Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Concepts

Description

Capital budgeting process

Capital Budgeting
Process of identifying and evaluating capital projects (projects where CF to firm will be received over a period longer than a year)

Categories of capital budgeting
projects

1
...
Replacement projects for cost reduction :
- Whether obsolete usable equipment should be replaced
- Fairly detailed analysis is required
3
...
New product / market development :
- Complex decision-making process, with detailed analysis, due to high level of uncertainty
5
...
agency / insurance company
- involve safety-related / envi concerns
- generate minimum revenue, but accompany new revenue-generating projects undertaken by the company
6
...
Decision based in CF, not accounting income
- Sunk cost : not include
- Exernalities (effect of the project acceptance on firm's other CF) : include
2
...
Timing of CF is important
4
...
Financing cost are reflected in project's required rate of return
1
...
After-tax operating CF : Incremental CF over capital asset' economic life
CF = (S - C - D) × (1 - T) +D = (S - C) × (1 - T) + T × D
S = Sales
C = Cash operating costs
D = Depreciation expense
T = Marginal tax rate
(*) Depreciation : non-cash operating expense, but reduce the taxes paid by firm
3
...
Initial outlay : reflect the sale of old asset

𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑜𝑢𝑡𝑙𝑎𝑦 = 𝐹𝐶𝐼𝑛𝑣 + 𝑁𝑊𝐶𝐼𝑛𝑣 − 𝑆𝑎𝑙 + 𝑇 × (𝑆𝑎𝑙 − 𝐵 )
2
...
Terminal year after-tax non-operating CF (TNOCF)

𝑇𝑁𝑂𝐶𝐹 = 𝑆𝑎𝑙

− 𝑆𝑎𝑙

+ 𝑁𝑊𝐶𝐼𝑛𝑣 − 𝑇 × [ 𝑆𝑎𝑙

−𝐵

− 𝑆𝑎𝑙

−𝐵

]

Effect of inflation on capital
budgeting analysis

1
...
Changes in inflation affect project profitability : Inflation higher than expected → ↓ future CF → ↓ project's value
3
...
Inflation decrease the payment value to bondholders
5
...
Least common multiple of lives approach
2
...
Choose combina on of projects it can afford to have the greatest
total NPV
Hard capital rationing : fund alocated to managers cannot be increased
Soft capital rationing : allow to ncrease allocated capital budget if can justify that additional funds will create shareholder value

Sensitivity analysis

Sensitivity analysis : changing an independent input variables to see the change in dependent variable
- Start with base case scenario
- Change 1 variable by a fixed % point above and below the base case
- Noting the effect of this change on the project NPV

Scenario analysis

Scenario analysis : risk analysis technique, that consider both the sensitivity of key output variable (NPV) to changes in key input variables
- Allow for changes in multiple input variables at once
- Create Worst case, Best case and Base case

Simulation analysis (Monte Carlo
simlation)

Calculate discount rate based on
market risk method

Probability distribution of project NPV outcomes, rather than just a limited number of outcomes
- Step 1 : Assume specific probability distribution for each variable input
- Step 2 : Simulate a random draw from the assumed distribution of each input variable
- Step 3 : For each et of inputs from Step 2, calcuate NPV
- Step 4 : Repeat Step 2 and 3 for 10,000 times
- Step 5 : Calculate mean standard deviation and correlation of NPV with each input variable
- Step 6 : Create probability distribution of NPV from 10,000 outcomes

𝑅

=𝑅 +𝛽

× (𝑅 − 𝑅 )

(*) Use project-specific discount rate, rather than overall company rate
Real option

Real option : option to the right, but not the obligation, to make future decisions that change the value of capital budgeting decision made today
- Offer flexibility → improve project's NPV
1
...
Abandonmen option : PV of incremental CF from exiting > PV of incremental CF from continuing → able to abandon the project
3
...
Flexibility option : Choices regarding the operating of the project, including :
- Price setting option : abe to change price of a product
- Production flexibility option : paying OT / using different input materials / producing different variety of products
5
...
g
...
E
...
: Low barrier entry → new conpe tors → lower profitability
- Misusing standardised templates
...
Shoud include only the incremental overhead costs related to management tim and IT support, which is difficult to quantify
- Using incorrect discount rate
- Politics involved with spending th entire capital budget → to ask for more budget next year
- Failure to generate alternative investment ideas
- Improper handling of sunk and opportunities costs

Economic income

Economic income = CF + (Ending MV - Beginning MV)
In which :
MV = discounted future CF
(*) Economic income rate = Economic income / Beginning MV = project's WACC

Accounting income

Accounting income : reported net income result from an investment in a project
Accounting income = (EBIT - Interest expense) × T - After-tax salvage value
In which :
Interest expense = % debt finance × Beginning MV × pretax cost of debt

Reasons for differ between
accounting income and economic
income

Accounting income

Economic income

1
...
Interest expense

- Deduct from accounting income

- ignore when calculating economic income (already reflect in WACC)

Economic profit

Economic priofit : Measure of profit in excess of the dollar cost of capital invested in a project
Economic profit = NOPAC - $WACC
NOPAT = Net operating profit after tax = EBIT × (1 - T)
$WACC = WACC × Capital
Capital = $ amount of investment (FCInv)
Economic profit focuses on returns to all suppliers of capital (both debt and equity)
NPV of Economic profit = Market value added (MVA)
MVA + Capital = Company value = Project's NPV

Residual income

Residual income : focuses on ROE
𝑅𝐼 = 𝑁𝐼 − 𝑘 × 𝐵
In which:
𝑅𝐼 = 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑁𝐼 = 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑘 = 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦
𝐵
= 𝑂𝑝𝑒𝑛𝑛𝑖𝑛𝑔 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
RI + equity investment + value of debt = company value = project's NPV

Claim valuation approach

Value of company = PV of CF to debtholders + PV of CF to equityholders
In which :
CF to debtholders = interest + principal payments (discounted at cost of debt)
CF to equityholders = dividends + share repurchases = Net income + Depreciation - Principal payments to debtholders (discount at cost of equity)

Concepts
Modigliani Miller Proposition I (No
Taxes)

Description
Capital structure
Modigliani Miller : Value of firm is unaffected by its capital structure
Assumptions :
- Perfectly competitive capital markets : no transaction cost, taxes, or bankruptcy costs
- Investors have same expectations with respect to CF generated by the firm
- Riskless borrowing and lending : Investors could lend / borrow @ risk free rate
- No agency costs : no conflict of interest between managers and shareholders
- Investment decisions are unaffected by financing decisions : operating income is independent of how assets are financed

𝑉 =𝑉
In which :
𝑉 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑙𝑒𝑣𝑒𝑟𝑒𝑑 𝑓𝑖𝑟𝑚
𝑉 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑢𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 𝑓𝑖𝑟𝑚
Modigliani Miller Proposition II (No Modigliani Miller : Cost of equity increases linear with the increase in % of debt financing → benefit of ↑ debt (as a cheaper source of financing) is offset with ↑ in cost of equity → no
Taxes)
change in WACC → no effect on overal firm's value
Debtholders have the priority to claim on income and assets → Cost of debt < Cost of equity
↑ % debt → ↑ risk to equityholders → ↑ cost of equity
Assumptions :
- Perfectly competitive capital markets : no transaction cost, taxes, or bankruptcy costs
- Investors have same expectations with respect to CF generated by the firm

𝑟 =𝑟 +

Modigliani Miller Proposition I
(With Taxes)

𝐷
× 𝑟 −𝑟
𝐸

In which:
𝑟 = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝑟 = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑠𝑠𝑢𝑚𝑒 𝑛𝑜 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒
𝑟 = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡
Modigliani Miller : Debt provide tax shield → tax shield add value to firm → value of levered firm = value of unlevered firm + tax shield → Op mal capital structure : 100% debt
𝑉 =𝑉 +𝑡×𝑑

Modigliani Miller Proposition II
(With Taxes)

Modigliani Miller : WACC is minimised @ 100% debt
𝐷
𝑟 =𝑟 + × 𝑟 −𝑟 × 1−𝑡
𝐸

Costs and effect on capital
structure

1
...
Agency costs of equity :
- Monitoring costs : costs of supervising management , incude expenses to make report to shareholders and paying the BOD
- Bonding costs : assumed by management to assure shareholder that the managers are working in the shareholders' best interest (e
...
: premiums for insurance to guarantee performance
; implicit costs for non-compete agreements)
- Residual losses : Other costs
(*) Use of debt force managers to be desciplined on how to spend cash, because they have less free cash to spend
3
...
Order from most favored to least favored :
+ Internal generated equity (RE)
+ Debt
+ External equity (issue share)

Static Trade-off Theory

Static trade-off theory : balance the tax shield benefits and value-reducing cost of financial distress from using debt → op mal capital structure

𝑉 = 𝑉 + 𝑡 × 𝑑 − 𝑃𝑉 𝑐𝑜𝑠𝑡𝑠 𝑜𝑓 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑑𝑖𝑠𝑡𝑟𝑒𝑠𝑠
- Using debt → tax benefits
- Using debt → increase cost of financial distress
Target capital structure

Target capital structure : structure that firm uses overtime when making decisions on how to raise capital
- Maximise profit : Target capital structure = Optimal capital structure
- Reason for fluctuation of actual capital structure around target capital structure:
+ To exploit opportunities in a specific financing source (e
...
: temporary rise in stock price → opportunity to issue addi onal equity → ↑ % of equity
+ MV fluctuation of stock and bond market

Debt rating

Debt rating : reflect the creditworthiness of a company's debt
...
g
...
Total debt
- Japan, Italy, France : more total debt
- US, UK : less total debt
2
...
Emerging market differences
- Developed countries : more total debt, longer maturity debt
- Emerging markets : less total debt, shorter maturity debt

Factors for the differences in use of Factors
financial leverage
1
...
Financial markets and banking system factors
- Larger capital markets, with more liquidity
- More reliant o banking system than corporate bond market as source of corporate borrowing
- More institutional investors
3
...
Regular cash dividend :
- Stable / increasing dividends → sign of consistent / growing profitability
- Dividend reinvestment plan : reinvest cash dividend by purchasing additional share (newly issued or in the open market)
2
...
Liquidating dividend :
- When :
+ a part / whole firm is sold
+ dividends in excess of Retained earnings are paid
- Consider as a return of capital
4
...
Stock split
1
...
Bird-in-hand (dividend preference theory) :
- ↑ dividend payout ra o → ↓required rate of return on equity capital
- Due to : future capital gains from reinvesting RE is less certain than current received dividend payments
3
...
Dividend initiation :
increases, decreases, and omissions - Positive signal : optimist about its future
- Negative signal : lack of profitable reinvestmnt opportunities
2
...

3
...
Clientele effects : different groups of investors (individuals, institutions, corporations) → different dividend preference
...

+ Stock price when go ex-dividend :

∆𝑃 =

𝐷× 1−𝑇
1−𝑇

- Requirements of institutional investors : institutional investors only invest in companies that pay dividend / have dividend yield above a target threshold
- Individuals investor preferences
2
...
Investment opportunities
- availability of + NPV investment opportunities
- Speed required for reaction
2
...
Financial flexibility : Desire to maintain financial flexibility → stock repurchase instead of dividends
4
...

5
...
Contractual and legal restrictions : Firm may be restricted from paying dividend by legal requirement / restrictions caused by cash need, include
- Impairment of capital rule : dividends paid cannot > RE
- Debt covenants

Effective tax rate under :
- Double taxation system
- Split rate tax system
- Dividend imputation tax system

1
...
Split rate tax system : Tax rate for distributed earning < Tax rate for retained earning
...
Imputation tax system : Effective tax rate = shareholder's tax rate

Compare :
- Stable Dividend policy
- Constant Dividend payout ratio
policy
- Residual dividend model

1
...
Constant dividend payout ratio policy: Pay dividend as a % of eanrings each year → dividend will vary directly with earning
3
...
Open market transactions : buy back shares in open market @ most favourable terms
2
...
Dutch auction : tender offer with a range of prices
- Identify the minimum clearing price for desired numbmer of shares need to be repurchased
- Bids are accepted from lowest price until the desired quantity is filled
- Accept the price of the last offer as the price paid to all shareholders
4
...
Potential tax advantages when Capital gain tax < Dividend tax
2
...
Add flexibility, since it is not a LT commitment
4
...
Increase financial leverage (change company's capital structure)
1
...
In developed markets, % companies paying cash dividends ↓ over the long run
3
...
E
...
:
Dividend payout ratio = Dividends ÷ NI
Dividend coverage ratio = NI ÷ Dividends
(*) Compare :
- Should compare with industry / market average
- Higher than normal dividend payout ratio → higher probability of dividend cut
- Stable / Increasing dividend → favourable ; Cut dividend in the past → unfavourable
FCFE = CFO - FCInv + Net borrowing
FCFE coverage ratio = FCFE / (dividends + share repurchase)
FCFE coverage ratio significantly <1 : unsuitable

Concepts
Key stakeholders groups

Description
Corporate Performance, Governance and Business Ethics
Stakeholders : Internal / External groups with an interest / claim in a company
...
Identify relevant stakeholders
2
...
Identify the demands of each group on the company
4
...
Identify strategic challenges these conflicting demands pose

Principal - Agent relationship

Principal - Agent relationship :
- Arise when one group delegates decision making / control to another group
- Due to the asymmetric information advantage of the agent over the principal
- Principal - Agent problem arises when the agent uses the information asymmetric advantage for their own interest, at the cost of the interest of the principal
Corporate geovernance procedures to control Principal - Agent relaionship:
- Guide the behaviour of agents by setting goals and principles of behaviour
- Reduce information asymmetric
- Remove agents who misbehave and violate ethical principles
Common examples of unethical behaviour :
- Self dealing : misappropriate corporate assets for personal use
- Information manipulation : misleading information / hiding risk
- Anticompetitie behaviour
- Opportnistic exploitation of suppliers / distributors in violation of negotiated terms when they do not have the power to resist
- Substandard working conditions
- Environmental degradation
- Corruption (bribery)

Roots of unethical behaviours

1
...
Failure to realise issue that may lead to ethics violations
3
...
Flawed business cuture, where top management set unrealistic goals leads to ethics violations
5
...
Friedman doctrine : the only social responsibility of business is to make profit "within the rules of the game", thru "open and fair competition without deception or fraud"
- Critic: when law, regulation, rules are poorly defined, ethical behaviour entails more than making profits
2
...
Kantian ethics : People are more than just an economic input, and deserve dignity and respect
4
...
Pursuit of the utilitarianism's greatest good should not violate these rights
...
Justice theories : focus on a fair distribution of economic output
...
Turn this process into yes/no questions
- Does this decision meet the code of ethics an standards?
- Am I willing to have this decision widely reported to stakeholders and the press?
- Would others whose opinion I value and respect approve this decision?
Step 5 : Appoint ethics officers who articulate, propose, train, monitor and revise a code and behaviour
Step 6 : Establish strong corporate governance procedures, include :
- Majority of BOD are idependent, outside, knowledgeabe members, with high integrity
- Chairman and CEO are separate
...

Major business forms and
associated conflicts of interest

Business form

Characteristics

Potential conflict of interest

1
...
Partnerships

- 2 or more owners / managers
- No distinction between the business and the owners → unlimited liability shared among partners
- Can pool knowledge and capital, share business risks

Typically involve creditors and suppliers
Potential conflict between partners are
solved in the partnership agreement
Between Management and shareholders

3
...
Shareholders want managers to make decisions that maximise shareholders wealth, but
managers may make decision that maximise their own wealth
...
g
...
Attent extraordinary meeting when necessary
- Ensure BOD members are adequately trained
- Composition of BOD, whether directors are independent / dependent
...
Should have industry, strategic planning, risk management knowledge ; not serve on more than 2-3 BODs
; show commitment to investors interest, ethical management and investing principles
- How the board is elected : election annually (force directod to make more careful decisions, more attentive to shareholders) or staggered election
- Board self-assessment practices: should be performed at least annually, focus on member participation, committee activities, future needs of the board
- Frequency of separate meeting for independent directors : at least annually, without management attendance, to openly discuss about policies, management, compensation, without
concern about management influence
- Audit comittee and audit oversight : only independent directors, with expertise in financial / accounting, has full access to the management, has cooperation of the management, and meet
with the auditors at least annually
- Nominating committee : only independent directors
- Compensation committee and the compensation awarded to management : focus on LT ; not excessive
...

- Use of independent / expert legal counsel : use independent , outside counsel whenever legal counsel is required
...
Legislative and Regulatory risk : risk that new laws / regulations will negatively impact firm's probability or business model
(ESG) risk exposure
2
...
Reputational risk
4
...
Financial risk : risk that ESG risk factors will result monetary cost to the firm / shareholders
Valuation of corporate governance Effective corporate governance system : Higher profitability, and higher returns for shareholders
Ineffective corporate governance system - risk :
- Financial disclosure risk : info/disclosures are incomplete, misleading or materially mistated
- Asset risk : Management may use company assets inappropriately
- Liability risk : Management may enter into off-BS obligations → reduce value of shareholders' share
- Strategic policy risk : Management may enter transactions not in the best interest of shareholders, but provide benefis for management

Concepts
Forms of integrations

Description
Mergers and Acquisitions
1
...
Target ceases to exist as a separate entity
2
...
Consolidation : both companies cease to exist, come together as a completely new company

Types of mergers

1
...
Vertical merger : acquirer seeks to move up / down the supply chain
- Forward integration : acquirer move toward ultimate customers
- Backward integration : acquirer move toward raw materials
3
...
Few, if any synergies

M&A motivations

1
...
Achieve more rapid growth : common in mature industries
3
...
Gaining access to unique capabilities, e
...
: R&D, intellectual capital
5
...
Bootstrapping EPS
7
...
Tax benefits : use target's accumulated losses to lower tax liability
9
...
Achieve international business goals :
- Taking advantages of market inefficiencies : acquire manufacturing plant in country with cheap labour costs
- Working arounf disadvanageous government policies : overcome barrier to free trade (tariffs, quotas)
- Use technology in new market : access to markets where technology can be marketed
- Product differentiation
- Provide support to existing multinational clients

Bootsrapping EPS

- High P/E firm acquire Low P/E firm in a stock transaction
- Exchanging higher-price shares to lower-price shares at ratio less than 1-for-1

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 + 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝑃𝑜𝑠𝑡 𝑚𝑒𝑟𝑔𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 + 𝐸𝑎𝑟𝑛𝑛𝑔𝑠
𝐸𝑎𝑛𝑖𝑛𝑔𝑠
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
=
<
+
𝑆ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 + 𝑆ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 × 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑖𝑛𝑔 𝑟𝑎𝑡𝑖𝑜 𝑆ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝑆ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑖𝑛𝑔
𝑃𝑜𝑠𝑡 𝑚𝑒𝑟𝑔𝑒𝑟 𝐸𝑃𝑆 =

Relationship between industry life Industry Life Cycle Stage
cycle, merger motivation, and types
of merger
1
...
Rapid growth

- High profit margins
- Accelerating sales and earnings
- Competition is still low

- Gain access to capital
- Expand capacity to growth

- Conglomerate
- Horizontal

3
...
Stabilization

- Competition reduce growth potential
- Capacity constraints

- Economies of scale / Reduce costs
- Improve management

- Horizontal

5
...
Definition : acquirer give target's shareholders cash / securities in exchange for shares of
target's stock

1
...
Payment : directly to target's shareholder

2
...
Approval : At least majority vote

3
...
Tax : shareholders pay capital gain tax
...
Tax : Target company pays capital gain tax
...
Liabilities : Acquirer assumes all target's liabilities

5
...
Securities offering : target's shareholders receive chases of acquirer's stock in exchange for their shares in target company, based on an exchange ratio
2
...
Friendly merger offers
- Step 1 : Acquirer directly approach target's management to negotiate the payment method and terms of transactions
- Step 2 : Both side perform due diligence on the other party
...
Target wants to make sure the payment capacity of acquirer
- Step 3 : Attorneys drafts a definitive merger agreement
- Step 4 : Announce to the public, and encourage target shareholders to vote for the deal
- Step 5 : Once the deal is approve → payment and close the deal
2
...
Each shareholder either accept or reject the offer
+ Proxy battle : Seeks control over the targer by having shareholders' approve for a new "acquirer approved" BOD → repalce target's management with new BOD → merger offer
become friendly

Takeover defense mechanism
Pre-offer defense mechanism

1
...
Poison put : give the bondholders the option to demand immedialte repayment of their bonds in case of hostile takeover
3
...
Staggered board : split BOD into 3 equal-sized groups, each group is elected in 3-year term → bidder could win at most 1/3 board seats → take at least 2 years to control the board
5
...
Supermajority voting provision for mergers : require supermajority (over 75% or 85%) of vote for a merger
7
...
Golden parachutes : compensation between target and its senior to pay a large amount of cash payout if they leave the target after a merger

Takeover defense mechanism
Post-offer defense mechanism

1
...
Litigation : lawsuit against the acquirer on anti-trust ground / violation of securities law → expensive and me-consuming legal effort to fight
3
...
Share repurchase : Target submit a tender offer to repurchase its own shares → force acquirer to raise its bid → increase the use of leverage in target's capital structure → target less
attractive
5
...
Crown jewel defense : sell the subsidiary / major asset to other 3rd party
7
...
White knight defense : seek a 3rd party with good strategic fit with the target that could offer a higher price than the hostile acquirer → bidding war
9
...
Takeover price
must be determined separately
- Hard to take into account the effect of synergy or
change in capital structure
- Historical data used to estimate takeover premium may
not be timely → not reflect current condi on in M&A
market

- Assume value of past transactions is accurate
...
Stock payment

1
...
Stock offer : Profit of target's shareholders is determined by value combined firm's stock

𝑃 = 𝑁 × 𝑃𝑃𝑆

Post merger studies

In which :
𝑃 = 𝑃𝑟𝑖𝑐𝑒 𝑝𝑎𝑖𝑑 𝑡𝑜 𝑇𝑎𝑟𝑔𝑒𝑡
𝑁 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑛𝑒𝑤 𝑠ℎ𝑎𝑟𝑒𝑑 𝑡ℎ𝑒 𝑡𝑎𝑟𝑔𝑒𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑠
𝑃𝑃𝑆
= 𝑃𝑜𝑠𝑡 𝑝𝑒𝑟𝑔𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑐𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑓𝑖𝑟𝑚
1
...
Longer term performance studies :
- Acquirer ted to underperform their peers
- Avg
...
Strong buyer : Acquirer shows strong performance (i
...
: earnings ; stock price growth) in the prior 3 years
that create value
2
...
Few bidders → Greater acquirer's future returns
4
...
Divestitures : A company selling / liquidating / spinning off a division or subsidiary, mostly to outside buyer
2
...

3
...
Split-offs : Allow shareholders to receive a new shares of a division of the Parent, in exchange for a portion of their shares in the parent company
5
...
Mostly associated with bankcruptcy

Common reasons for restructuring 1
...
Lack of profitability : Division's return < Firm's cost of capital
- Reason 1 : management made a bad decision to enter the division at the first place
- Reason 2 : Division's profitability declines over time due to rising costs / or change in customers' preference
3
...
Infusion of cash : Parent company experiences financing difficulty → selling a division to raise cash and reduce debt



---