A Taker over company scans the environment to find out the right candidate for take over. The process involves following steps.
Screening and Valuation Process
A Taker
over company scans the environment to find out the right candidate for take
over. The process involves following steps.
Identification
of industries
Selection
of sectors
Choosing companies (which are 5 to 10% of size
bidding companies)
Finding cost of acquisition and returns: compare
candidates with respect to ROIs.
Ranking
of candidates Identify
good candidate(s)
After
going through the screening process the fooling considerations merit attention. Funds
availability Likely
positive synergies Negative
synergies an weaknesses Appropriate
timing Availability
of required management style. Next step
is valuation. Valuation determines the worth or value of the M & A. Mergers
& Acquisitions involve share of stocks of different companies and exchange.
The valuation procedures are similar to the capital budgeting procedures. (1) Valuation
by P/E Ratio.
Market price per share
= --------------------------------------------
Net earnings after tax per share
If market price of a share is Rs 40/- and EPS is Rs
2/- the PE ratio = 40/2=20.
This means this company would have to sustain
profit at this level for 20 years to pay back its current price. The
differences in P/E ratio for different companies are attributed to differences
in the following.
Growth
rate of a company
Risk
associated with investment
Competition
& environment
Essential commodities have shorter business cycles
and more uniform earning compared to sectors like heavy Engineering which are
linked with growth of the economy.
(2) Earnings
Per Share (EPS) Compare the EPS of acquirer and acquired and two
together. Refer the balance sheet and profit and loss account for sources and
uses of funds.
(3) Divest
loss making operations
The
acquirers should divest loss making subsidiaries and reduce cash drain to
invest in attractive ventures. Unwanted assets should be disposed off at book
value. (4) Use ratio
analysis: Calculate key ratios
(a) Current ratio = Current Assets
/Current liabilities
This should be checked with industry’s average to
know if it is on the higher side. If high, the individual assets and
liabilities should be checked. If current assets are high excess money will be
with debtors or stocks may be high. This should be checked with industry’s
average. Reduce current liability like bank over draft and working capital
loans to save on interest charges.
(b) Level of stock (in months) =
(Stocks/Cost of goods sold) x 12
If the firm’s level of stock is 8 months and
industry’s average is 6 months then the stock level should be reduced. The
funds should be deployed for better purposes.
( c) Average age of debtors (in
days) = (Debtors / Sales) x 365
If the acquiring company’s average age of debtors
is low follow the same policy of the acquired one.
(d) Revise Balance sheet and
profit & loss account-
The new EPS after merger should
be better for the new company.
(5) Incorporate
growth and expectation rates
Prepare proforma statements with
expected growth rates.
(6)
Market value of assets: Find the current market value of assets. It is a good
measure of strength.
(7) Replacement
value (RV) of assets
Replacement
cost is better than historical cost particularly in an inflationary economy.
Replacement
value of an asset = 1- Age of Assets/ Total Economic life of Asset) x Current
value of asset.
Tags : Strategic Management - Strategy Formulation
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