BUSF_A01.qxd

Chapter 14 • Corporate restructuring

Appraisal of the merger

By the bidder

A merger is simply an investment, and should be appraised as one. The expected cash

flows from the merged business must be estimated and discounted according to a cost

of capital factor that incorporates consideration of market perceptions of the risk of the

merged business, that is, the systematic risk. The cash flows that must be assessed will

include all of the normal operating cash flows of the new undertaking. In addition,

any cash flows arising from disposing of any unwanted divisions of the target (or of

the bidder) arising from the merger, including any cost of making employees redund-

ant, must be taken into account. We must also include the amount paid to acquire

the target’s equity. Where payment is not all in cash, the amount should include the

opportunity cost of the equity and/or loan notes issue, that is, it should include the net

amount of cash that would have been received for the share/loan notes issue had it

been made for cash, assuming that all other factors would have been the same.

If the net present value calculated from the above is positive, then, logically, the

investment should be made.

There will usually be non-financial factors to consider, such as the acceptability of

declaring employees redundant in order to gain potential economies of scale. These

factors will have to be balanced with the strictly financial aspects when reaching a

decision.

By the target’s shareholders

Appraisal of the offer by the target’s shareholders is just as much a capital investment

decision as it is for the bidder. Each shareholder must assess whether future cash

benefits from accepting the offer, suitably discounted, will exceed the discounted cash

flow benefits of retaining the shares of the target.

What level of expertise and sophistication will be applied to this appraisal and

whether it will be done at all, on the basis suggested above, depends on the indivi-

dual shareholder. The large investing institutions will, it is presumed, reach their deci-

sions on the basis of detailed analysis. This may be less the case with the individual

private investor.

Hostile and friendly mergers

The directors of many target businesses resist any merger attempts: in other words

the merger attempts are ‘hostile’. This may be for a variety of reasons, including

Table 14.2Takeovers and mergers by industrial and commercial businesses

involving UK businesses during the ten-year period 1998 to 2007

Type of takeover Total number Mean value

£m

Takeover of a UK business by another UK business 6,309 55.0

Takeover of an overseas business by a UK business 1,594 143.7

Takeover of a UK business by an overseas business 758 289.9

Source: Adapted from National Statistics (2008), Mergers and acquisitions involving UK companies 4th quarter

2007 Tables 6, 7 and 8