Each person will analyze one completed M&A transaction from recent times. I’ll distribute a list of these transactions, but you can change your assignment if you want to work on a company or industry of your choice. There are two main requirements from the term-paper: (1) an analysis of the strategic and economic rationale behind the merger, and (2) an analysis of abnormal returns, premium paid and the structure/means of payment. Since you are analyzing a completed merger, you may have some comments on how the post-merger company has done so far.
Please write a one-page Executive Summary. The paper should be about 15 pages long (with additional explanations, references and supporting data in appendix) and should address the following items:
- Brief history of the companies. Company strengths and weaknesses. Description of products, market shares, distribution channels, technology etc. Discussion of synergy. [History of the company can be brief, but strengths and weaknesses should be described in as much detail as possible.]
About 5 pages
- Industry Analysis; brief discussion of changes in the industry around the time of the merger. Role of M&A in corporate strategy.
About 3 pages
- Recent history leading to the merger. [You should have a Table showing the important event dates and a brief description of these events. Please see Bruner, page 697-699 or Table 1 in the AT&T/NCR case-study]
About 2 pages
Standard ratio analysis should be used to supplement the discussion of strength and weakness. [See the use of ROE and P/E ratio in George Baker’s analysis of Beatrice.]
The following ratios are most often used by practitioners:
(a) Growth Rates: PEG Ratio and 10 year or 5 year compound growth rates (CAGR) in Sales and EPS of the two companies prior to the merger.
(b) Liquidity Ratios
(c) Leverage Ratios:
(i) Book Value of Total Debt/Book Value of Equity
(ii) Book Value of Long-term Debt/Book Equity
(iii) Book Value of Total Debt/Market Value of Equity
(iv) Interest and other fixed charge Coverage Ratio
(d) Operating Characteristics:
(i) Total Asset Turnover
(ii) Average Collection Period
(iii) Gross Profit Margin
(iv) ROE and ROA
(e) Investment Characteristics:
- Capital Expenditure as a percentage of Total Asset
- R&D as a percentage of Total Assets
Most of these ratios are available from Bloomberg, Standard and Poor’s Industry Survey, or similar sources. You may also access WRDS for relevant information.
About 2 pages of summary of Ratios in appendix.
- Description of the deal, analysis of abnormal returns & premium
(a) Describe the transaction structure, mode of payment, and financing.
(b) Give your comment/assessment of the structure and discuss why this structure was adopted and whether you would recommend a different structure. For example, if it was a stock transaction with a fixed exchange ratio, then explain why no collars or options were used.
(c) Discuss valuation: DCF, Comparables, 52-week High, Sum of Parts, etc.
(d) Show announcement period abnormal returns, price run-up and total premium.
- Summary and Conclusion (about 2 pages)
- Sources of data for your research
Mergent database, Proxy Statements, Annual Reports, Lexis-Nexis, Analyst Reports, Moody’s Industrial, Utilities, or OTC Manuals, Moody’s Bond Records, Standard and Poor’s Company Reports, Value Line Investment Survey etc.
