Merger and Acqusition Paper Final

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MERGER & ACQUSITION

FINAL TERM
ATTEMPT ALL QUESTIONS
100 marks
1. The following are the details of two potential merger candidates, Khyber electronics and
Saleem electronics, in 2018. X shows that you have to assume your own value (40)
Khyber electronics Saleem electronics
Revenues Rs. 104,400.00 $55,125.00
Cost of Goods Sold (w/o Depreciation) X X
Depreciation X X
Tax Rate 35.00% 35.00%
Working Capital 10% of Revenue 10% of Revenue
Market Value of Equity $2,000.00 $1,300.00
Outstanding Debt $160.00 $250.00
Both firms are expected to grow 15% a year in a perpetuity. Capital spending is expected to
be offset by depreciation. The beta for both firms is 1 and both firms are rated BBB, with
an interest rate on their debt of 9% (the treasury bond rate is 8%).
As a result of the merger, the combined firm is expected to have a cost of goods
sold of only X% of total revenues. The combined firm does not plan to borrow additional
debt.
a. Estimate the value of Khyber Electronics, operating independently.
b. Estimate the value of Saleem electronics operating independently.
c. Estimate the value of the combined firm, with no synergy.
d. Estimate the value of the combined firm, with synergy.
e. How much is the operating synergy worth?
2. What are main motives of Merger and Acquisition explain each motive with the help of
practical examples? (30)
Case study (30)
Cadbury is an international company to produce, promote and distribute sweets and beverage
products. It is the world’s second largest confectionery company as well as the second largest
chewing gum company. Kraft food is the second largest food company in the world, whose core
products are coffee, candy, dairy products and beverages. It has over sixty thousand employees
around the world and has launched business in 145 countries.
Even though the American blue-collar are enthusiastic about Kraft products, Kraft’s sales
performance was far less than expectation as its revenue declined by 6%. Due to the excessive
reliance on low end market and the lack of new growth points, Kraft faced a crucial decision: one
was introducing new products and promoting a new brand, the other was taking over the existing
namely brands.
On 28 August 2009, Rosenfeld, the chairman of Kraft, proposed an offer to absorb Cadbury at a
price which was 31% higher than the closing price at that day and amounted to nearly 10.2
billion pounds. Although Roger, the chairman of Cadbury realized that the development of the
company size had suffered bottlenecks, he convinced that in the acquisition game, Cadbury
would be able to reap the initiative opportunity. On 7 September, Cadbury formally stated that it
rejected Kraft’s acquisition, because the proposed acquisition greatly underestimated the value
and development prospects of Cadbury. Because of the acquisition news, Cadbury’s share price
rose by 37% at that day, causing its total market value up to an unprecedented 106 billion
pounds, which was more than Kraft’s bid. On September 22nd, intolerable Cadbury asked the
British M&A supervision institution to give a ruling to Kraft, forcing it to nail down before the 9
November. If it cannot submit a more reasonable offer, Kraft would not take acquisition
activities within at least six months. Immediately, Rosenfeld said that Kraft did not have to take
over Cadbury. This made a lot of Cadbury’s shareholders begin to worry that Cadbury’s share
price would collapse if Kraft gave up the acquisition. Roger appeased shareholders and he
believed that refusing the acquisition and remaining independence of Cadbury could bring about
best interests to shareholders. Cadbury was confident of its independent strategy and
development prospective in the future, while merging with Kraft, which had low growth, may
have an obscure prospect. On October 21st, Cadbury released the third-quarter financial
statement which indicated that the quarterly revenue rose by 7%. On that day, its stock price
reached a record high, with a total market value as much as 11.08 billion pounds. Shareholders
of Cadbury took the opportunity to express that if Kraft’s offer was 122 million pounds, they
were able to discuss on the issue of acquisition. This price was 20 billion pounds higher than
Kraft’s original offer price. On 9 November, Kraft announced that it would launch a hostile bid
for Cadbury in accordance with the previous offer.
In late November 2009, the US Hershey Corporation, the Italian Ferrero Corporation and Nestlé
of Switzerland had expressed their willingness to bid. Therefore, Cadbury must not be so easily
accept Kraft’s offer. Because Kraft is not the only one which tended to take over Cadbury, while
Cadbury is almost the only choice for Kraft. Roger Carr said that Cadbury preferred to merger
with Hershey rather than Kraft, because this merger was expected to generate higher earnings per
share. It was reported that the directors of Cadbury secretly contacted Hershey’s directors to
encourage it to launch a tender offer in order to compete with Kraft.
A. Explain the case study in your own words?

B. Discuss the types of defensive strategies available to target companies and in particular,
describe the strategies used by Cadbury to, albeit unsuccessfully, defend the bid by
Kraft.?

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MERGER & ACQUSITION

Case study (30)

A. Explain the case study in your own words?

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