Finding the Win-Win Deal

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Finding the Win-Win Deal

• P.V. Viswanath

Class Notes for FIN 648 Mergers and Acquisitions
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Framework

• In a stock-for-stock deal, the exchange ratio is
  the number of buyer shares per target share.
• In a cash deal, the cash exchange ratio is the
  number of dollars exchanged per target share.
• To determine the correct ratio in a cash deal,
  compare the cash payment to the intrinsic value
  of the asset.
• In principle, the rule is the same in the stock
  deal as well however, in this case, both buyer
  and target shares have to be valued.
• The greater the synergy, the greater the
  possibility for a win-win deal.
• This analysis provides the data needed for
  negotation between buyer and target.

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Terms

• ER exchange ratio buyer shares per target
  share.
• ER1 max acceptable exchange ratio for buyer.
• ER2 max acceptable exchange ratio for seller.
• P1 buyers price before transaction
• P2 targets price before transaction
• P1 buyers shares outstanding before transaction
• P2 targets shares outstanding before
  transaction
• P12 price of combined company
• DCF12 discounted cashflow value of combined
  company

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Max/Min Acceptable Exch Ratios - DCF

• Share-for-Share Exchange
• Buyers Maximum Acceptable Exch Ratio
• P12 ? P1
• Sellers Min Acceptable Exch Ratio
• P12ER2 ? P2

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Share-for-Share Exchange
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Max/Min Acceptable Exch Ratios (DCF)

• Cash-for-Share Exchange
• Buyers Maximum Acceptable Exch Ratio
• P12 ? P1
• For the seller, the minimum acceptable exch ratio
  is simply P2, the price of the target prior to
  the acquisition.

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Cash-for-Share Exchange
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Max/Min Acceptable Exch Ratios (P/E)

• Share-for-Share Exchange (P/E Model)
• Need to estimate PE12 (corresponds to DCF
  estimation in previous analysis).
• Buyers Maximum Acceptable Exchange Ratio
• P12 ? P1
• P12 (PE12)(EPS12)
• EPS12 (E1E2Esynergies)/(S1S2ER1)

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Max/Min Acceptable Exch Ratios (P/E)

• Share-for-Share Exchange
• Sellers Maximum Acceptable Exchange Ratio
• P12ER2 ? P2
• P12 (PE12)(EPS12)
• EPS12 (E1E2Esynergies)/(S1S2ER1)

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Choosing a ratio in the Win-Win Zone

• Bargaining Power
• Control Premium in comparable transactions
• Focal points based on relative contribution of
  the two firms.
• Keep relative pre-merger share prices of target
  and buyer
• ER Ptarget/Pbuyer
• Some contribution indicators are
• Operating profits, assets, unit sales, revenues,
  no. of employees
• If C contribution of buyer