Acquisition Analysis and Valuation Outline: The proposal must conform to the following conditions: (1) each manager will be representing an acquiring company or investment group whose business growth strategy involves an acquisition and (2) the target firm must be in the same industry.
The acquisition is to be a purely hypothetical acquisition of a financial services company or submit your alternative idea for approval from the Professor:
The use of publicly traded companies as comparables will facilitate data collection, and the selection of a single company and companies in the same industry will simplify the analysis. Based on analysis, define scenarios where an acquiring firm [might] overpay, underpay, or pay “fair market value” for the target firm and why.
The purpose of this Acquisition Simulation is to give students the opportunity to apply the tools they have learned in an increasingly common real world situation, i.e., mergers and acquisitions. In no more than 12 pages plus supporting charts, tables, financial statements and appendices, each proposal must address the following areas:
1. Executive summary [<1 page]: Identify the industry/market in which the acquiring firm is seeking to grow and discuss why a particular firm was chosen as the target. Moreover, discuss the rationale for the magnitude and composition of the initial offer price and your recommendation as to how it should be financed and why. This section should be no more than one page in length.
2. Industry/market overview[1 page]: Describe the industry/market in terms of size, growth rate, product offering, and other pertinent characteristics. Furthermore, describe industry/market dynamics in terms of customers, competitors, potential entrants, product/service substitutes, and suppliers.
3. Opportunities/threats [1/2 page]: Discuss major opportunities and threats that exist because of the industry’s competitive dynamics including any barrier to entry. Be sure that you can show how these threats or opportunities are a consequence of industry dynamics described in (2).
4. Objectives [1 page]: Assume FINANCIAL BUYER. Specify how the acquisition will enable the new company (i.e., the combination of the acquirer and target firms) to grow and create shareholder value. Cite specific objectives the acquirer hopes to achieve (e.g., gain access to new customers or products or proprietary technologies, improve shareholder value by achieving economies of scale or scope, etc.) and quantify whenever possible. Note that objectives can include the exploitation of opportunities or defense against threats identified in section (3).
5. Negotiating strategy [1/2 page]: Once the primary target has been identified
–Describe what you believe to be the primary issues/needs of the parties involved (i.e., target firm stakeholders)
–Recommend a deal structure that addresses the primary needs of all parties. Identify and explain the rationale for choosing the main elements of the structure including the proposed acquisition vehicle, post closing organization, form of payment, form of acquisition, and tax structure. Indicate how you might “close the gap” between the seller’s expected price and the offer price, if the seller rejects the initial offer, by making a counter-offer.
6. Financials and valuation [3-4 pages]: For the acquiring and target firms, provide projected three-five year income and balance sheet and estimate each firm’s value based on its projected DDM. List key forecast assumptions. Provide projected five year income, balance sheet, and cash flow statements for the consolidated acquirer and target firms including the effects of potential synergy.
Clearly state potential sources and destroyers of value. Develop a preliminary minimum and maximum purchase price range for the target firm. Identify an initial offer price, the composition (i.e., cash, stock, debt, or some combination) of the offer price, and why you believe this price is appropriate in terms of meeting the primary needs of both target and acquirer shareholders. The appropriateness of the offer price should reflect your preliminary thinking about the deal structure.
7. Financing plan [1/2 page]: Using the combined/consolidated financial statements, determine if the proposed offer price can be financed through some combination of cash, stock, or borrowing without endangering the combined firm’s credit worthiness or seriously eroding near-term profitability and cash flow.
8. Integration plan [1/2 page]: Identify potential integration challenges and possible solutions. (For those characterizing themselves as financial buyers, integration may not apply. Instead, they should identify an appropriate “exit” strategy.)
9. Conclusion: [<1 page] Recommendations for achieving value in the proposed acquisition supported by key evidence discussed in the narrative.
10. References: List articles read and data sources.
11. Appendices: Any detailed analyses and charts-tables used to support statements made in the “body” of the paper should be included here. If a chart or table is cited it should have a narrative of no more than 150 words. Unnecessary or un-narrated elements of a chart-table have no grade value. All work must be shown for equation calculations and equations must be plain-language specified. (Source ratio, e.g., Morningstar, must have an equation spec.)
DDM = dividend discount model
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