pepsi and coke financial management mergers lbos divestitures and business

7/27/2019 Pepsi and Coke Financial Management Mergers Lbos Divestitures and Business

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MERGERS, LBOS,

DIVESTITURES, AND BUSINESS

FAILUREChapter 171


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MERGER FUNDAMENTALSPart 1


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TERMINOLOGIES: Corporate Restructuring

activities involving expansion or contraction of a

firms operations or changes in its asset orfinancial (ownership) structure.

Merger

combination of two or more firms, in which the

resulting firm maintains the identity of one of

the firms, usually the larger one.

MERGER FUNDAMENTALS

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TERMINOLOGIES: Consolidation

combination of two or more firms to form a

completely new corporation

Holding Company

corporation that has voting control of one or

more other corporations.

Subsidiaries

the companies controlled by a holding company.

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TERMINOLOGIES: Acquiring Company

firm in a merger transaction that attempts to

acquire another firm.

Target Company

the firm in a merger transaction that the

acquiring company is pursuing.

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TERMINOLOGIES: Friendly Merger

A merger transaction endorsed by the target

firms management (board of directors),

approved by its stockholders, and easilyconsummated.

Hostile Merger (Unfriendly Merger)

a merger not supported by the target firmsmanagement, forcing the acquiring company to

gain control of the firm by buying shares in the

marketplace.

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TERMINOLOGIES: Strategic Merger

a merger transaction undertaken to achieve

economies of scale.

Financial Merger

a merger transaction undertaken with the goal

of restructuring the acquired company to

improve its cash flow and unlock its hiddenvalue.

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MOTIVES FOR MERGING1. Growth or Diversification

2. Synergy of Mergers

3. Fund Raising

4. Increased Managerial Skill or Technology

5. Tax Considerations

Tax loss carry forward

6. Increased Ownership Liquidity7. Defense Against Takeover

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Types of Mergers1. Horizontal Merger

a merger of two firms in the same line of

business.

2. Vertical Merger

a merger in which a firm acquires a supplier or

a customer.

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LBOSAND DIVESTITURESPart 2


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LEVERAGED BUYOUTS (LBOS)

o An acquisition technique involving the use

of large amount of debt to purchase a firm.

PURPOSE:

to allow companies to make large acquisition

without having to commit a lot of capital.

to create a high debt- private corporation with

improved cash flow and value.


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TYPICALLY FINANCED WITH ATLEAST 90%DEBT TO 10% EQUITY:

o the assets of the firm are used to secure the

borrowings of the acquiring company.

o the loans are paid back from the acquired

companies cash flow.

o the lender take a portion of the firmsequity.


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usiness

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CHARACTERISTICS: Must have a good position in industry with a

solid record of profitability.

Must have a low level of debt, but high level of

assets to use as collateral.

Must have a stable and predictable cash flow

that are adequate for meeting debt obligations

and working capital needs.


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it can increase management commitmentand effort.

It tends to improve the companysproductivity and loyalty.

act to revitalize a mature company andimprove its market position.

tends to create value for variety of parties.

it enhances the value of firm.


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the company may fail and go bankrupt.

Dangerous for companies that are vulnerable

to industry competition or volatility in

the overall economy.

it can cause significant problems for

employees and suppliers.

It can damage a companies credit rating due

to paying high interest rates.


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DIVESTITURES

o Selling of some of a firms assets for various

strategic reasons.

MOTIVE:

To generate cash for expansion of other product

lines, to get rid of a poorly performing

operation, to streamline the corporation, or to

restructure the corporations business in a

manner consistent with its strategic goals.


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APPROACHES:

1. Sale of a product line to another firm2. Sale of the unit to existing management.

3. Spin-off

4. Liquidation of the operating unitsindividual assets.


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ANALYZINGAND NEGOTIATING

MERGERSPart 3


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VALUINGTHE TARGET COMPANY

Estimating the target value of the company byusing Valuation and Capital BudgetingTechniques.

o ACQUISITION OF ASSETS

o Acquiring a firm for collection of assets(generally fixed assets) that the acquiringcompany needs.

o ACQUISITIONS OF GOING CONCERNS

o The methods of estimating expected cash flows

from an acquisition are similar to those used inestimating capital budgeting cash flows.

o Typically,pro forma income statementsreflecting the postmerger revenues and costsattributable to the target company are prepared.


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STOCK SWAP TRANSACTIONS

An acquisition method in which the acquiring

firm exchanges its shares for shares of the

target company according to a

predetermined ratio.

o RATIO OF EXCHANGE (actual)

o = amountpaidper share of the target company

market price per share of the acquiring firm


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EFFECT ON EARNINGS PER SHARE (EPS)

INITIAL EFFECT

If the following conditions are present the mergedEPS will initially remain constant:

1. Ratio of Exchange = 1

2. Acquiring firm premerger EPS = Target firm premergerEPS

3. P/E ratio of acquiring firm = P/E ratio of target firm.

LONG-RUN EFFECT

Often, the effects are quite favorable when an initialdecrease in the EPS of the stock held by the originalowners of the acquiring firm is expected.


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EFFECT ON MARKET PRICE PER SHARE

Factors that affect the Market Price perShare

1. Expected Earnings

2. Dilution of Ownership

3.

Changes in risk4. Other operating and Financial Changes


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EFFECT ON MARKET PRICE PER SHARE

RATIO OF EXCHANGE IN MARKET PRICE Indicates the market price per share of the

acquiring firm paid for each dollar of market

price per share of the target firm.

MPR = ( MPacquiring x RE ) / MPtarget


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MERGER NEGOTIATION PROCESS

FIGHTING HOSTILE TAKEOVERS Takeover Defenses

Strategies for fighting hostile takeovers.

White Knight

A takeover defense in which the target firm finds an

acquirer more to its liking than the initial hostile

acquirer and prompts the two to compete to take

over the firm.

Poison Pill

A takeover defense in which a firm issues securities

that give holders rights that become effective when a

takeover is attempted. These rights make the target

less desirable to acquirer.


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MERGER NEGOTIATION PROCESS

FIGHTING HOSTILE TAKEOVERS Golden Parachutes

provisions in the employment contracts of key

executives that provide them with sizeable

compensation if the firm is taken over.

Shark Repellents

Antitakeover amendments to a corporate charter

that constrain the firms ability to transfer

managerial control of the firm as a result of a

merger.


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HOLDING COMPANIES

Holding Company

A corporation that has control of

one or more other corporations.


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BUSINESS FAILURE FUNDAMENTALSPart 4


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TYPESOF BUSINESS FAILURE

1. Negative or Low Returns

2. Technical Insolvency

3. Bankruptcy


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usiness

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MAJOR CAUSESOF BUSINESS FAILURE

1. Mismanagement

2. Economic Activity

3. Corporate Maturity4. Lack of Skills

5. Sales


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VOLUNTARY SETTLEMENTS

arrangements between a failedfirm and its creditors that

allow it to bypass some of the

costs involved in legal

bankruptcy proceedingsnormally initiated by the

debtor firm.


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ADVANTAGES simplicity and relatively low cost

no court proceedings as in bankruptcy

general cost of administration are much lower

than in a bankruptcy greater protection of confidential business

matters

less negative publicity in the legal and

business community

less time consuming and usually less expensive


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DISADVANTAGES no protection against secured parties

inability to reject leases and other burdensome

executory contracts

no legal way to compel dissenting creditors to

cooperate contracts

no legal way to compel dissenting creditors to

cooperate with settlements


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STRATEGIES TO SUSTAIN THE

FIRM:

1. Extension2. Composition3. Creditor Control4. Com bination of the three


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REORGANIZATIONAND LIQUIDATION

IN BANKRUPTCYPart 5


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BANKRUPTCY LEGISLATION

Bankruptcy occurs when the firm cannot pay

its bills or when its liabilities

exceed the fair market value of its

assets.


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Bankruptcy Reform Act of 1978

Chapter 7. The portion that details the

procedures to be followed when liquidating

a failed firm.

Chapter 11. The portion that outlines the

procedures for reorganizing a failed or

failing firm, whether its petition is filed

voluntarily or involuntarily.


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Reasons for Unethical Bankruptcy

1. Although bankruptcy may enable acompany to survive by giving it time torebuild liquidity, the company never hasto make whole.

2. Bankruptcy proceedings take from othersamounts that were agreed upon in good

faith contracts and bargaining3. When a company declares chapter 11

bankruptcy, non- bankrupt competitorsare harmed.


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REORGANIZATIONIN BANKRUPTCY

BankruptcyLegally declared inability or

impairment of ability of an

individual or organization to pay

its creditors.


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REORGANIZATIONINBANKRUPTCY

Allowing the debtor to maintain

operating control, while

restructuring debts and workingout a repayment schedule

acceptable to creditors.


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Two types of Reorganization1. Voluntary Reorganization a petition

filed by a failed firm on its own behalf for

reorganizing its structure and paying itscreditors.

2. Involuntary Reorganization a petitioninitiated by an outside party for the

reorganization and payment of creditorsof a failed firm.


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Procedures for Reorganization1. A Reorganization Petition is filed in court.

2. A debtor in possession is appointed by the

judge.3. Once the court approved the plan and

disclosure of statement, these are given to the

firms creditors and shareholders for their

acceptance.

4. Once accepted and confirmed by the court,the plan is put into effect as soon as possible.


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Role in Debtor in Possession1. Valuation of the firm.

If: a). Value as a going concern < LiquidationValue

b). Value as a going concern > LiquidationValue

2. Recapitalization3. When determined the new capital structure

and distribution of capital, it will submit the

reorganization plan and disclosure statementto the court.


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LIQUIDATIONIN BANKRUPTCY

TRUSTEEappointed by the Securities and Exchange

Commission (SEC) to administer the bankruptcy.

RESPONSIBILITIES:1. Liquidate the firm

2. Keep records

3. Examine the Creditors Claims

4. Disburse Money5. Furnish information required

6. Make final reports on the liquidation


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Priority of Claims1. Unsecured Liabilities with Priority

a. Administering Expenses

b. Unpaid interim expenses

c. Unpaid salaries and wages

d. Unpaid employee benefit plane. Unsecured customer deposits

f. Taxes

2. Creditors

a. Secured

b. Unsecured3. Stockholders

a. Preferred

b. Common


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Example:Assets: (@FMV)

Cash 2,000

Receivables 20,000

Land 10,000

Claims:

Liquidation Expenses 4,200

Unpaid Wages 500

Notes Payable 6,000

(secured by Land)Unsecured Liabilities 19, 000


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GROUP 2

Bang-ud, Abigail T.Balilit, Regine P.

Capsuyen, Pennylyn S.

Dangiw, Elva B.

Dasalla, Roselyn O.

Donato, Kristine Jean

Lumagbas, Lovely

Macayana, Angelica Yoko R.

Maymaya, Connie Calay

Marquez, JomaPanner, Rachell

Quing-A, Remalyn A.

Sab-it, Esther 52

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