Task1: Select 1 listed company on the ASX or any major international stock exchange. Provide an executive summary on the company’s nature of operations, industry, current financial positions, risk profile, and strategic directions. (10 marks)
Expectation: Students should be able to describe the company’s profile in their own words. Extra marks will be given to students who can infer the unique opportunities available to the company, describe how the company positions itself within its own industry and how it compares with its peers, and outline its strengths and weaknesses.
Task 2: The CEO of the above company is looking for some expansion opportunities. He/she approaches the Corporate Finance Division within the company for advice. Suppose you are one of the analysts in the Corporate Finance team. Your job is to identify a potential takeover target for the company and outline the reasons why such acquisition is deemed to be beneficial. Complete a detailed analysis of the takeover deal. Your report should include but not be limited to the followings:
a) Provide a brief summary of the target (10 marks)
Expectation: Students are able to describe the target in their own words
b) Classify the type of the takeover deal, describe the benefits associated with the deal and identify potential sources of synergy (20 marks)
Expectation: Students are expected to explain why the chosen company is a suitable target and elaborate on why the takeover will generate synergy from various sources.
c) Calculate the market capitalization of the target and the synergy, hence advise the management of the acquiring company on the offer price (20 marks)
Expectation: Calculate the current market cap. Provide an estimated figure for the synergy benefits. In the real world, estimates of synergy involve many analysts from different departments across the firm, not just finance. However, the objective of this assignment is to engage the students in an M&A deal from a finance point of view. Therefore, as long as the synergy estimate is reasonable given the benefits outlined above, and is consistent with the assumptions made, students should be awarded high marks for this question. Synergy comes from revenue enhancement or cost reduction. Estimates of synergy should be based on either of these two reasons. Key point is that students will need to make assumptions, justify the assumptions, and come up with an estimate of synergy based on the assumptions.
d) How should the merger be paid for? Cash, stock or a combination of both? Give reasons. (10 marks)
Expectation: Average marks are given to students who can reasonably explain the appropriate ways for the parent company to pay for this takeover. High marks will be given to students who do extensive research on the M&A literature and are able to apply the findings of the research to work out whether cash or stock or a combination of the two is more appropriate for this particular takeover deal.
e) Estimate the cost, the NPV of the merger, and the post-merger stock price. (10 marks)
Expectations: These calculations should be based on your answers to parts c) and d) of Task 2.
Task 3: If the company pays all or part of the acquisition by cash, how should the company finance the takeover? Should the company raise the capital using internal funds, debt, equity, hybrid securities or a combination of the above? Give reasons. (20 marks)
Expectation: Average marks are awarded to students who can reasonably specify the pros and cons of using internal funds, debt, equity, hybrid or a combination method. These are all outlined in the workshop materials. Extra marks will be given to students who research on the various ways of raising capital and apply the concept in this specific situation. For example, if the company has quality assets, it may mean that it’s cheaper for them to borrow. If they have excess retained earnings, is it suitable to use retained earnings to fund the deal?
Task 4: Outline the risk(s) involved with this takeover deal. State your assumptions and perform sensitivity analysis on the NPV of the merger. (20 marks)
Expectation: One of the most important risks in any takeover deal is the risk of incorrectly estimating the potential synergy, as the cost of the merger and the NPV of the merger are highly dependent on it. Therefore, students are expected to perform a sensitivity analysis of the NPV of the merger based on how synergy is estimated. For example, if the synergy stems from cost reduction or revenue enhancement, what are the factors that affect these benefits and how sensitive is the NPV estimation to changes in these factors?
Bottom line: Students can pass the assignment by following the materials in the workshop. However, to get high marks, students need to demonstrate their ability to apply the techniques, theory and relevant research in the situation unique to the chosen company.