CU-Sem VI-Investment Banking

8.3 SCREEN FOR COMPARABLE COMPANIES The first and most crucial stage in doing a comparable company study is selecting a set of comparable businesses, or a comparable universe. Your initial list of comparable businesses serves as the foundation for the remainder of your investigation and appraisal. Because of this, it's crucial to make sure you select the appropriate comparable universe; otherwise, you run the risk of having your valuation and all the effort you put into creating your model invalidated. Table no 8.1 Market Data Comparable Criteria Whether a company is a good comparable company for your model depends on a variety of criteria. Financial analysts typically choose comparable companies based on which companies are most similar to the one they are seeking to appraise. 101

The rationale behind this is that if investors are prepared to pay a specific sum for a firm that is similar to our target company, they should be prepared to pay that same sum for our target company as well. A financial analyst should search for the firm they are appraising on Bloomberg or CapitalIQ as their initial step. They will be able to learn about the company's description and industry classification as a result. There are many factors that contribute towards whether a company is fit for your comparable universe. Several of these elements are listed below:  Industry Classification  Size  Geography  Growth Rate  Profitability  Capital Structure Industry Classification The classification of an industry is crucial when selecting comparable businesses. An analyst can uncover comparable companies by starting with a company's industry because businesses within a certain sector frequently function in a similar way. A financial analyst can determine a company's industry using a variety of tools, including Bloomberg's Industry Classification System. Consider the goods or services the business you are valuing offers as another angle on this. Compare them to the offerings from the businesses you want to include in your comparable universe. For instance, Toyota and Honda would both be companies in the same industry if you were seeking for comparable businesses for an automaker that makes mid-sized sedans. Aston Martin, which is an automobile company as well, would not be a good alternative because it creates luxury sports cars. 102

Size When examining companies in your comparable universe, size is another aspect to take into account. The ideal comparable universe would include firms with size profiles similar to the firm you are attempting to value. This comparison could be made based on revenue, assets, the number of employees, or other elements. Even though Activision Blizzard Inc. is an extreme case, it can be used to demonstrate why scale matters. With a market value of US$63 billion as of October 2018, Activision Blizzard generated US$7 billion in annual revenue in 2017 and employed over 10,000 employees. The business has a broad, international scope. Therefore, since the two businesses operate on quite different scales, it would not be fair to use Activision Blizzard as a comparison for an independent video game studio with a staff of 30 people. Geography The ability to compare businesses is aided by their similarity in operations. In this regard, geography is another factor to take into account while deciding on your comparable universe. Consumer demographics, consumption habits, regulatory limitations, and product demand vary according to regions. If a company does not alter its offering or method of operation, it may find that it is not successful in Asia. Consequently, the geographic region has an impact on a firm's capacity to be compared. 103

Fig no 8.1 Geography Growth Rate When assessing a company's worth, investors consider growth expectations and growth rates. The company with a higher growth rate would naturally be valued higher if two businesses were otherwise comparable. We may look at the formula for determining a company's terminal value to get an idea of this. The formula is as follows in its most basic form: Where:  FCF = perpetual free cash flows 104

 r = discount rate (usually the weighted average cost of capital of the firm)  g = terminal growth rate We can hold the following values constant and only change the growth rate to observe the effects of higher growth rates on the value of a firm.  FCF = $10,000  r = 10%  g = 8% or 5% A growth rate of 8% produces a terminal value of $500,000. A growth rate of 5% produces a terminal value of $200,000. It is clear with this calculation that the growth rate of a company widely influences the value that investors see in it. Therefore, it is imperative for an analyst to find comparable companies with similar growth profiles for their comparable universe. Profitability The profitability of a company affects its value to investors is a given. Similar to growth rate, we can compare two businesses with comparable operational and capital structures, Firm A and Firm B. Firm A will be valued higher if both businesses have comparable sales but Firm A has larger margins. Margins that are higher are a sign of better financial performance. Greater margins result in higher profits and more options to invest in business expansion or pay investors dividends. When choosing companies for their comparable universe, an analyst runs the risk of changing their valuation because they are no longer using companies with similar expectations of value. Thus, when choosing comparable organisations, an analyst should consider profitability as a key criterion. 105

The Financial Modeling & Valuation Analyst (FMVA)TM certification programme from CFI can help you improve your valuation abilities and become a top-notch financial analyst. Capital Structure Another important factor to take into account when selecting comparable businesses for a comparable universe is financial structure. The risk that shareholders take increases with a company's debt level. This is due to the fact that in a bankruptcy, debtholders' claims are prioritised over shareholders' interests. When a business files for bankruptcy, its assets are used to pay off its creditors first. Equity investors only have an opportunity to recoup their investments after the claims of the debtholders have been resolved. Investors are at risk because a company might not have enough assets to cover all demands from equity holders. Due to the risk they run when a company takes on additional debt, investors demand a higher return. A corporation with more leverage often trades at a discount as a result. When choosing comparable organisations, a financial analyst should be aware of the capital structure of the businesses they are analysing. By doing this, leverage disparities between the comparable companies and the company the analyst is trying to value will prevent the comparables valuation from being correct. Constructing a Comparable Universe It would be better to locate businesses that satisfy each of these requirements in an ideal situation. However, if a financial analyst applies each and every one of the criteria we've listed, there may not always be enough companies to choose from. An analyst may need to apply more criteria at times or fewer at others. When valuing the company they are studying, it is crucial for an analyst to take these elements into account. As an illustration, even if a company does not belong to the same industry as the one you are attempting to value but has comparable growth rates, margins, capital structure, size, and geography, it can still be used as a comparable company. 106

Additional Resources  Want to develop into a top-tier financial analyst? The Corporate Finance Institute has a variety of programmes and tools that will help you learn more and advance your career. Look at them below:  Creating an Excel Financial Model  Growth in Revenue for Financial Modeling  Template for Comparable Company Analysis  Guide to DCF Modeling 8.4 CALCULATION OF KEY FINANCIAL STATISTICS AND RATIOS Statistics transforms raw data into meaningful results. It is the science behind the identification, collection, organization, interpretation, and presentation of data. Data could be qualitative or quantitative. Statistics makes information-based decision-making easier. Statistics comprises useful data interpretation tools like mean, median, mode, standard deviation, coefficient of variance, and sample tests. Raw financial data in a numerical format is interpreted using mathematical formulas. Many sectors like science, government, manufacturing, population, psychology, banking, and financial markets rely on statistical data. Financial ratio Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more. Financial ratios are grouped into the following categories:  Liquidity ratios  Leverage ratios  Efficiency ratios 107

 Profitability ratios  Market value ratios The first type of financial ratio analysis is the liquidity ratio. It aims to determine a business’s ability to meet its financial obligations during the short term and maintain its short-term debt- paying ability. Liquidity ratio can be calculated in multiple ways they are as follows: – 1– Current Ratio Working capital ratios, or banker's ratios, include the current ratio. The link between a current asset and current liabilities is expressed by the current ratio . Current Assets / Current Liabilities is the formula. A company's current ratio can be compared to its historical current ratio to help establish whether it is high or low at the present time.The optimal ratio is 1, meaning that there won't be any problems repaying liabilities if current assets exceed current liabilities by two. However, if the ratio is less than 2, debt repayment will be challenging and have an impact on the job. 2 – Acid Test Ratio/ Quick Ratio Typically, an organization's entire short-term solvency or liquidity condition is assessed using the current ratio. However, for this acid test financial ratio, it is frequently desirable to know a firm's more immediate position or immediate debt-paying ability than that suggested by the current ratio. This is so that it may match current liabilities to the assets that are most liquid. Acid Test Formula = (Current Assets -Inventory)/(Current Liability) One can write the quick ratio as: – Quick Ratio Formula = Quick Assets / Current Liabilities Or Quick Ratio Formula = Quick Assets / Quick Liabilities 108

3 – Absolute Liquidity Ratio Calculating actual liquidity is aided by absolute liquidity. Inventory and receivables are not included in current assets because of this. In order to better assess liquidity, some assets are also prohibited. The ratio should ideally be 1:2. Absolute Liquidity = Cash + Marketable Securities + Net Receivable and Debtors 4 – Cash Ratio The Cash ratio is useful for a company undergoing financial trouble. Cash Ratio Formula = Cash + Marketable Securities / Current Liability Calculating actual liquidity is aided by absolute liquidity. Inventory and receivables are not included in current assets because of this. In order to better assess liquidity, some assets are also prohibited. The ratio should ideally be 1:2. 5.Turnover Ratio Analysis The turnover ratio is the subject of the second class of financial ratio analysis. The activity ratio is another name for the turnover ratio. This kind of ratio shows how effectively an organisation uses its resources. Once more, each asset type's financial ratio can be determined independently. Financial ratios like the ones below are frequently calculated: - Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory. 6 – Inventory Turnover Ratio The relative inventory size is measured by this financial ratio, which also affects the amount of cash available to pay liabilities. Inventory Turnover Ratio Formula = Cost of Goods Sold / Average Inventory 109

7 – Debtors or Receivable Turnover Ratio How frequently the receivable was converted into cash is indicated by the receivable turnover ratio. Receivable Turnover Ratio Formula = Net Credit Sales / Average Accounts Receivable 8 – Capital Turnover Ratio The capital turnover ratio evaluates how effectively a company makes use of its financial assets. Capital Turnover Ratio Formula = Net Sales (Cost of Goods Sold) / Capital Employed 9 – Asset Turnover Ratio This financial ratio shows how frequently net tangible assets are changed over in a given year. The better the ratio, the better. Asset Turnover Ratio Formula = Turnover / Net Tangible Assets 10 – Net Working Capital Turnover Ratio This financial ratio shows whether working capital has been used efficiently to generate revenues. Net The difference between current assets and current liabilities is referred to as working capital.. Net Working Capital Turnover Ratio Formula = Net Sales / Net Working Capital 11 – Cash Conversion Cycle The length of time it takes a company to change its cash outflows into cash inflows is known as the cash conversion cycle (returns).. Cash Conversion Cycle Formula = Receivable Days + Inventory Days – Payable Days 110

12- Operating Profitability Ratio Analysis The operating profitability ratio is the third category of financial ratio analysis. Through this, the profitability ratio assists in determining a company's profitability. = Gross profit / Net sales * 100. 13 – Earning Margin It is the percentage representation of the net income to turnover ratio. It alludes to the used final net profit. Earning Margin formula = Net Income / Turnover * 100 14 – Return on Capital Employed or Return On the Investment This financial ratio evaluates a company's profitability in relation to its total capital invested. Return on Investment formula = Profit Before Interest and Tax / Total Capital Employed 15 – Return On Equity Divide net income by shareholder equity to get return on equity. It gives management a profit from the equity of the shareholders. Return on Equity Formula = Profit After Taxation – Preference Dividends / Ordinary Shareholder’s Fund * 100 16– Earnings Per Share By dividing the company's earnings by the total number of outstanding shares, EPS is calculated. It refers to a gain or net income. 111

Earnings Per Share Formula = Earnings After Taxation – Preference Dividends / Number of Ordinary Shares The investor employs all of the aforementioned statistics to optimise profit and assess risk before making an investment. He finds it simple to use ratios to compare businesses and forecast their future growth. Additionally, the financial statement is made simpler 17- Business Risk Ratios Business risk ratio analysis is the fourth category of financial ratio analysis. Here, we gauge the sensitivity of the business's earnings to its fixed expenses and assumed debt on the balance sheet. 18 – Operating Leverage Operating leverage, which gauges how sensitive operating income is to changes in revenues, is the percentage change in operating profit compared to sales. The more fixed costs a corporation has, the more a change in sales will affect operational income. Operating Leverage Formula = % change in EBIT / % change in Sales 19 – Financial Leverage Financial leverage evaluates how sensitive net income is to changes in operating income by comparing the percentage change in net profit to operating profit. The company's financing choices are the main source of financial leverage (debt usage). Financial Leverage formula = % Change in Net Income / % Change in EBIT 20 – Total Leverage Total leverage is the percentage change in net profit relative to its sales. The total leverage measures how sensitive the net income is to the change in sales. Total Leve8rage Formula = % Change in Net Profit / % Change in Sales 112

21 - Financial Risk Ratio Analysis The financial risk ratio is the fifth category of financial ratio. Here, we assess the company's level of leverage and where it stands in terms of its ability to repay loans. 22– Debt Equity Ratio Debt Equity Formula = Long Term Debts / Shareholder’s Fund The amount of equity needed to pay off debt can be calculated. For long-term calculations, it is employed. 23 – Interest Coverage Ratio Analysis This financial ratio shows if the company can afford to pay the assumed debt's interest. Interest Coverage Formula = EBITDA / Interest Expense  Higher interest coverage ratios imply the greater ability of the firm to pay off its interests.  If interest coverage is less than 1, then EBITDA is insufficient to pay off interest, implying finding other ways to arrange funds. 24 – Debt Service Coverage Ratio (DSCR) The debt service coverage ratio indicates whether operating income is enough to cover all debt- related obligations in a given year. Debt Service Coverage Formula = Operating Income / Debt Service Operating Income is nothing more than EBIT Debt Service is Principal Payments + Interest Payments + Lease Payments  A DSCR of less than 1.0 implies that the operating cash flows are insufficient for debt servicing, indicating negative cash flows. 113

25-Stability Ratios The sixth type of financial ratio analysis is the stability ratio. It is used with a vision of the long- term and to check the company’s stability in the long run. One can calculate this type of ratio analysis in multiple ways. 26 – Fixed Asset Ratio This ratio is used to know whether the company is having good fun or not to meet the long-term business requirement. Fixed Asset Ratio Formula = Fixed Assets / Capital Employed The ideal ratio is 0.67. If the ratio is less than 1, one can use it to purchase fixed assets. 27 – Ratio to Current Assets to Fixed Assets Ratio to Current Assets to Fixed Assets = Current Assets / Fixed Assets If the ratio rises, profits rise and the growth of the company are reflected; if the ratio falls, trading is loose. 28 – Proprietary Ratio The proprietary ratio, which expresses a company's financial strength, is the proportion of shareholder funds to total tangible assets. The ideal ratio is one to three. Shareholder Fund / Total Tangible Assets is the proprietary ratio formula. 8.5 SUMMARY  Financial information, often known as \"financial statements\" or \"financial reports,\" is a record of the financial operations and condition of a person, business, or other institution.  Financial investors can utilise the key financial figures to assess the viability of investing in the company.  The classification of an industry is crucial when selecting comparable businesses. 114

 The ability to compare businesses is aided by their similarity in operations.  The profitability of a company affects its value to investors is a given.  The Financial Modeling & Valuation Analyst (FMVA)TM certification programme from CFI can help you improve your valuation abilities and become a top-notch financial analyst.  Statistics transforms raw data into meaningful results.  Working capital ratios, or banker's ratios, include the current ratio.  The capital turnover ratio evaluates how effectively a company makes use of its financial assets. 8.6 KEYWORDS  Prospective investors - Any Person from whom the Company proposes to receive a Proposed Financing is referred to as a Prospective Investor.  Perpetual free cash flows - In order to determine the present value of a company's cash flows when discounted back at a specific rate, one utilises the perpetuity calculation in valuation approaches.  Financial Modeling & Valuation Analyst - The Financial Modeling & Valuation Analyst (FMVA)® curriculum from CFI is made to teach financial analysts the practical applications of accounting, Excel, finance, financial modelling, valuation, and other essential skills.  Market value - Market value, sometimes referred to as OMV or \"open market valuation,\" is the cost that an asset would command on the open market or the estimation that the financial community makes of a specific equity or company.  Working Capital - Working capital is the money available to meet your current, short- term obligations. 8.7LEARNING ACTIVITY 1. Write the formulae of Current ratio. 115

2. Mention the difference between Acid test ratio and Current ratio. 8.8UNIT END QUESTIONS Descriptive questions A. Short questions 1. Explain the concept of financial statements. 2. Name the financial ratios are grouped into the following categories. 3. Name the elements of financial statements. 4. Write note on Current Ratio. 5. What is a Quick Ratio? Long questions 1. What are the key factor using in financial statements? 2. What do you mean by financial ratio? 3. Discuss the Calculation of Key Financial Statistics and Ratios. 4. Explain the Screen for Comparable Companies. 5. Describe the term in detail Cash Ratio. B. Multiple choice questions 1. The activity ratio is another name for the ________________ 116

a. Turnover ratio b. Cash Ratio c. financial ratios d. Receivable Turnover Ratio 2.Acid Test Formula _______________ a. Cash + Marketable Securities + Net Receivable and Debtors b. Quick Assets / Quick Liabilities c. Current Assets –Current Liability)/Inventory d. (Current Assets -Inventory)/(Current Liability 3. ______________are created with the use of numerical values taken from financial statements to gain meaningful information about a company. a. Financial ratios b. Statistics ratio c. Economical ratio d. Current ratio 4.FMVA stands for __________________ a. Foreign Modeling & Valuation Analyst b. Financial Modeling & Valuation Analyst c. Fiscal Modeling & Valuation Analyst d. Financial Management & Valuation Analyst 5. ______________can utilise the key financial figures to assess the viability of investing in the company. 117

a. financial investors b. Employee c. Owners and managers d. Customer Answers: 1- a,2-d ,3-a ,4- b,5-a 8.9 SUGGESTED READING AND E- RESOURCES 1. PunithavathyPandian, SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, Vikas Publications Pvt. Ltd, New Delhi. 2001. 2. Kevin.S, SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, PHI, Delhi, 2011 3. YogeshMaheswari, INVESTMENT MANAGEMENT, PHI, Delhi, 2011 4. Bhalla V K, INVESTMENT MANAGEMENT: SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, S Chand, New Delhi, 2009 5. Prasanna Chandra, PORTFOLIO MANAGEMET, Tata McGraw Hill, New Delhi, 2008. 118

UNIT - 9 VALUATION 9.0 Unit Objective 9.1 Introduction 9.2 Concept of Valuation 9.3 Determination of Valuation 9.4 Summary 9.5 Keywords 9.6 Unit end questions 9.7 Suggested Reading and E- Resources 9.0 UNIT OBJECTIVES  To discuss the concept of Valuation  To understand the various determination of Valuation 9.1 INTRODUCTION Valuation is associated with fundamental analysis, which seeks to understand the \"fundamental drivers\" of a business, outside of the valuation's core meaning. Fundamental analysis considers a wide range of influencing factors to arrive at a value, including internal financial indicators like earnings and future liabilities as well as the external environment, such as the federal interest rate. Contrastingly, technical analysis examines statistical patterns of trade activity that are shown on charts, such as variations in price and volume. 9.2 CONCEPT OF VALUATION Analysts value stocks, businesses, or assets by using a procedure called valuation to estimate their current or future value.A security is valued in order to locate prudent investments by comparing the calculated value to the current market price. 119

While valuation models only take into account a small number of variables, the current market price is believed to reflect all variables, including irrational conduct. This explains why there are so many distinct appraisal techniques. Dividend Discount Model (DDM) One of the most popular valuation models is called the Dividend Discount Model, or DDM. By calculating the present value of anticipated future dividend payments, this approach determines the value of a share. Money today is worth more than the same amount paid out at a later period because investors anticipate making interest payments on their capital over time. Because of this, future dividends are \"discounted\" when determining their current worth. The weighted average cost of capital is the rate at which future dividends are discounted. The \"opportunity cost\" of what the investor's money could have generated if it were invested somewhere else is known as the Weighted Average Cost of Capital, or WACC. The Dividend Discount Model additionally takes into account an estimated eternal dividend payout increase made throughout time based on dividend payout increases in the past. Future dividends' present value is equal to the predicted stock value. The DDM suggests a purchasing opportunity if the present value of projected dividend payments, as determined by the DDM, exceeds the stock's current price. The fact that the Dividend Discount Model can only be applied if the company pays dividends and the dividend returns are steady and predictable is a significant drawback. Discounted Cash Flow Model (DCF) The stock price is determined using the discounted cash flow model, or DCF, which values a company by deducting its future cash flows from the investor's projected rate of return. Even if a corporation doesn't pay a dividend or has unpredictably high dividend yields, the discounted cash flow model can still be applied. 120

The weighted average cost of capital, or WACC, is used to discount future earnings in order to determine a share's value using the discounted cash flow model. To get the company's fair value, deduct net debt from the enterprise value, and divide the result by the number of outstanding shares to determine the value of a share. The formula for DCF is as follows:  Take the future cash flows for year 1.  Then divide by one plus “r,”which represents the discount rate, or WACC, raised to the first power.  Then, add the future cash flows for year 2.  This total is then divided by one plus “r,”or the WACC, raised to the second power.  And continue this sequence using a detailed forecast for five years, then add a terminal value, which is the present value of future cash flows in perpetuity.  Once you have the enterprise value, subtract the net debt of the company and divide by the number of outstanding shares. The DCF model provides a purchasing opportunity if the predicted value of a share using the Discounted Cash Flow Model is higher than the share's current value. This model's flaw is that it completely depends on estimations of unknowable future cash flows. Furthermore, inaccurately estimating the discount rates and cash flows can result in conclusions about the investment's attractiveness that are incorrect. Capital Asset Pricing Model (CAPM) The value of a security is determined by the Capital Asset Pricing Model, or CAPM, based on the projected return in relation to the risk investors take when purchasing that security. By multiplying the volatility, also known as \"beta,\" by the additional payment for taking risks, also known as the \"Market Risk Premium,\" and then adding the risk-free rate to that result, one can determine the value of a stock using the CAPM. The formula for CAPM is as follows: 121

Expected return of the investment = the risk-free rate + the beta of the investment times the expected return on the market – the risk free rate which is the market risk premium. The expected return ought to rise proportionately to each incremental increase in risk. The CAPM model says that it is a good time to buy a security if it is discovered to offer a better return than the added risk involved. Because some of its underlying assumptions are idealistic, the CAPM has its limitations, just as any valuation models. For instance, beta coefficients only indicate systematic risk rather than total risk and are erratic over time. This methodology is very well-liked for valuing securities despite its flaws. Graph no 9.1 Expected Returns 122

9.3 DETERMINATION OF VALUATION What is the fair market value of your company? Why does it matter, too? This often occurs when you are trying to get capital for your company. The percentage of your company that you will provide to investors in exchange for their money will depend on the value of your firm when you are seeking financing. Your company is often worth whatever someone is prepared to pay for it. Additionally, the procedures used by one buyer in one industry may differ from those used by another buyer in a different industry. Nevertheless, the investing community employs a number of factors and techniques fairly frequently. “Valuing early-stage businesses is more of a negotiation art rather than a mathematical equation.” A number of variables will contribute to an early-stage company's valuation. Some of the things to think about are listed below:  Market Demand- The sector in which a company operates will be crucial in determining out valuation. In comparison to another company at the same stage of development and present traction in a different industry, it is possible that a company operating in a \"hot\" industry will be able to acquire a greater valuation. This is because there will be a stronger demand for investments in a \"hot\" business and more money available to invest, leading to higher industry average entry valuations.  Market Capacity- The potential gain from an investment increase with the size of the market in which a company competes.Therefore, the potential valuation a company can command increases with market size and vice versa. Investors will approach you with several offers if your product is in a sector with high demand but low market supply. Unless you have a clear competitive advantage, your chances of getting investors are minimal if you operate in a market that is highly saturated with competitors. Investors can determine the value of your company by estimating your earning potential based on market demand. 123

 Development stage- It is highly improbable that a company that is still simply an idea will receive the same valuation as one that already has a product on the market and a client or user base.  Traction- Investors will be convinced that a company is on to something if it can show proof of incredible traction and significant growth rates; this might lead to a higher valuation.  Talent Potential- Your company's talent is taken into account when determining valuation in addition to market potential. You're more likely to achieve product/market fit if your company's leadership has more relevant experience. Your talent is crucial in developing that early traction and, in turn, drawing investors because most investors prefer to see early proof of market traction. A great team with prominent or seasoned key members will be able to command a greater price since a successful firm is more likely to be built by a team of a higher calibre (or so their track record would suggest). The team is, for many investors, the most crucial consideration when deciding whether or not to invest.  Ongoing Financing- Another crucial consideration is taking into account how many rounds of financing a company will require to achieve an exit point. Companies should avoid distributing excessive amounts of equity too soon so that the team and founders are motivated to grow the business to its full potential. Investors are aware of this and take it into consideration.  Economics unit- 124

It is quite unlikely that the company will become profitable at this early stage. To convince investors that your business will be lucrative in the future, you must be able to show that your product or service has strong unit economics.  Comparable Businesses- Examine similar businesses and sector departures. You'll be able to determine what a prospective exit situation would entail by taking a look at these. A corporation can work backwards toward a present valuation once it has a notion of a potential exit scenario.  Broader economics – There is probably less interest in investing in a high risk asset class like early stage enterprises when the economy is doing poorly (i.e. during a recession). As a result, it is likely that valuations will be lower than they are when the general economy is doing well during these times.  Buyer demand- Investor demand to participate in the transaction is frequently the main determinant of a company's valuation.  Urgency - A company's valuation will probably be lower than that of a company that doesn't need financing immediately. We advise against using this because it may come out as a bit desperate, especially if you're facing a major downturn. 125

9.4 SUMMARY  Valuation is associated with fundamental analysis, which seeks to understand the \"fundamental drivers\" of a business, outside of the valuation's core meaning.  Analysts value stocks, businesses, or assets by using a procedure called valuation to estimate their current or future value.  One of the most popular valuation models is called the Dividend Discount Model, or DDM.  The \"opportunity cost\" of what the investor's money could have generated if it were invested somewhere else is known as the Weighted Average Cost of Capital, or WACC.  The stock price is determined using the discounted cash flow model, or DCF, which values a company by deducting its future cash flows from the investor's projected rate of return.  The DCF model provides a purchasing opportunity if the predicted value of a share using the Discounted Cash Flow Model is higher than the share's current value.  The value of a security is determined by the Capital Asset Pricing Model, or CAPM, based on the projected return in relation to the risk investors take when purchasing that security.  “Valuing early-stage businesses is more of a negotiation art rather than a mathematical equation.”  The potential gain from an investment increase with the size of the market in which a company competes. 9.5 KEYWORDS  Analysts - a skilled analyst or someone who analyses.  Opportunity cost - Opportunity cost is frequently referred to as the second-best option. The loss of gain that would have been realised if a different option had been chosen is sometimes referred to as the alternative cost.  Terminal value - When we predict a steady growth rate indefinitely, the terminal value of a security in finance is the present value of all future cash flows at some point in the future. 126

 Market Demand - Market demand is the level of consumer desire for a given product over a specific time period.  Traction - Traction is proof that your product or service has begun to experience a \"hockey-stick\" adoption rate, indicating a sizable market, a sound business strategy, and long-term growth. 9.6 LEARNING ACTIVITY 1. On what basis is value of a security determined? 2. What is Dividend Discount Model? 9.7 UNIT END QUESTIONS A. Short questions 1. What do you mean by Fundamental analysis? 2. Describe the term Valuation. 3. Explain the concept of opportunity cost. 4. What do you mean by Dividend Discount Model? 5. Write note on the DCF model. Long questions 127

1. Explain the Capital Asset Pricing Model and formula. 2. Write in detail Valuation concept. 3. Describe the concept of DCF and formula. 4. What are the different between DCF and DDM? 5. Explain the determination of valuation B. Multiple choice questions 1. _______________considers a wide range of influencing factors to arrive at a value, including internal financial indicators like earnings and future liabilities. a. Capital Asset Pricing Model b. Weighted average cost of capital c. technical analysis d. Fundamental analysis 2. calculating the present value of anticipated future dividend payments, ________________ approach determines the value of a share. a. DCF b. WAAC c. DDF d. DDM 3. DDM stands for _____________ a. Design Discount Model b. Division Discount Model c. Debt of Discount Model d. Dividend Discount Model 128

4. _______________ only take into account a small number of variables, the current market price is believed to reflect all variable. a. Capital Asset Pricing Model b. Discounted Cash Flow Model c. Valuation models d. Dividend Discount Model 5. _____________examines statistical patterns of trade activity that are shown on charts. a. technical analysis b. Valuation models c. primary analysis d. Fundamental analysis Answers’ 1-d, 2-d ,3-d ,4-c ,5-a 9.7 SUGGESTED READING AND E- RESOURCES 1. PunithavathyPandian, SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, Vikas Publications Pvt. Ltd, New Delhi. 2001. 2. Kevin.S, SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, PHI, Delhi, 2011 3. YogeshMaheswari, INVESTMENT MANAGEMENT, PHI, Delhi, 2011 4. Bhalla V K, INVESTMENT MANAGEMENT: SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, S Chand, New Delhi, 2009 5. Prasanna Chandra, PORTFOLIO MANAGEMET, Tata McGraw Hill, New Delhi, 2008. 129

UNIT - 10 M&A- I 10.0Unit Objective 10.1Introduction 10.2 Concept of Mergers and Acquisitions 10.3M&A sale process 10.4Summary 10.5Keywords 10.6 Learning objective 10.7Unit end questions 10.8Suggested Reading and E- Resources 10.0 Unit Objectives  To understand the concept of Mergers and Acquisitions  To discuss the M&A sale process 10.1INTRODUCTION Business transactions known as mergers and acquisitions occur when one company merges with another, known as a merger, or when one company buys another, known as an acquisition. Despite the fact that the terms \"acquisitions\" and \"mergers\" theoretically have separate meanings, individuals frequently refer to the entire process in business as such. The phrase might be abbreviated to M&A. For the corporations engaged as well as the investment banking sector, which is frequently involved in the M&A legal process, acquisitions and mergers can result in large profits. 10.2CONCEPT OF MERGERS AND ACQUISITIONS We frequently link the words \"merger\" and \"acquisition\" with corporate legislation. Consequently, based on the six-letter term \"merger,\" we might assume that it emphasises the idea that two entities combine to create a new, more effective organisation. However, the first image that comes to mind when we discuss acquisition is the assimilation of one organisation into another; as a result, a corporation in a stronger position has the ability to acquire or subdue 130

another entity. However, the Companies Act of 2013 did not define merger and acquisition. According to many academics, lagged indicators of industry merger and acquisition (M & A) activity serve as a good proxy for the expected demand that potential targets will experience for their assets. Definition of Merger and Acquisition An acquisition involves one firm buying only a portion of another firm. The acquisition may happen to acquire assets or an altogether different segment of the other firm. A merger involves the total absorption of a target firm by the acquirer. As a result, one firm ceases to exist, and only the new firm (acquirer) remains. M&A, or mergers and acquisitions, is the process of joining two businesses into one. In order to create synergy, or the situation where the whole (new company) is bigger than the sum of its parts (previously two separate companies), two or more enterprises must be combined). In a merger, two businesses come together. These deals usually involve companies of similar size that are aware of the advantages that the other offers in terms of boosting sales, efficiencies, and capabilities. The conditions of the merger are frequently amicably negotiated, and the two businesses join forces as equal partners in the new business. Acquisitions happen when one business buys another and combines the two into one. Depending on whether the company being purchased thinks it would be better off as an operating unit of a bigger venture, the acquisition may be friendly or hostile. The outcome of both procedures is the same, but the nature of the relationship between the two businesses depends on whether a merger or acquisition occurred. takes place. Why do Mergers Happen?  Companies will gain access to greater resources after the merger, and operations will be carried out on a larger scale.  Companies may undergo a merger to benefit their shareholders. Following the merger, the original organisations' shareholders receive shares in the new business.  Companies may decide to merge in order to expand into new markets or diversify the range of goods and services they offer, both of which will boost earnings. 131

 Companies merge when they wish to purchase assets that would require time to develop internally.  A business with high taxable income may try to merge with one that has a sizable tax loss carryover in order to reduce its tax obligation.  A merger of two businesses will end competition between them, lowering the cost of product advertising. Additionally, buyers will profit from the price cuts, which will eventually boost sales.  Better planning and use of financial resources may come from mergers. Types of Mergers: 6. Congeneric/Product extension merger These mergers take place between businesses that are active in the same market. A new product is added to one company's current product range as a result of the merger. The union gives businesses access to a bigger customer base, which helps them gain market share. 7. Conglomerate merger A conglomerate merger is the joining of businesses engaged in unrelated industries. Only if the union boosts the shareholders' wealth will it be implemented. 8. Market extension merger Companies that sell the same products but operate in different markets join forces in order to get access to a broader market and client base. 9. Horizontal merger Businesses in markets with fewer of these establishments consolidate to capture a broader market. A horizontal merger is one way to combine businesses that offer comparable goods or services. As a result, competition is eliminated, allowing for the realisation of economies of scale. 10. Vertical merger When businesses that are involved in the same industry but at separate points in the supply chain unite, this is known as a vertical merger. Such mergers take place to boost efficiency, supply chain management, and synergies 132

Advantages of a Merger and Acquisitions 1. Economies of Scale The promise of economies of scale is the driving force behind every M&A activity. The advantages of growing larger include: increased capital access, increased volume results in cheaper costs, greater negotiating power with distributors, among other things. Although buyers should always resist the urge to engage in \"empire building,\" larger companies typically have benefits that smaller companies do not. 2. Economies of Scope The economies of scope that are brought about by mergers and acquisitions are often not achievable through organic growth. Facebook is a good example of how this is the case. Even though its platform let users to send and receive messages from friends and share photographs, it nevertheless bought Instagram and WhatsApp. Therefore, economies of scope enable businesses to meet the needs of a much bigger customer base. 3. Synergies Synergies are frequently defined as \"one plus one equals three\": the value that results from two businesses collaborating to create something far more potent.The acquisition of Lucasfilm by Disney serves as an illustration. Disney may expand the customer offering by including theme park attractions, merchandise, and other items. Lucasfilm was already a significant income source thanks to the Star Wars franchise. 4. Opportunity-Driven Value Creation Some of the best transactions take place when a business isn't even actively looking to acquire another one. The purchase price for these deals is typically lower than the net assets of the target company's fair market value. These businesses frequently have some financial difficulties, but deals can be negotiated to keep them operating while the buyer gains immediate value as a direct result of the purchase. 133

5. Increased Market Share Increased market share is one of the more prevalent reasons for M&A. There has always been significant industry consolidation in retail banking because historically, retail banks have considered their regional footprint to be essential to gaining market share (the majority of nations have a set of \"Big Four\" retail banks). Santander, a Spanish retail bank, is a notable example because it actively pursues the purchase of smaller banks, which has helped it grow into one of the biggest retail banks in the world. 6. Higher Competition Levels Theoretically, a corporation grows more competitive as it grows in size. Being bigger allows you to compete for more, which is basically one of the advantages of economies of scale. As an illustration, hundreds of new businesses are currently offering a variety of vegetable-based \"meats\" in the market for plant-based meat. However, many of the start-ups will disappear when P&G or Nestle start to concentrate on this sector because they will be unable to compete with these behemoths. 7. Risk Diversification This is related to economies of scope: A corporation can distribute risk among its various income streams by having more of them rather than concentrating on just one, as a result of having more revenue streams. To go back to the Facebook illustration: According to some observers, younger users are shifting their attention away from the social media behemoth and onto other platforms, including WhatsApp and Instagram. When one revenue stream declines, another revenue stream may maintain or even increase, reducing the risk to the acquiring company. 8. Faster Strategy Implementation The best way to transform a long-term strategy into a mid-term strategy may be through mergers and acquisitions. Consider a scenario in which a business wishes to enter the Canadian market. It may start from scratch and hope to achieve the desired scale in five to ten years. 134

Or it might be a company, its customer base, distribution, and brand value, and gain from them all after the acquisition is completed. Additionally, an organic strategy may seldom ever match the pace offered by M&A in fields like new product development and R&D. 9. Tax Benefits If the target firm is in a strategically important industry or a nation with a beneficial tax system, acquisitions may occasionally result in tax benefits. A case in point is when US pharmaceutical corporations looked at smaller Irish companies and moved their headquarters there to take advantage of the country's lower tax base. This transaction is known as a \"tax inversion.\" The most well-known instance involved a $160 billion merger between Pfizer and Allergan that was proposed in 2016 but later derailed by US government involvement. Disadvantages of a Merger and Acquisitions While mergers and acquisitions can be advantageous for the firms involved, there may be some downsides that all parties involved should carefully examine. The following are some instances of possible drawbacks related to mergers and acquisitions: 10. Increased legal costs The legal business transaction of merging two businesses frequently involves the participation of various important professionals. Financial experts that can help with the assets and other financial aspects are usually need to be brought in, as well as lawyers who specialise in this kind of business. Legal fees for mergers and acquisitions may be expensive. 11. Expenses related to the transaction The company acquiring the other would be liable for paying a quantity of money for that company and its assets, in addition to paying the professionals helping with the logistics of the merger or acquisition. A company can see such expense as a drawback. 12. Possibly lost opportunity The businesses involved may have to pass up other chances because of the time, effort, and cost involved in a merger or acquisition. 135

Differences between mergers and acquisitions  In an acquisition, the business acquiring the other business often keeps its activities, legal structure, and corporate name. In a merger scenario, the parties involved may decide to use one of the current company names to preserve brand recognition and loyalty, or they may decide to adopt a new name that better captures the mission of the new, united organisation.  Legally speaking, the company that is acquired by another corporation essentially ceases to exist as a separate legal entity and under its prior name. If the acquired firm had sold or traded shares, the stock would now be owned and controlled by the acquiring company since it has been absorbed by the acquiring company.  Despite the frequent confusion between the two terms, depending on the specifics of the business transaction, some scenarios are mergers and others are acquisitions. When a corporation refuses to be acquired by another, the scenario is referred to as a hostile takeover and is treated as an acquisition. The distinction frequently manifests in how the merger or acquisition is pitched to the board of directors, shareholders, and employees. However, many merger and acquisition scenarios are mutually advantageous and permit businesses to increase their presence and reach. 10.3 M&A SALE PROCESS 1. Preliminary discussions and non-disclosure agreements Typically, high-level negotiations between prospective buyers and sellers represent the initial step in the M&A process. During this exploratory phase, businesses can talk about how they can complement one another, whether their values are compatible, and what benefits might result from joining together. Non-disclosure agreements should be signed before to providing more sensitive material to ensure that potential buyers cannot exploit it for their own personal gain. 136

2. Assessment and evaluation of target In an M&A deal, the deal team must identify and evaluate all significant risks and problems that a prospective buyer might discover throughout the sale process, or conversely, if they are on the buy- side, must assess all such risks in the target firm.The first step taken by the deal team is to create a market analysis. Buyers who lack market knowledge require assistance in comprehending the company and its place in the industry.Second, they must do a strategic evaluation of the company. They must be able to explain to prospective buyers how key business objectives will be met in a compelling management plan. Thirdly, the sale team needs to make sure that historical financial reports have been audited and are available for potential buyers to review. In order to value the target company, buyers will ask to see financial forecasts as well as historical and projected financial models. The negotiation team will also need to put together an information memorandum, which is a comprehensive report on the company that highlights its financial and business situation as well as its main selling points. 3. Due diligence within a Data Room The M&A process includes a crucial step called due diligence. Companies, their advisers, and possible bidders (as well as their advisors) can view documents in data rooms securely and safely online from any location in the globe. The most secure method for businesses and deal teams to manage deal documents and other crucial company data is through a virtual data room. It makes it possible for buy- side teams to methodically examine, evaluate, and confirm all of this evidence in a structured and controlled manner.This stage's due diligence Q&A is important because it gives everyone the chance to get their questions addressed and problems fixed in the data room before the deal is finalised. 137

4. Signing the contract and closing the deal The two businesses will sign the last contracts and complete the acquisition, assuming there are no unpleasant shocks during the due diligence stage. Between signing and closing, there may be a pre- close period during which the last steps necessary to meet all closing requirements are completed. When each of these requirements has been satisfied, the deal is considered to have officially closed when money is exchanged. 5. Post deal integration The full-scale integration of the acquired company can start as soon as the acquisition is finalised. The M&A process comes to an end with this stage. It is crucial that the post-deal integration strategy be devised early and taken into consideration simultaneously with the due diligence process because this can be just as time-consuming as carrying out the transaction itself. 10.4 SUMMARY  Business transactions known as mergers and acquisitions occur when one company merges with another, known as a merger, or when one company buys another, known as an acquisition.  An acquisition involves one firm buying only a portion of another firm.  A merger involves the total absorption of a target firm by the acquirer.  M&A, or mergers and acquisitions, is the process of joining two businesses into one.  During this exploratory phase, businesses can talk about how they can complement one another, whether their values are compatible, and what benefits might result from joining together.  The M&A process includes a crucial step called due diligence.  Companies, their advisers, and possible bidders (as well as their advisors) can view documents in data rooms securely and safely online from any location in the globe. 138

10.5 KEYWORDS  Bid - A bid is a request for something to be done or an offer to set a price for a good or service by an individual or company.  Merger - A merger is an arrangement that combines two current businesses into a single new business.  Acquisition - The process of gaining anything, including the acquisition of knowledge or property.  Non-disclosure agreement - In a non-disclosure agreement, often known as an NDA, the parties are required by law to keep secret information between them for a specific amount of time.  Risk Diversification - A diversified portfolio can also be seen from the perspective of risk diversification. The latter is a method of managing investments in which we allocate our funds among various assets. 10.6 LEARNING ACTIVITY 1. What is another name for Business transactions? 2. What is Acquisition? 10.6 UNIT END QUESTIONS A. Short questions 1. Explain the Concept of Mergers and Acquisitions 139

2. Explain the word Merger. 3. What is the exact the process merger and Acquisitions? 4. Explain the different between merger and Acquisitions 5. What do you mean by Acquisitions? Long questions 1. Describe the M&A sale process. 2. What is the advantage of M&A? 3. Explain the disadvantage of M & A. 4. Write in detail Concept of Mergers and Acquisitions 5. Describe the steps involved in company mergers and acquisitions B. Multiple choice questions 1. The full-scale integration of the acquired company can start as soon as the acquisition is _______________ a. incomplete b. start c. finalized d. unfinished 2. M&A process comes to an end with _______________ stage. a. Pre deal integration b. Signing the contract and closing the deal c. Post deal integration d. Due diligence within a Data Room 3. ________________ is the process of joining two businesses into one. 140

a. sole trading b. mergers and acquisitions c. partnership d. dissolution 4. In _____________ phase, businesses can talk about how they can complement one another, whether their values are compatible, and what benefits might result from joining together. a. Signing the contract and closing the deal b. Due diligence within a Data Room c. Preliminary discussions and non-disclosure agreements d. Assessment and evaluation of target 5. The first step taken by the deal team is to create a ___________ a. market analysis b. market view c. market development d. market penetration Answers’ 1-c, 2-c ,3-b ,4-c ,5-a 10.7 SUGGESTED READING AND E- RESOURCES  PunithavathyPandian, SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, Vikas Publications Pvt. Ltd, New Delhi. 2001.  Kevin.S, SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, PHI, Delhi, 2011  YogeshMaheswari, INVESTMENT MANAGEMENT, PHI, Delhi, 2011 141

 Bhalla V K, INVESTMENT MANAGEMENT: SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT, S Chand, New Delhi, 2009  Prasanna Chandra, PORTFOLIO MANAGEMET, Tata McGraw Hill, New Delhi, 2008. 142

UNIT – 11 M&A- II 11.0Unit Objective 11.1Introduction 11.2Considerations in mergers and acquisitions 11.3Summary 11.4Keywords 11.5 Learning activity 11.6Unit end questions 11.7Suggested Reading and E- Resources 11.0 UNIT OBJECTIVES  To discuss considerations in mergers and acquisitions 11.1 INTRODUCTION Among other things, businesses will acquire or combine with another business in the goal of accelerating their own growth or thwarting competition. However, there are dangers that could result in a botched M&A acquisition, like overpaying or a failure to successfully merge the two businesses. M&A can have an impact on a company in many ways, including its capital structure, stock price, and potential for future growth. Some M&A transactions are notable successes, such as the 2011 Gilead Sciences-Pharmasset acquisition, while others are well-known failures, such as the AOL-Time Warner agreement in 2000. 11.2 Considerations in mergers and acquisitions A corporate merger or acquisition may significantly alter a company's long-term perspective and potential for growth. However, despite the fact that an acquisition can revolutionise the acquiring company in a matter of hours, there is a substantial amount of risk involved. 143

The reasons why businesses engage in M&A transactions, the causes of their failures, and some well-known M&A transaction examples are covered in the sections that follow.In M&A transactions there are several important factors that executives, investment bankers, and other stakeholders have to consider, including: 1. Form of consideration (cash vs. shares) 2. Accounting 3. Tax treatment 4. Synergies 5. Strategic rationale 6. Intangibles 1. Form of consideration for the M&A deal In order for a company to consider a merger or acquisition, there are a few things that need to be reviewed. Cash vs. Stock Consideration Mix The first item that needs to be considered is how sellers get paid and the buyers pay. There are many ways that a business seller can be compensated in regards to a merger or acquisition. These compensation methods can be extensive and complex.The payment normally includes cash, company stock, a payable note, or a combination of all three. The buyer normally sources the cash via debt or equity.Whether a buyer uses company stock, cash, or a note can depend on a number of factors. Impact on Pro-forma EPS and Ownership The next item is the impact that the purchase will have on the acquirer after the transaction as opposed to before. The financials of the two merged companies will need to be analyzed using a merger model.The goal of this analysis is to determine how the buyer’s earnings per share (EPS) will change due to the merger. An increase in EPS is called Accretion and a decrease is 144

called DilutionThis analysis will consider whether the merger or acquisition will be financially beneficial to the new owner’s bottom line. Impact on Credit Statistics Another item to consider when thinking about how the buyer will purchase the company at hand is what effect their payment method could have on the company or owner’s credit. Just with any large purchase, if using a note or even cash that was taken from a loan, a credit report will be pulled and the business will acquire debt. This will, in turn, decrease the credit rating. 2. Accounting in M&A transactions Mergers and acquisition require many financial and tax reports. Purchase Price Allocation Acquisition accounting includes a purchase price allocation (PPA) which is pretty much just what it says – an allocation of the purchase price paid to the assets and liabilities that are included in the transaction. It is important because it is how Goodwill is determined in M&A transaction (i.e. Purchase Price less Net Identifiable Assets = Goodwill).The application of allocation happens when one company (the acquirer) purchases the second company and allocates the purchase price into the assets and liabilities. These are used for both financial and tax purposes. New Depreciation and Amortization from Write-Ups Tying directly into the purchase price allocation of the acquired net assets, the write-up values of the tangible and intangible assets that are collected must be depreciated and amortized over time and reported on the income statement as such. Creation of Goodwill Goodwill, from an accounting perspective, is an intangible asset that comes from a business buying another firm. The money paid to buy the business divided by the business’s assets and 145

liabilities is the goodwill.Goodwill is not subject to periodic amortization and includes things like the value of the business’s brand name in the marketplace, patents, and technology owned by the company. It also includes customer relations, the customer base, and a stable workplace.Goodwill cannot be seen or touched which is why it is considered an intangible asset. This is incredibly important when merging or acquiring another company as the goodwill will also be transferred and could change the worth of the company based on its positive or negative branding. The formula for goodwill in an M&A transaction is: Goodwill = Purchase Price – Net Identifiable Assets 3. Tax treatment in M&A Asset Sale Asset sales are pretty straightforward when it comes to taxes. Asset sales are favorable to buyers when it comes to taxes as the assets will get the benefit of depreciation deductions, in turn reducing the buyer’s taxes going forward. Stock Sale Tax will almost always be minimized if the transaction is treated as a stock sale rather than an asset sale. The reason being is because the seller pays an immediate tax on its gain when the sale involves assets; therefore, this is not the favorited option by the seller. The individual assets retain their character, bases, and holding periods with stock sales. Stock Sale with 338 or 338(h)(10) Elections In this case, the tax consequences of an asset sale is achieved in the form of a stock transfer transaction. This is ideal if it is preferred to do a stock sale for commercial purposes because it avoids the need to transfer the ownership of all individual assets. 146

4. Synergies in M&A deals Synergy itself is the added value generated by combining two companies – creating opportunities that would not have otherwise been available to these firms operating individually. Synergies are ways to increase profit and earnings per share through either an acquisition or a merger (aka why companies merge in the first place). Estimating and Valuing synergies Estimating and valuing synergies in mergers and acquisitions are based on measuring the value of benefits that various synergies will bring (aka it is the value enhancement of the buyer). For example, though an operating synergy may not have any monetary value, it could reduce the costs of sales, thereby increasing the profit margin. For a synergy to affect value, it must influence the firm in at least one of the following ways:  Lengthen the growth period  Lower the firm’s cost of capital  Increase cash flows from existing assets  Increase the firm’s expected growth rates 5. Strategic rationales for M&A Adding value to a company through combining it with another will create synergies that make sense.  Financial synergy  Operating synergy  Growth  Market Power  Corporate Tax Savings  Retirement 147

 Tax Incentives  Market/ Business/ Product Line Issues  Acquire Needed Resources (customers, manpower, etc.)  Diversification 6. Transaction “intangibles” Intangibles are assets that are not physical in nature. In this case, some M&A transaction intangibles may include the following:  A patent  Customer lists  Employee five-year non-compete agreements  Tech that is unpatentable  Trademarks  Copyrights  Business methodologies  Goodwill  Brand recognition 11.3 SUMMARY  M&A transactions are notable successes, such as the 2011 Gilead Sciences-Pharmasset acquisition, while others are well-known failures, such as the AOL-Time Warner agreement in 2000.  A corporate merger or acquisition may significantly alter a company's long-term perspective and potential for growth.  Acquisition accounting includes a purchase price allocation (PPA) which is pretty much just what it says – an allocation of the purchase price paid to the assets and liabilities that are included in the transaction. 148

 Goodwill, from an accounting perspective, is an intangible asset that comes from a business buying another firm.  Goodwill cannot be seen or touched which is why it is considered an intangible asset.  Asset sales are pretty straightforward when it comes to taxes.  Adding value to a company through combining it with another will create synergies that make sense. 11.4KEYWORDS  Financial Synergy - While two businesses come together, their financial operations are improved to a higher extent than they were when the businesses were operating independently. This is known as financial synergy.  Intangibles - incapable of being touched: having no physical existence  Brand recognition - The degree to which a consumer can correctly identify a specific good or service only by looking at its logo, tagline, packaging, or marketing campaign is known as brand recognition.  Trademarks- Any word, phrase, symbol, design, or combination of these that distinguishes your products or services might be considered a trademark.  Patent - An invention is a product or a technique that, in general, offers a new way of doing something or presents a new technical solution to a problem. A patent is an exclusive right awarded for an invention. 11.5LEARNING ACTIVITY 1. What is Goodwill? 2. Explain the difference between tangible and intangible assets. 149

11.6 UNIT END QUESTIONS A. Short questions 1. What do you mean by Synergies? 2. Explain the concept of merger or acquisition. 3. Describe the term Accounting. 4. Name the M&A transactions important factors. 5. What is the formula for goodwill in an M&A transaction? Long questions 1. How M&A Can Affect a Company? 2. Explain in detailconsiderations in mergers and acquisitions? 3. HowSynergies in M&A deals? 4. Write a note on accounting in M&A transactions. 5. What do you mean by Cash vs. Stock Consideration Mix? B. Multiple choice questions 1. PPA stands for _______________- a. purchase price allocation b. Product price allocation c. Promotion price allocation d. primary price allocation 2. _______________are ways to increase profit and earnings per share through either an acquisition or a merge. 150