M&a - the Summary of P4

1. M&A

Advs

 Acquisition of a co to gain access to the new products, markets, technologies, expertise will almost certainly be quicker and may be less costly than developing internally.

In the same industry: vertical integration（secure supply chain and maximize return from value chain）horizontal integration(eliminate competitors, possible over capacity in industry, economies of scale, bargain power)

Into new area: require managers of knowledge and expertise of the area which they are not familiar with. In a saturated market, may be little opportunity for organic growth/internal growth, ie the only way

Into diverse areas: diversification of risks

Problem

Uncertainty among staff: key staff may leave(mgt may be the owner of the co and run autonomously          key staff must be identified and assured early[pic 2][pic 3][pic 1]

Uncertainty among customers: weak brand acquires strong brand

Clash of cultures：integrating biz process

Unanticipated problems: asset and staff prove to be lower quality than expected

Paying too high: agent problem          set a maximum ceiling for the price it willing to pay[pic 4]

Solution

Be4: perform due diligence on the target co(&the offeree co)

After: a)control of key factor: new capex approval centralized

      b)reporting relationship

      c)clarify objectives and plans

      d)org structure: integrating biz process to maximize synergy

      e)position audit: build understanding of the issues faced by target co

        via regular online employee surveys.

1. diversification of risk into diver biz sectors

Approach to diversify risks--------M&A

Aim of diversification

Like individuals holding well-diversified portfolio, a co with a number of subsidiaries in different sectors could reduce its exposure to unsystematic risks. Another possible benefits of diversification may be a reduction in volatility of cash flows which may lead to a better credit rating and a lower cost of capital.

Management and employee

Disadv

   Individual investors can undertake risk diversification both quickly and cheaply themselves, there is little reason for co to do so. Research suggests that markets do not reward risk diversification.

三、regulation of M&A

Competition

The regulator will assess significant M&A’s impact on competition in the market. It will ,for example, use tests such as turnover. It may block M&A if it feels that the M&A will give the combined company the monopolistic power or enable it to carve out a dominant position so as to negatively affect consumer choice and prices.

Sometimes the regulators may ask for the co to sell some of its assets to reduce its dominant position.

四、assumption

It is assumed that the figure of-----------estimates are accurate. However, there is considerable uncertainties around the accuracy of these, the scenario analysis or sensitivity analysis is probably needed to asses the impact of these uncertainties.

1.It is assumed that rb model provides a reasonably good estimate of the growth rate, and the perpetuity is not an unreasonable assumption.

2.[probability and expected value]When assessing the value of project, the future circumstances are given as occurring with discrete probabilities and the resulting cash flows under the circumstances are given with certainty. There may be more circumstances in practice than given and the cash flow may not be known with such certainty. The Black-Scholes Option Pricing model may provide a more accurate alternative.

3.[subsidies offered]It is assumed that ---------.Co may want to assess the reliability of xx’s offer.

  五、treasury department

The adv of a centralized treasury department

    The centralized treasury department should be able to evaluate the financing requirement of the group as the whole.

1. It may be able to negotiate a better rate when borrowing in bulk.
2. It can serve as an internal bank and undertaking matching of funds.There4 it can transfer the spare cash from subsidiaries to ones need them and thus avoid going to costly external funds
3. It may reduce cost of duplication of functions
4. It may be able to undertake multilateral netting and thereby reduce the exposure to foreign exchange risks and the cost of hedging them.
5. The concentration of info and resources may result in an effective decision-making environment.

The adv of a decentralized treasury department

1. Each subsidiary is more familiar with local regulations, customs. (Adaption)
2. Giving subsidiary co more autonomy on how to manage their own funds may resulting in

increased motivation and effort from the management of subsidiaries and therefore increase the return for the co.

1. Decentralized treasury department can respond quicker to the opportunity and risks of local  market.(localization)

                   六、Islamic contract(like forward)

① It settle in physical delivery therefore avoid uncertainty and avoid uncertainty and speculation.（specified price、quantity and quality）

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