MERGER NEGOTIATIONS AND MECHANICS

Process of MERGER: 1. Search for a target company: Whether a group firm (expansion) or a nongroup firm (diversification) The acquiring company may take help of various agencies such as investment bank, financial institutions, professional experts etc. In India, BIFR can help selecting a target firm.

2. Primary investigations about the target firm The suitability of a target firm can be analysed using following types of analysis: a. Financial analysis: to assess the financial viability and profitability of the target firm. b. Industry analysis: to assess the present and future position. c. Management analysis: to assess the present management.

d. Economic analysis: to assess the competitive condition, cyclical variations etc. e. Marketing analysis: to assess the present and future market shares, product life cycle and marketing strategies. f. Engineering analysis: to assess the production capacity, research and development facilities and operating economies etc.

3. Selecting the Merger strategy After selecting the target firm, the acquiring firm then has to decide about the method of merger i.e. tender offer, hostile takeover etc.

Financial evaluation of a merger proposal

An acquiring firm should pursue a merger only if it creates some real economic values which may arise from any source such as better and ensured supply of raw materials, better access to capital market, better intensive distribution network, more efficient management, greater market share, tax benefits etc. The shareholders of the target firm will ordinarily demand a price for their shares that reflects the firms value. For the would-be purchaser, this price may be high enough to negate the advantage of merger.

 The financial evaluation of a target candidate, therefore, includes the determination of the total consideration as well as the form of payment i.e., in cash or securities of the acquiring firm.

Aspects of financial evaluation:

1. Determining the purchase price: The following factors have a bearing on the value of a target firm: Tangible and intangible assets of the target firm Market/ realizable value of the assets. Earnings of the firm A comprehensive and analytical study of the combined effects of these factors will help determine the value of the firm. The market price of a share of the target firm can be a good approximation to find out the value of the firm. However, the market price of the share cannot be relied in many cases or may not be available at all. (i) The market price of the share may be affected by insiders trading (ii) Sometimes, market price does not fully reflect the firms financial and profitability position.

 The following approaches may be undertaken to assess the value of the target firm.

1. Valuation based on assets:

The acquiring firm purchases the target firm and therefore, it should be ready to pay the worth of the latter. The value of the firm may be defined as: Value of all assets Less: external liabilities Net Assets or Value The assets valuations of the target firm may be based on: a) Book value of the assets: it is based upon the historical values which may be irrelevant at present. b) Realizable value of the assets: it gives a current and close approximation to the worth of the target firm Limitation of assets valuation approach?

2. Valuation based on earnings:

The acquiring firm shows interest in taking over the target firm for the synergistic efforts or growth of the new firm. The estimate of future profits carry synergistic element in it. Thus, the future expected earnings of the target firm give a better valuation. These expected profits figures are however, accounting figures and suffer from various limitations. Hence, they should be converted into future cash flows by adjusting for non-cash items.

3. Dividend based Valuation: 4. CAPM based share valuation: 5. Valuation based on cash flows: