After reading each article/ executive summary,
1/ Analyze the way the discounted cash flow (DCF) analysis assists in the determination of the value of the target company and explain how using this method will allow the author to negotiate a reasonable price for the acquisition.
2/ Explain how the net present value (NPV) calculation, as part of the DCF, will the author to analyze strategic alternatives for the identified mergers and acquisitions activity.
Each section should have at least 300 words and at least two academic journals or scholarly articles as references.
Mergers and acquisitions often solidify and boost the competitive position of a company. However, if not properly done they can create various challenges. For a successful merger or acquisition, a favorable climate is required along with other critical success factors. The process of acquisition can be divided into two. The initial step of the process is the beginning of the negotiation process while the second step is the start of the implementation and the execution of the transaction.Both steps of the process are influenced by various factors.During the pre-transaction phase, various factors need to be taken into account. One factor is choosing the right partner. A wrong partner can lead to a strenuous negotiation process. Trust between the parties involved is another factor. Trust promotes smooth negotiations.During the post-transaction phase various factors need to be taken into account. The quality of the plan is one of the factors. A comprehensive and logical plan will promote success. The swiftness of the integration process is essential since it builds on trust. The execution of the plan needs to be of high quality to ensure success
To get a reasonable price to pay for acquisitions of publicly traded firms comparable to your target company, various pricing benchmarks need to be accounted for. The intrinsic value of the company is one of them. The intrinsic value of a company is its most basic valuederived fromthe net present value of expected future cash flows while beingautonomousof any acquisitions. The market value is another pricing benchmark. The market value reflects the valuation of the company based on the market’s participants. Another price benchmark is the purchase price. This is the price that bidders anticipate to payso that thetarget shareholderscanaccept it. The synergy value is also important. This is the net present value that results from improvements made once the companies combine.
Merger premium is termed as the difference between theoffer priceof the targetand the market price before the transactionis announced(Corporate Finance Institute, 2021). To calculate the merger premium for your target company, one has to follow a process. One has to first identify both the present stock price and theprice paid per share of the target company. The merger premium is determined byfinding the difference betweenthe price paid per shareand thecurrent stock priceof the target company. The result is then divided by the target’s current stock price. The merger premium isarrived at usingthe share price 30 days before thefirststatementonacquisitionsincethe price of both companies is usually impacted in the days leadingup to a merger due to various macroeconomic factors and the execution of the merger process. This means that theacquiring firm’s shareholdersmayrealize a reductionin share value whilethe target firm’s shareholdersmayrealizea rise in share value withinthis time. This means that share prices may be inflated leading to wrong results.
The discounted cash flow (DCF) analysis and the net present value (NPV) calculation will be useful for the acquisition of mytarget company in various ways. TheDCF is usedin estimatingthepresent value of an investment dependingon itsprojectedfuture cash flows (Leybag, 2020). If the DCF value is higher than the current investment cost, the opportunity can lead to a positive return and vice versa. Companies often use the weighted average cost of capitalin finding thediscount rate since it accounts for the rate of return that shareholders expect. The NPV determines the current value of all future cash flows that a project generates. NPV is used in capital budgeting to determine the projects that are most likely to return maximum profits. While NPV is used to determine and compare external and internal investments, DCF is used tofind the time it would take to recoup thereturns. In other words, the NPV is an important tool in strengthening the DCF method.
According to Statista, the average deal or price paid for a merger in the communications sector was 151 million US dollars (Rudden, 2021). However, T-Mobile paid 26 billion dollars in the merger acquisition with Sprint. T-Mobile has increased their services and their prices as well as a result. The negotiation was between Softbank and T-Mobile because they owned 85% of Sprint. The deal was that Softbank would give T-Mobile 11 shares of Sprint for 1 of T-Mobile. The German company Deutsche Telekom would also receive stakes since it owns about 60% of T-Mobile. In a merger, every party must agree on a price. According to the textbook,
For a merger to proceed, both the target and the acquiring board of directors must approve the merger and put the question to a vote of the target’s shareholders (and, in some cases, the shareholders of the acquiring firm as well). In a friendly takeover, the target board of directors supports the merger and negotiates with the potential acquirers. If the target board opposes the merger, the acquirer must go around the target board and appeal directly to the target shareholders, asking them to elect a new board to support the merger (Berk