategiesCh.12:Accounting&TaxConsiderationsCh.15:BusinessAlliancesCh.16:Divestitures,Spin-Offs,Split-Offs,andEquityCarve-OutsCh.17:BankruptcyandLiquidationCh.2:RegulatoryConsiderationsCh.1:MotivationsforM&APartIII:M&AValuationandModelingCh.3:TakeoverTactics,Defenses,andCorporateGovernanceCh.13:FinancingtheDealCh.8:RelativeValuationMethodologiesCh.18:Cross-BorderTransactionsCh.14:ValuingHighlyLeveragedTransactionsCh.10:PrivateCompanyValuationLearningObjectivesPrimarylearningobjective:ProvidestudentswithaknowledgeofhowtoanalyzeandvalueprivatelyheldfirmsSecondarylearningobjectives:ProvidestudentswithaknowledgeofCharacteristicsofprivatelyheldbusinessesChallengesofvaluingandanalyzingprivatelyheldfirms;Whyandhowprivatecompanyfinancialstatementsmayhavetoberecast;andHowtoadjustmaximumofferpricesforliquidityrisk,thevalueofcontrol,andminorityriskWhatisaPrivateFirm?Afirmwhosesecuritiesarenotregisteredwithstateorfederalauthorities1

Withoutregistration,theirsharescannotbetradedinthepublicsecuritiesmarkets.Shareownershipusuallyheavilyconcentrated(i.e.,firms“closelyheld”)1BusinessesmustgenerallyregistertheirlegalformwiththeSecretaryofStateandwiththeStateRevenueagenciesfortaxpurposes.KeyCharacteristicsof

PrivatelyHeldU.S.FirmsTherearemorethan28millionfirmsintheU.S.Ofthese,7.4millionhaveemployees,withtherestlargelyself-employed,unincorporatedbusinessesM&AmarketinU.Sconcentratedamongsmaller,family-ownedfirms --Firmswith99orfeweremployeesaccountfor98%ofallfirmswithemployees

PercentDistributionofU.S.FirmsFilingIncomeTaxesin200872%9%19%Family-OwnedFirms89%ofU.S.businessesfamilyownedNotallfamily-ownedfirmsaresmall(e.g.,Wal-Mart,Ford,Motorola,Loews,andBechtel)Majorchallengesinclude:succession,accesstocapitallackofcorporategovernance,informalmanagementstructure,lessskilledlowerlevelmanagement,andapreferenceforownershipovergrowth.GovernanceIssuesWhatworksforpublicfirmsmaynotforprivatecompanies“Marketmodel”reliesondispersedownershipwithownership&controlseparate“Controlmodel”moreapplicablewhereownershiptendstobeconcentratedandtherighttocontrolthebusinessisnotfullyseparatefromownership(e.g.,smallbusinesses)ChallengesofAnalyzingandValuing

PrivatelyHeldFirmsLackofexternallygeneratedinformationLackofadequatedocumentationofkeyintangibleassetssuchassoftware,chemicalformulae,recipes,etc.LackofinternalcontrolsandrigorousreportingsystemsFirmspecificproblemsNarrowproductofferingLackofmanagementdepthLackofleveragewithcustomersandvendorsLimitedabilitytofinancefuturegrowthCommonformsofmanipulatingreportedincomeRevenuemaybeunderstatedandexpensesoverstatedtominimizetaxliabilitiesTheoppositemaybetrueifthefirmisforsaleStepsInvolvedinValuingPrivatelyHeldBusinessesAdjusttargetfirmdatatoreflecttruecurrentprofitabilityandcashflowDetermineappropriatevaluationmethodology(e.g.,DCF,relativevaluation,etc.)EstimateappropriatediscountrateaAdjustfirmvalueforliquidityrisk,valueofcontrol,orminorityriskifapplicableaAdjustforspecificbusinessrisk.Step1:AdjustingtheIncomeStatementOwner/officer’ssalariesBenefitsTravelandentertainmentAutoexpensesandpersonallifeinsuranceFamilymembersRentorleasepaymentsinexcessoffairmarketvalueProfessionalservicefees(e.g.,legalorconsulting)Depreciationexpense(e.g.,acceleratedmakeseconomicsensewhenequipmentobsolescencerapid)Reserves(e.g.,fordoubtfulaccounts,pendinglitigation,futureretirementorhealthcareobligations)AreasCommonlyUnderstated Whenabusinessisbeingsold,thefollowingexpensecategoriesareoftenunderstatedbytheseller:ThemarketingandadvertisingexpendituresrequiredtosupportanaggressiverevenuegrowthforecastTrainingsalesforcestomarketnewproductsEnvironmentalclean-up(“l(fā)ong-tailed”liabilities)EmployeesafetyPendinglitigationAreasCommonlyOverlookedWhenabusinessisbeingsold,thefollowingassetcategoriesareoftenoverlookedbythebuyeraspotentialsourcesofvalue:1Customerlists(e.g.,cross-sellingopportunities)Intellectualproperty(e.g.,unusedpatents)Licenses(e.g.,unusedlicenses)Distributorshipagreements(e.g.,alternativemarketingchannelsforacquirerproducts)Leases(e.g.,atlessthancurrentfairmarketvalue)Regulatoryapprovals(e.g.,permitssaleofacquirerproducts)Employmentcontracts(e.g.,employeeretention)Non-competeagreements(e.g.,limitscompetition)Howmightyouvalueeachoftheaboveitems?1Fortheseitemstorepresentsourcesofincrementalvaluetheymustrepresentsourcesofrevenueorcostreductionnotalreadyreflectedinthetarget’scashflows.AdjustingtheTarget’sFinancialStatementsTarget’sStatementsNetAdjustmentsAdjustedStatementsCommentsNetRevenue80008000Checkforprematurebookingofrevenue&adequacyofreserves1CostofSales25000(400)4600ConvertLIFOtoFIFODepreciation100(40)60ConvertacceleratedtostraightlineSelling:Salaries/Benefits1000(100)900EliminatefamilymemberSelling:Rent200(100)100EliminatesalesofficesSelling:Insurance20(5)15ReducepremiumsSelling:Advertising201030IncreaseadvertisingSelling:Travel&Enter25050300IncreasetravelAdmin.:Salaries/Benefits600(100)500Reduceowner’spayAdmin:Rent150(30)120ReduceofficespaceAdmin:Directors’/Prof.Fees280(40)240ReducefeesTotalExpenses7620(755)6865EBIT38011351Reveneisbookedbeforeproductshippedorforproductsnotordered.Reservesmustbehighenoughtoreflectreturnsanduncollectableaccounts..2Costofsales=purchasedmaterials&services-?inventories.Theobjectiveistoalignrevenueinagivenperiodwiththeactualcostofproducingthatrevenue.Suchcostscouldreflectbothcurrentproductionandpastproductionwhenunitssoldcomefrominventory.DiscussionQuestionsWhyisitoftenmoredifficulttovalueprivatelyownedcompaniesthanpubliclytradedfirms?Givespecificexamples.Whyisitimportanttorestatefinancialstatementsprovidedtotheacquirerbythetargetfirm?Bespecific.Howcouldananalystdetermineifthetargetfirm’scostandrevenuesareunderstatedoroverstated?Givespecificexamples.Step2:DetermineAppropriateValuationMethodologyIncomeorDCFapproachRelativeormarket-basedapproachReplacementcostapproachAsset-orientedapproachCommonCapitalizationMultiplesPerpetuity(zerogrowth)orconstantgrowthmethodscommonlyusedinvaluingsmall,privatelyownedfirmsforsimplicityandduetodatalimitationsFCFF/WACC=(1/WACC)xFCFF,where(1/WACC)isthezerogrowthcapitalization(valuation)multipleFCFF(1+g)/(WACC–g)=[(1+g)/(WACC–g)]xFCFF,wheregistheconstantgrowthrateand[(1+g)/(WACC-g)]istheconstantgrowthcapitalization(valuation)multipleAssumediscountrateis8%andfirm’scurrentcashflowis$1.5million.Multiplesinbrackets.Ifcashflowexpectedtoremainlevelinperpetuity,theimpliedvaluationis[1/.08]x$1.5=12.5x$1.5=$18.75millionIfcashflowexpectedtogrow4percentannuallyinperpetuity,theimpliedvaluationis[(1.04)/(.08-.04)]x$1.5=26x$1.5=$39.0millionNote:12.5and26representthecapitalizationmultiplesforthezeroandconstantgrowthmodels,respectively.Step3:SelectAppropriateDiscount

(Capitalization)Rates Capitalassetpricingmodel(CAPM)Estimatesystematicriskbycalculatingfirm’sbetabasedoncomparablepubliclylistedfirmsorhistoricaldata1Adjustfornonsystematicrisk2WeightedAverageCostofcapitalCostofdebtbasedonwhatpublicfirmsofcomparableriskarepaying3Weightsreflectmanagement’stargetdebttoequityratioorindustryaverageratio4

1Assumingprivatefirmleveraged,estimateprivatefirm’sleveragedbetabasedonunleveredbetaforcomparablepubliclyfirmsadjustedforprivatefirm’stargetdebttoequityratioandmarginaltaxrate.Alternatively,useindustryaverageratioassumingfirm’stargetD/Ewillmovetoindustryaverage(SeeChapter7).

2Differencebetweenjunkbondrateandrisk-freerate,returnonOTCsmallstockindexandrisk-freerate,orIbbotson’ssuggestedfirmsizeadjustments

3Assumingfirmswithsimilarinterestcoverageratioswillhavesimilarcreditratings,estimatewhatprivatefirm’screditratingwouldbeandbaseitspre-taxcostofborrowingonacomparablyratedpublicfirm’scostofborrowing.

4DividingD/Eby(1+D/E)convertsD/Eintoadebttototalcapitalratio,whichsubtractedfromonegivestheequitytototalcapitalratio.Usingtheindustryaveragedebt-to-equityor-totalcapitalratioimpliesthefirm’sgoalistoachieveandsustaintheindustryaverageratio.AlternativeWaystoEstimateDiscountRates:TotalBetaCAPMbetasmeasuresystematicriskofthemarginalinvestor(buyer)inafirm,withsuchinvestorsdiversifyingawaynonsystematicrisk.EmpiricalevidencesuggeststhatCAPMunderstatesfinancialreturnsonsmallcompaniesSmallfirmowner’snetworthoftenprimarilytheirownershipstakeinthefirm.Becauseofthedifficultyinattractingnewinvestors,thecurrentownercanbeviewedasthemarginalinvestorinthefirm.Therefore,Theyarenotwelldiversifiedandareconcernedaboutbothsystematicandnonsystematicrisk(i.e.,totalrisk)Totalbetas(βtot),unlikemarketbetas(β)estimatedfromcomparablepublicfirms,measuretotalrisktothebusinessownerandcanbeestimatedasfollows:1

βtot=Marketβ/√R2whereR2isthecoefficientofdeterminationestimatedforcomparablepubliccompaniesand√R2isthecorrelationcoefficientTotalbetasarelargerthanCAPMbetas21Inalinearregressionofthereturnontheithstockagainstthereturnondiversifiedmarketindexofstocks,β=Cov(i,m)/?m2

andmayberewrittenas(?i/?m)R,since(?i/?m)xCov(i,m)/(?ix?M)=Cov(i,m)/?m2,where?istandarddeviation(volatility)ofaithsecurity,?misthestandarddeviationoftheoverallstockmarket,andRisthecorrelationcoefficientbetweentheithsecurityandtheoverallstockmarket.Thecorrelationcoefficientindicatesdirectionoftherelationshipbetweentheithstockandtheoverallmarketandthecovariancemeasuresthevolatilityoftheithstockversustheoverallmarket.2Marketbetaβ=(?i/?m)R,where0≤R≤1.DividingbyRtocalculateβtoteliminatesRresultinginβtot>β.AlternativeWaystoEstimateDiscountRates:TheBuild-UpMethodRepresentsthesumofrisksassociatedwithaparticularfirmbyaddingtotheCAPM’sestimateofthefirm’scostofequity(forwhichthefirm’smarketbetaisassumedtobeone)1anestimateoffirmsize,industryrisk,andfirmspecificrisk.Thebuild-upmethodcouldbedisplayedasfollows:ke=Rf+ERP+FSP+IND+CSRwhereke=costofequity

Rf=riskfreereturnERP=EquityriskpremiumFSP=firmsizepremium(measuresriskofdefault)IND=Industryriskpremium(measuresoperatingrisk)CSR=Firmspecificriskpremium(e.g.,excessivedependenceofasinglecustomer,narrowproductfocus,limitedaccesstocapital)21Assumesfactorscausingthefirm’sbetatodeviatefromonearecapturedbyfirmsize,industryandfirmspecificriskadjustments.2DataforfirmsizeandindustryriskpremiumsavailablefromMorningstar’sIbbotsonStocks,Bonds,Bills&InflationandDuff&PhelpsRiskPremiumReport.Firmspecificriskoftenobtainedthroughmanagementinterviewsandfirmsitevisits.Step4:AdjustFirmValueforLiquidityRisk,ValueofControl,orMinorityRiskDiscountAppliedtoFirmValueLiquidityrisk:ReflectspotentiallossinvaluewhenanassetissoldinanilliquidmarketMinorityrisk:Reflectslackofcontrolassociatedwithminorityownership.RiskvarieswithsizeofownershippositionPremiumAppliedtoFirmValueValueofcontrol:Abilitytodirectactivitiesofthefirm(e.g.,makekeydecisions,declareadividend,hireorfirekeyemployees,directsalestoorpurchasesfrompreferredcustomersorsuppliersatotherthanmarket-determinedpricelevels)LiquidityDiscountAliquiditydiscountisareductionintheofferpriceforthetargetfirmbyanamountequaltothepotentiallossofvaluewhensoldduetothelackofliquidityinthemarket.1

Recentstudiessuggestamedianliquiditydiscountofapproximately20%intheU.S.Variesbycountry.Thesizeoftheliquiditydiscountwillvarywithprofitability,growthrate,anddegreeofrisk(e.g.,betaorleverage)ofthetargetfirm.1Theofferpricecanbereducedbyeitherdirectlyreducingthetargetfirm’svaluationasastandalonebusinessbyanestimateoftheappropriateliquiditydiscountorbyincreasingthediscountrateusedinvaluingthefirmbyanamountwhichreflectstheperceivedliquidityrisk.ControlPremiumPurchasepricepremiumrepresentsamountabuyerpayssellerinexcessoftheseller’scurrentsharepriceandincludesbothasynergyandcontrolpremiumControlandsynergypremiumsaredistinctlydifferent1

--Valueofsynergyrepresentsrevenueincreasesandcostsavingsresultingfromcombiningtwofirms,usuallyinthesamelineofbusiness --Valueofcontrolprovidesrighttodirecttheactivitiesofthetargetfirm(e.g.,changebusinessstrategy,declaredividends,andextractprivatebenefits)2Countrycomparisonsindicatehugevariationinmediancontrolpremiumsfrom2-5%incountrieswithrelativelyeffectiveinvestorprotections(e.g.,U.S.andU.K.)toasmuchas60-65%incountrieswithpoorgovernancepractices(e.g.,BrazilandCzechRepublic).Medianestimatesacrosscountriesare10to12percent.1Controlandsynergypremiumsmaybeinterdependentsincetheabilitytoachievesynergiesmayrequireacontrollingownershipstake.2Controlcanbeachievedatlessthan50percentownershipifothershareholdersownrelativelysmallerstakesanddonotbandtogethertooffsetvotescastbythelargestshareholder.MinorityDiscountMinoritydiscountsreflectlossofinfluenceduetothepowerofcontrollingblockshareholder.Investorspayahigherpriceforcontrolofacompanyandalesseramountforaminoritystake.LargecontrolpremiumsindicatehighperceivedvalueaccruingtothecontrollingshareholdersandsignificantlossofinfluenceforminorityshareholdersIncreasingcontrolpremiumsassociatedwithincreasingminoritydiscountsImpliedMedianMinorityDiscount=1–1_______________(1+mediancontrolpremiumpaid)ControlPremium(%)MinorityDiscount(%)109.11513.02016.72520.0KeyPoint:Minoritydiscountsvarydirectlywithcontrolpremiums.InteractionBetweenLiquidityDiscounts,1ControlPremiums,andMinorityDiscountsWhenmarketsareliquid,investorsplacealowervalueoncontrolsinceinvestorsdissatisfiedwithcontrollingshareholderdecisionscaneasilyselltheirsharesdrivingdownthevalueofthecontrollinginterest’sstake.Whenmarketsareilliquid,investorsplaceahighervalueoncontrolsinceshareholderscanonlyselltheirsharesatasubstantialdiscount.MinorityshareholderstakesareilliquidinpartbecauseMinorityshareholderscannotforcethesaleofthebusinessandControllingshareholdershavelittletogainbybuyingtheirsharesThisimpliesthatthesizeofliquiditydiscounts,controlpremiums,andminoritydiscountsarepositivelycorrelated.2

1IThesizeofliquiditydiscountsisaffectedprimarilybytheavailabilityofliquidmarkets,aswellastheprofitability,growthrate,andriskinessofthetargetfirm..2Ifcontrolpremiumsandminoritydiscountsandcontrolpremiumsandliquiditydiscountsarepositivelycorrelated,minoritydiscountsandliquiditydiscountsmustbepositivelycorrelated.AdjustingTargetFirmValuenPV=ΣFCFFi/(1+ke)n+TV/(1+ke)nI=1WherePV=PresentvalueofprojectedtargetfirmfreecashflowsFCFF=Freecashflowtothefirmke=CostofequityexcludingliquidityandminoritydiscountsandvalueofcontrolTV=TerminalvalueAdjustPVforLiquidityDiscount(LD%):1PVadj=PV(1–LD%)AdjustPVforLiquidityDiscountandControlPremium(CP%):1,2PVadj=PV(1–LD%)(1+CP%)AdjustPVforLiquidityDiscountandMinorityDiscount(MD%):1,3PVadj=PV(1-LD%)(1-MD%)1Alternatively,PVcouldbeadjustedbyincreasingthediscountratetoreflecttheliquiditydiscount.2MultiplicativetoreflectinteractionbetweenLD%andCP%,i.e.,foragivenCP%,ahigherLD%increasesthePVofthefirmtothecontrollinginvestor.3MultiplicativetoreflectinteractionbetweenLD%andMD%,i.e.,foragivenMD%,ahigherLD%reducesthevalueofaminorityinvestmentinthefirm.GeneralizingAdjustments

toTargetFirmValueQuestion:Whatisthemaximumamountanacquirershouldpayforanownershipinterestinafirm?PVMAX=(PVMIN+PVNS)(1+CP%)(1–LD%)andPVMAX=(PVMIN+PVNS)(1–LD%+CP%–CP%xLD%)

=(PVMIN+PVNS)(1–LD%+CP%(1–LD%))WherePVMAX=MaximumpurchasepricePVMIN=MinimumfirmvaluePVNS=NetsynergyLD%=Liquiditydiscount(%)CP%=Controlpremiumorminoritydiscount(%)CP%xLD%=Interactionofthesefactors

AdjustingCostofEquityforIlliquidity,ValueofControl,andMinorityDiscountLiquiditydiscount:Assumeke=k(1-LD%),wherekisthecostofequityincludingliquiditydiscount,then k=ke/(1-LD%)Liquiditydiscountandvalueofcontrol:Assumeke=k(1+CP%)(1-LD%),wherekisthecostofequityincludingliquiditydiscountandvalueofcontrol,then k=ke/(1+CP%)(1-LD%)Liquiditydiscountandminoritydiscount:Assumeke=k(1-MD%)(1-D%),wherekisthecostofequityincludingliquidityandminoritydiscounts,then k=ke/(1-MD%)(1-LD%)RecalculatePVMAXusingtheappropriatevalueofkThatis,otherthingsequal:kincreaseswithilliquidity(PVMAXdecreases).kdecreaseswithanincreasingvalueofcontrol(PVMAXincreases).kincreaseswithsizeoftheminoritydiscount(PVMAXdecreases).LGIwantstoacquireacontrollinginterestinAcuityLighting,whoseestimatedstandaloneequityvalueequals$18,699,493.LGIbelievesthatthepresentvalueofsynergiesis$2,250,000duetocostsavingsgeneratedbycombiningAcuitywithLGI.LGIbelievesthatthevalueofAcuity,includingsynergy,canbefurtherincreasedbyatleast10percentbyapplyingprofessionalmanagementmethods.Toachievetheseefficiencies,LGImustgaincontrolofAcuity.LGIiswillingtopayacontrolpremiumofasmuchas10percent.LGIreducesthemedian20%liquiditydiscountby4%toreflectAcuity’shighfinancialreturnsandcashflowgrowthrate.WhatisthemaximumpurchasepriceLGIshouldpayfora50.1percentcontrollinginterestinthebusiness?Foraminority20percentinterestinthebusiness?Toadjustforpresumedliquidityriskofthetargetfirmduetolackofaliquidmarket,LGIdiscountstheamountitiswillingtooffertopurchase50.1percentofthefirm’sequityby16percent.

PVMAX=($18,699,493+$2,250,000)(1-.16)(1+.10))x.501=$20,949,493x.924x.501=$9,698,023IfLGIweretoacquireonlya20percentstakeinAcuity,itisunlikelythattherewouldbeanysynergy,becauseLGLwouldlacktheauthoritytoimplementpotentialcostsavingmeasureswithouttheapprovalofthecontrollingshareholders.Becauseitisaminorityinvestment,thereisnocontrolpremium,butaminoritydiscountforlackofcontrolshouldbeestimated.TheminoritydiscountisestimatedusingEquation10-5inthetextbook