MERGERS AND ACQUISITION & APV METHOD OF CALCULATIONS: FDI: Establish opr facilities in another country is FDI.

FDI: Establish opr facilities in another country is FDI. Useful when location is closer to target mkt, cheaper to In the above, A is the variable currency and B is the base (parent) currency. Using the bolded number, disc the
operate in another country, securing cheaper sources of supplies for the same material. Method of Investment: future CF in local currency & then apply the spot rate to convert NPV to parent currency.
1- General principles of take-over and mergers: (a) Directors and advisors should be in the best interest of the Start-up a new subs, takeover an established company, enter into a join venture with a partner. Methods of
company. (b) Equal treatment of all shareholders in the same class. (c) After obtaining effective control normally is obtaining investment payment from FDI: Transfer price arrangement, dividend out of profits, royalty on use of If restrictions on payment/remittance: Adj the yrly cashflows wrt the restrictions yearly & adj the entire amt at
required to make a generic offer to all. (d) After receiving offer, board cannot frustrate the offer or deny patents, sale of asset of sister companies, sales to subsidiaries. These payments are subject to prof of foreign inv, the end of the project. Suppose, Y2, firm can only take your 75% of 1000$ company earned, the yr end CF will be
shareholders the opportunity to decide whether to accept or reject the offer. taxation, transfer pricing regulations, exchange control. DOUBLE TAX RELIEF: if corporate tax 10% in local country 750 and the adjustment for the remaining 250 will be done at the end of the project.
2- Specific Rules: (a) Offer must be made to the offeree’s board. (b) Must make a public announcement once an but 17% in own country, only 7% needs to be paid at home. If 8% in home country, then no tax liab in home. 2%
intent to make offer is given to offeree. (c) Directors of the offeree must obtain independent advice about terms. will not be returned back to the parent company. NOTE FOR THIS TOPIC: Check if the CF is being oaid at the end of the. Yr- then no mid yr disc needed. & if both,
(d) When offeror ha conflict of interest in offeree, should take independent advice. (e) mandatory offer to acquire the local (15%) and the parent (5%) tax is payable in different yrs, then may need to calc 15% based on some yr’s
the remaining must be made when a person acquires 30% or more of voting rights. It should also be there when a base and 5% based on some other yr’s base.
person acquiring more that 30% takes even 1% more. (f) A cash offer must provide a cash offer to the remaining
share at a price no less than the highest price it has paid in the mkt if it has purchased 10% or more shares of the AS A TEMPLATE, CAN USE THIS BELOW:
target within the offer period or 6 months prior to the bgn of the offer period.
3- Competition Act: Set up to check that merger does not damage competition. It protects consumers and
businesses that can control supply and prices.
4- Implication on Val. 1: Business and financial risk of the acquirer are not affected. The systematic risk of acquirer
remains the same as before after the acquisition. Therefore, can use any method: asset/multiple/DCF/DDM. BUT
when synergy existsà discount cash flows, synergy from rev and cost(then use either method: FCFF before
deducting int& principal payments on debt (to obtain valn for target as a whole- debt+equity), using the acquirer’s
WACC or FCFE after int & principal on debt to obtain equity capital in tgt company, using acquirer’s Re.
REMEMBER: The above is a simple valn which assumes no change in risks. Acquirers tend to be much larger than
the targets to do so.
5- Implication of Valn 2- Financial risk of acquirer IS AFFECTED: Scenario assumes no change in the business risk
of the acquirer after the acquisition but is expected a a change in its financial risk and hence its systematic risk.
Use APV methodà Discount FCFF by acquirer’s unlevered Re & make adjustments for the PV of tax shield.
REMEMBER: Vl = Vu + D(Tc). This becomes the firm value of the target. To get eq value, deduct MV of debt, C&CE,
etc. Do not forget the adjs or estimated premiums associated with bankruptcy and default costs. Rmb, to get the
unlevered Re of the acquirer, need to unlever the beta. After computing base case NPV, estimate the value of
debt used for acquisition by adding the MV of debt of acquiree + debt being used for acquisition. Multiply this Future maintainable earning (fme) Method of Valuation:
with Tc to get the tax rate. Deduct any issuance cost. Then deduct the acquiree’s debt to get max value of
acquiree’s debt (NOTE: this is onlt the debt of acquiree and does not include the debt used for acquisition).
Suitable for pvt businesses in which the disc CF is unreliable or inappropriate. Suitable for companies with steady
REMEMBER: This method ignores bankruptcy and distress costs. Estimated prem associated with default and the
g, regular CAPEX, non-finite lives. It is a simplification of the discounted CF method. Majorly, 3 steps involved: i)
bankruptcy cost may need to be included in the APC calc in practice.
estimate the FME of the company, ii) Determine the appropriate cap rate (multiple) that reflects the buyers’s
required return on inv, risk of business, future g and other inv opportunities ; Make a separate assessment of the
value of other assets and liabs that do not affect the maintainable earnings & which could be sold separately.
STEP 1: Estimate the FM pre- tax E:
Need to adjust & eliminate the non-core transactions and the non-arms length transaction. Ex: DEDUCT: Mkt
wages and benefits of owners & fam members ; Prov of annual replacement of cap equipment and associated
labor costs (or annual capital commitment for assets replacement) ; Interest received from surplus cash and
Transaction risk: Short term risk associated with FX movement on individual business transaction. Ex: good sold to ADD: Donations ; Payroll exp related to fam members who are not physically working in the business ; owner’s
another country with trade terms of payment after 3 monthsà risk exists due to dep/app risk. salary in the books ; Financing charge ; Depreciation (Depends if EBDIT or EBIT is used- so take note). OTHER
Translation risk: Assets and liabilities (in BS) of subsidiaries will change value in the reporting currency due to POSSIBLE NON-ARMS LENGTH TRANS: Adj mkt rent on business premises owner by family members.
change in the exchange rate. This unrealised gain/loss through translation may affect financial ratios which may STEP 2: Decide the appropriate capitalization rate (Rmb- EM= Earnings multiple):
trigger technical default on loan covenants. As a general rule, translation risk should not be a significant concern The following method can be used to get the multiple of pvt companies: Cap rate= EM= 100/(Req rate of ret).Ex, if
for investment decisions, if the movement is not one-sided towards unfavourable results. buyers rate of return from inv is 25%, it becomes 100/.25= 4. Rule of thumb- Higher risk, lower EM. Small
Economic Risk: Long term exch rate between 2 countries. Whether 1 currency is depreciating against another. enterprises usually have EM as 1-5. EM of the pvt companies should be around 30-40% of comparative listed
Need to use the interest rate parity. If A is falling more than B, both the infl and int will be higher. Forecasting companies. Val of FME= FME*EM.
STEP 3: Make separate adj for non-opr assets:
exchange rates using purchasing power parity: Exch Rate AUD/THB= Current AUD/THB*((1+infl in aus)^n)/((1+infl
Val of FME= FME*EM+ Value of Non-Opr assets. Non Opr Assets include ST security or bonds, investment
in Thailand)^n). Interest rate Parity: Exch Rate AUD/THB= Current AUD/THB*((1+int in aus)^n)/((1+int in
properties, vacant land and utilized assets, surplus cash, loans receivable. Surplus cash discussion: Complex
Thailand)^n). Note int= nominal int rate. = real + infl. when cash is kept in different countries., escrow acc should be created. Responsible mgmt. will invest this cash in
Spot= USD 1.54/GBP1. Suppose, GBP is expected to app 2% against dollar. What will be the value of dollar after securities BUT note that M&A buyer should not pay extra for this. There for the asset-based approach, exclude
yr? Ans. Y1= 1.54*1.02= 1.5708 ; Y2= 1.5708*1.02= 1.6022. Now suppose USD app against dollar. Ans. Y1= C&C in the multiple and then add it back at the end to just make them pay 1 for 1 for C&CE. Seller may also
1.54/1.02= 1.4808 ; Y2= 1.4808/1.02= 1.4238. REMEMBER: KNOW YOUR BASE CURRENCY WELL. distribute C&CE as dividends before deal. THEREFORE, need to pay special attention to it.
Risk and cost of capital effect due to foreign investment: Tends to have higher risk than domestic. Therefore, Generic stuff needed to know: i) Profits at the bgn of calc can be: PAT, EBIT, PBT or EBDIT which may excl
should expect higher return from it. This means cost of capital should be higher for it. distortions created by depreciation charges –the method shown earlier ; ii) In seeking to estimate FME, it may be
New capital for a foreign investments in the currency of investments can come from investing in company’s appropriate to weight historical results giving more emphasis to recent results. However, there is no “magic” in
retained earnings, by taking loans in the local currency from the country where inv is being done subject to law simply taking an average, or weighted average, of prior years results unless one can be confident that this is an
and regulation and good banking environment ; exchange rates change overtime would lead to surplus profits appropriate basis for a prediction of future outcomes.
from the investments after loan repayment. Also take note that the EM is based on the profits and not CF. therefore consider the following: i) is the
International Equity Markets: Large companies have easier access to the international equity markets with large depreciation charge a reasonable proxy for the cost of maintenance of productive capacity at the levels implicit in
the earnings figure? -> the method can still be used with depreciation adjusted to a “maintainable” figure, or
international investors from US and Europe. Singapore companies have easier access. Singapore companies can
allowance can otherwise be made in the valuation (e.g. by deducting a “one-off” adjustment for capital outlays);
also issue depository notes. For International bond markets, generally exists in the US. Foreign companies can
ii) Is it realistic to assume that the “earnings” can be maintained without additional working capital? à If not,
5- Implication of Valn 3- Business & Financial risk of acquirer IS AFFECTED: 1- calculate asset betas, and then 2) issue bonds in the US.
allowance can be made by adjusting the earnings figure, or by reducing the growth factor in the capitalisation rate
calculate the weighted avg asset beta for the group (weighed avg based on mkt values of the 2 companies, i.e. incl Cost involved can be higher to raise fund in the international mkts. Therefore should make large issues to
MV of debt & equity. 3) calculate equity (levered beta) using hemada equation by using the weighted avg and the iii) Buyer and seller viewpoint can be different so the cap rate should reflect that. Mostly it is buyers perspective
spread the transaction costs.
combined firm’s debt & equity ratio. 4) Calculate the new group’s new WACC through CAPM & new D/E ratio. 5) as they want to see what is the FME when they takeover the business.
Calculated PV of combined firm (incl synergy) and the new WACC to calculate the PV of the group. Finally, 6) SUMMARY of COMMON ADJ: Salaries of owners, dep (depending on whether EBDIT is used or EBIT), income and
INTERNATIONAL INVESTMENT APPRAISAL SUM:
decrease the value of debt of the group from this value to get value of equity then deduct the current MV of exp from non opr (eg: interest), non-recurring items (ex: investment income/exp), rental exp paid to family
acquiree to see what the net effect is in the value of the acquirer. (NEXT COLMN PIC) members (above or below mkt rate), capitalization of assets
Steps to do the sum: 1) Est CF for wach yr of the project. CF maybe be in foreign currency. NEED to take into FME (EBDIT) 2017 2016 2015
consider the infl of the foreign entity. i.e. est CF should incl inflation. 2) Estimated CF should incl tax payable in Adjusted Profits $ '000 $ '000 $ '000
PESTEL ANALYSIS, COUNTRY RISKS, IRP: Earnings before tax 117 122 127 Weightage for weighted average (WA): 3 2 1
foreign country. 3) Prepare a forecast FX rate for each yr. Current FX is as at Y0. 4) Convert CF into parent
Market rate adjustments:
currency using the estimated exch rate. If mid-yr discounting, then exch rate & infl should consider mid-yr rates. Ang Father's Salary 70 66 63
Value based on:
International Trade: Reasons: 1) Growth ; 2) Economies of Scale ; 3) International Competition- Globalisation ; 4) 5) Now calc the Net CF received each yr by the parent/investing company in the currency of the parent/investing (50) (48) (46) 2017 Average WA
Ang Mother's Salary 50 48 46 Adjusted EBDIT used 332 286 299
National necessity since exports provides foreign currencies needed for imports. currency. i) Additional tax, if any, will be paid in the parent country. ii) return of inv from foreign subs or JV: the (38) (36) (34)
PESTEL: POLITICAL: Government attitudes, stability, international relations (formal and informal) and its role. relevant CF should be the CF received by the parent/JV. iii) Take into acc the exch control regulation of the country
Ang's Son 50
(3)
48
(3)
46
(3)
Capitalistion rate:
Polotical risk is the measure of political turbulence. ECONOMICAL: Economic factors affecting the demand and In question limiting the payment or remittance of dividend by foreign subs or JV. 6) Disc the net CF using the Rental for shophouse 120 100 85 Cost of equity:
(84) (84) (84) Ang's Coffee is 100% equity financed
ability to acquire goods and services. Overall economic activity, relative levels of inflation in the domestic and appropriate cost of capital. Unlevered beta from comparable 0.78 0.78 0.78
oversees mkts, exch rates, relative prosperity of domestic and overseas markets. SOCIAL: Different culture, media, Related party adjustments
Ang Grandpa's Salary (retired) 55 52 50
Using CAPM to obtain the unlevered cost of equity 8.44% 8.44% 8.44%
Capitalisation rate (1/cost of equity) 11.85 11.85 11.85
national distribution, ability to make use of national exch rates, population growth, social change. ALTERNATE APPROACH USING FISHER EQ & IMPAIRMENT OF ASSETS FRS 36: : Future cash flows are estimated in Non-recurring adjustment
TECHNOLOGICAL: intellectual prop, tech transfer req, ability to access domestic patents, relative cost of tech to the currency in which they will be generated, and then discounted using a discount rate appropriate for the Repair for flooding damange 40 0 0 Apply appropriate valuation discount on CR (25%)
labor ; ENVIRONMENTAL: ESG Measures ; LEGAL: nature and principle of local legal system, law of ownership of a currency. An entity translates the present value using the spot exchange rate at the date of the value in use Income generated from non-operating assets
round to 1 digit, Revised capitalisation rate 3 3 3

firm, acceptance of international trademark, copyright & patents. Company and contract law protection. calculation.
Interest received (5) (4) (4)
Valuation based on adjusted earnings ($ '000) 996 859 897
Market value of non-operating assets (Cash) 500 500 500
The adjusting disc rate: (1+disc rate of A)/(1+disc rate of B)= (Future spot of A/B in 12months’ time)/current spot. Depreciation
Adjusted EBDIT
10
332
10
271
10
256 Total Firm Value 1,496 1,359 1,397