ACTIVITY BRIEF FOR ASSESSMENT 2

ACADEMIC YEAR 2022 – 2023 – TERM II

Course MCO201 – Corporate Finance (3CH/4ECTS)

Instructor Dawid Brychcy Pete Nicolau

Participation in all assessment activities stated in this document is required. An overall course total of 70

points is required to pass the course. Due dates and times are always in Geneva time.

Assessment Choose an assessment category

Description Due date and time

Weight of course total

Task 2.1: Quiz on Bonds and Stock Valuation

Assessment type: Quiz

Description: Quiz on Bonds, and Bond/Stock valuation. (Session 4 and 5).

5%

Task 2.2: Quiz on Risk and Cost of Capital / Corporate Capital Structure

Assessment type: Quiz

Description: Quiz on Risk and Cost of Capital / Corporate Capital Structure (Session 6 and 7).

5%

Main task

Task 2.3: Mergers and Acquisitions Report

Assessment type: Exam

Description: Students will critically analyze the parties, and actions involved during a hostile takeover.

See sections below for further details.

50%

INSTRUCTIONS

Main task: Mergers and Acquisitions Report

Students are required to identify, and critically evaluate a hostile acquisition. Students must reference the source of information regarding their hostile takeover case. Please consider the following;

"Examine a hostile acquisition and discuss the tactics employed by both the predator and the target companies. Please discuss a real life example of the hostile take-over and which of the tactics, you have just discussed, were used”

Students should aim for approx. 1000 – 1500 words in total. Please follow Harvard Referencing System and the formatting below.

July 2nd, 17:00 CET 2023

July 9th, 17:00 CET 2023

July 23rd, 17:00 CET

2023

The due date for this assessment is July 23rd, 2023, 17:00pm CET

FORMAT

Start and due Date:

2 hours

Resources needed: open-book exam, calculator or Excel, internet

Attachments allowed: PDF or word file

Word Count: 1.000 – 1.500 words

All refencing and citations require Harvard referencing style.

LEARNING OUTCOMES

 Define the purposes and scope of mergers and acquisitions in terms of the legal and economic

consequences

 Evaluate the impact of mergers and acquisitions on the participating parties

 Describe the differences between mergers, and hostile acquisitions

 Critically interpret a company’s financials in relation to the environment/competitors.

ASSESSMENT CRITERIA

Task 2.1 Quiz on Bonds and Stock Valuations

The quiz will be numerical and consist of 10 multiple choice questions. Calculations will be required.

Task 2.2 – Quiz on Risk and Cost of Capital and Corporate Capital Structure

The quiz will be numerical and consist of 10 multiple choice questions. Calculations will be required.

ADDITIONAL INFORMATION

Rubric: written assignments

Criteria Accomplish ed (A)

Proficient (B)

Partially proficient (C)

Borderlin e (D)

Fail (F) Weight on assessme

nt

Problem identificati on

The business issue has been correctly identified, with a competent and comprehensive explanation of

The student correctly identified the issue(s), taking into account a variety of environment

The student correctly identified the case (issues), considering obvious environmental/context ual drivers. There is evidence of analysis, but it lacks depth.

The student correctly identified the issue(s) but analysis was weak. An absence of context –

The student failed to correctly identify the issue(s); analysis was incorrect or too

30%

Due Date: 23rd of July 2023, 17:00 CET

Length of the time-limited assignment:

The due date for this assessment is July 2nd, 2023, 17:00pm CET

The due date for this assessment is July 9th, 2023, 17:00pm CET

key driving forces and considerations. Impact on company operations has been correctly identified. Thorough analysis of the issue is presented.

al and contextual drivers. Key case information has been identified and analyzed.

the work is basically descriptive with little analysis.

superficial to be of use; information was misinterprete d.

Information gathering

The student showed skill in gathering information and analyzing it for the purposes of filling the information gaps identified. Comprehensiv e and relevant.

Relevant information gaps were identified and additional relevant information was found to fill them. At least two different types of sources were used. The student demonstrate s coherent criteria for selecting information but needs greater depth.

The student correctly identified at least one information gap and found relevant information, but which was limited in scope. Some evidence of sound criteria for selecting information but not consistent throughout. Needs expansion.

An information gap was identified and the student found additional information to fill it. However, this was limited in scope. Weak criteria for the selection of necessary information.

Information was taken at face value with no questioning of its relevance or value. Gaps in the information were not identified or were incorrect.

20%

Conclusion s

The student evaluated, analyzed, synthesized all information provided to create a perceptive set of conclusions to support the decisions and solutions.

The student evaluated, analyzed and synthesized to create a conclusion(s ) which support decisions and solutions.

The student reached conclusions, but they were limited and provided minimal direction for decision- making and solutions.

The conclusion was reasonable but lacked depth and would not be a basis for suitable strategy developme nt.

The student formed a conclusion, but it was not reasonable. It was either unjustified, incorrect or unrelated to the case in hand.

25%

Solutions The student used problem solving techniques to make thoughtful, justified decisions about difficult and conflicting issues. A realistic solution was chosen which would provide maximum benefit to the company. Alternative solutions were

The student used problem solving techniques to make appropriate decisions about complex issues. Relevant questions were asked and answered. A realistic solution was chosen. Alternatives

The student used problem-solving techniques to make appropriate decisions about simpler issues. The solution has limited benefit but does show understanding of implications of the decision. Alternatives were mentioned but not explored.

The student used problem solving techniques to make decisions about simpler issues but disregarded more complex issues. Implications of the decision were not considered. Alternatives

The student formed a conclusion, but it was not reasonable. It was either unjustified, incorrect or unrelated to the case in hand.

25%

explored and ruled out.

were identified, explored and ruled out.

were not offered.

Lecture Outline

• Corporate Investment and Financing Decisions

• The Role of the Financial Manager and the Opportunity Cost of Capital

• Goals of the Corporation

• Agency Problems and Corporate Governance

Mergers and

Acquisitions Session 9

Session Outline

 Sensible Motives for Mergers

 Some Dubious Reasons for Mergers

 Estimating Merger Gains and Costs

 The Mechanics of a Merger

 Proxy Fights, Takeovers, and the Market

for Corporate Control

 Merger Waves and Merger Profitability

Sensible Motives

for Mergers

Merger Announcements Pre Covid

The Number of Mergers Involving U.S. Companies, 1985–2017

 Horizontal

 Vertical

 Conglomerate

Motives for

Mergers

 Economies of

Scale

 Economies of

Vertical

Integration

 Complementary

Resources

 Surplus Funds

 Eliminating

Inefficiencies

 Industry

Consolidation

Motives for

Mergers

 Cost

Reduction

 Staff

Reduction

 Horizontal

Mergers

 Conglomerate

s

Economies

of Scale

 Back or

Forward

 Coordination

& Admin

 Current

Trends

Vertical

Integration

 Keys to

Success

 Faster &

Cheaper

 Opportunitie

s

Complementa

ry

Resources

 Lack of

Opportunitie

s

 Share

Buyouts

 Cash Flows

Surplus

Funds

 Non Cash

Assets

 Opportunitie

s

 Improvement

Eliminating

Inefficienc

ies

 Saturation

 Cost Cutting

 Reinvestment

Industry

Consolidati

on

Bank of America’s Family Tree

Note: Ironically, MBNA was once owned by a previous version of

Bank of America, which sold it in an IPO.

Some Dubious

Reasons for

Mergers

 Diversificat

ion

 Boot Strap

 Lower

Financing

Costs

Dubious

Reasons for

Mergers

 Against

Dividends

 Fresh

Opportunitie

s

 Risk and

Premium

Diversifica

tion

 Earnings Per

Share

 Economic

Benefit

 Price to

Earning

Ratio

Boot Strap

Impact of Merger on Market Value and Earnings Per Share of World Enterprises

Effects of Merger on Earnings Growth

 Economies of

Scales

 Issues

 Interest

Rates

Lower

Financing

Costs

Estimating

Merger Gains

and Costs

Estimating Merger Gains and Costs

• Questions

• Is there an overall economic gain to the merger?

• Do the terms of the merger make the company and

its shareholders better off?

PV(AB) > PV(A) + PV(B)

Estimating Merger Gains and Costs

Gain = PV AB

– (PV A

+ PV B ) = DPV

AB

Cost = cash paid – PV B

NPV = gain – cost

= DPV AB

– (cash – PV B )

Estimating Merger Gains and Costs

PV A

= $200

PV B

= $50

Gain = DPV AB

= +$25

PV AB

= $275 million

Cost = cash paid – PV B

= 65-50 = $15 million

Example: Two firms merge, creating $25 million in

synergies. If A buys B for $65 million, the cost is $15

million.

Estimating Merger Gains and Costs

NPV A

= 25-15 = +$10 million

NPV A

= wealth with merger – wealth without merger

= (PV AB

– cash) – PV A

= ($275-$65) -$200

= $10 million

Example: The NPV to A will be the difference

between the gain and the cost.

Right and Wrong Ways to Estimate the Benefits of Mergers

Estimated net gain = DCF valuation of target, including merger benefits – cash required for acquisition

• Ask why the two firms should be worth more together than apart.

• You add value only if you can generate additional economic rents.

The Mechanics of

a Merger

Accounting for the Merger

Possible Tax Consequences

Proxy Fights,

Takeovers, and

the Market for

Corporate

Control

 Right to Vote

 Change

 Control

 Stakeholders

 Mergers

Proxy Contests

 Tender Offer

 Role of Courts

 Position

Takeovers

Defensive Tactics

42

• The corporate charter consists of the articles of incorporation and corporate bylaws that establish the governance rules of the firm

• Firms frequently amend corporate charters to make acquisitions more difficult via super-majority amendments and classified boards

More Defensive Tactics

43

• Managers of target firms may attempt to negotiate standstill agreements, contracts wherein the bidding firm agrees to limit its holdings in the target firm

• These agreements usually lead to the end of a takeover attempt

• Standstill agreements often occur at the same time that a targeted repurchase is arranged

• In a targeted repurchase, a firm buys a certain amount of its own stock from an individual investor, usually at a substantial premium

• These payments made to potential bidders to eliminate unfriendly takeover attempts are referred to as greenmail

 Attractiveness

 Share Rights

Plans (SRP)

Poison Pills

 Stock Pricing

Share Rights

Plans (SRP)

 Golden

Parachute

 Poison Put

 Crown Jewel

 White Knight

 Lockup

Devices of

Corporate

Takeovers

 Shark Repellent

 Bear Hug

 Fair Price

Provision

 Dual Class

Capitalization

 Countertender

Offer

Devices of

Corporate

Takeovers

Summary of Takeover Defenses

Merger Waves

and Merger

Profitability

Merger Waves and Merger Profitability

• Who usually benefits from the merger?

• Shareholders of the target

• Lawyers and brokers

• The executives of the acquiring firm

• Who usually loses in a merger?

• Shareholders of the acquirer due to overpayment

• Executives of the target

• Employees due to restructuring

Lecture Outline

• Corporate Investment and Financing Decisions

• The Role of the Financial Manager and the Opportunity Cost of Capital

• Goals of the Corporation

• Agency Problems and Corporate Governance

Mergers and

Acquisitions Session 9

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