2011  

JAHANGIRNAGAR UNIVERSITY    

  

[ A CASE STUDY ON M&A BETWEEN TELFORD

PLC & WREKIN PLC] 

A CASE STUDY ON M&A BETWEEN TELFORD PLC & WREKIN PLC

Prepared for: 

Mohammed Sawkat Hossain. 

Lecturer, Faculty of Business Studies, 

Jahangirnagar University, 

Savar,Dhaka. 

Prepared by: 

1. Khairuzzaman Mamun ID No :20113137 Contact no : 01761808592 Email : kpmmamun@gmail.com

2. Md. Yeadul Islam Shaikh ID No :20113118 Contact no : 01727980638 Email : yeadul_ju@yahoo.com

3. Shameema yesmin sume ID No :20113117 Contact no : 01918615964 Email : sumiju34@gmail.com

4. Md.Razaul islam ID No :20113220 Contact no : 01670683420 Email : engr.minar@yahoo.com

Submission Date: December 09,2011 

   

December 09, 2011 

Mohammed Sawkat Hossain. 

Lecturer, Faculty of Business Studies, 

Jahangirnagar University, 

Savar,Dhaka. 

Dear Md. Sawkat 

Here  is the report that you asked ask us to conduct on November 25, 2011 on a Case Study on M&A between Telford plc and Wrekin plc.

This study focused on different types of discussion and result about the mergers and acquisitions between Telford plc and Wrekin plc. 

We will be pleased  if you have any further query for this you can call us at your convenient time and place. 

Sincerely yours, 

1. Khairuzzaman Mamun ID No :20113137 Contact no : 01761808592 Email : kpmmamun@gmail.com

2. Md. Yeadul Islam Shaikh ID No :20113118 Contact no : 01727980638 Email : yeadul_ju@yahoo.com

3. Shameema yesmin sume ID No :20113117 Contact no : 01918615964 Email : sumiju34@gmail.com

4. Md.Razaul islam ID No :20113220 Contact no : 01670683420 Email : engr.minar@yahoo.com

Executive summary Mergers  and  acquisitions  (abbreviated M&A)  refers  to  the  aspect  of  corporate strategy,  corporate  finance  and management  dealing  with  the  buying,  selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. 

Acquiring other  companies are  investment dicisions and must evaluated on  the same criteria as any other capital investment, say, buying of new equipment. 

 

Telford plc and Wrekin plc are two different kinds of company.Telfort plc wants to acquire Wrekin plc for various reasons. This study aimed to analize the acquisition of  Telford  plc  and  to  discuss  about  motives  of  acquisition,financing source,economic  effect  and  valuation.At  the  end,  some  recommendation  are made.

   

Table of contents 

 

 

Introduction Problem Statement Types of merger & acquisition Purpose / motives Financings source Economic effect Valuation

• Synergy benefits • Acquisition premium • Market value of asset • Other issues

Recommendations & suggestions Conclusions Appendix

   

Introduction  

Mergers and acquisitions: One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

   

Problem Statement    

Suppose Telford plc wants to acquire Wrekin plc and have placed a value of 65m $ on Wrekin. If this acquisition should go ahead Telford can sell a surplus warehouse for 2m $.In addition wage savings will be 3m $ per year by reducing the size of combined workforce and redundancy costs of 5m$ will be liable immediately. The company’s weighted average cost of capital (wacc) is 12%.

Suppose Telford current share price is 2$ and Wrekin is 1$. Telford made for share exchange: three Telford shares for five Wrekin shares.

• What is the value of synergy? • What is acquisition premium? • What is the value of asset?

Types of merger & acquisition 

There are three types of M&A 

Horizontal integration Vertical integration

• Forward or downstream integration • Backward or upstream integration

Conglomerate integration  

In our study we see that Telford‐plc and Wrekin‐plc are different types of company. 

Here M&A should be conglomerate integration. 

 

 

   

Purpose / motives: 

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:

• Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

• Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.

• Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

• Synergy: For example, Telford plc such as the increased opportunity of managerial specialization. Another example is purchasing Wrekin plc due to increased order size and associated bulk-buying discounts.

• Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability.

• Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.

• Other motives are :

• Market power • To create new market and industries • Risk diversification • Bargain buying • Inefficient management • Managerial motives • Third party motives

 

 

Financings source: 

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

Cash

Payment by cash such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earn out). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyer’s capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results

Stock

Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

In a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA).

In our study Telford plc made a share-for-share exchange: three Telford shares for five Wrekin shares.

 

Economic effect: 

The study found that Wrekin plc lose many of their executives each year following an acquisition – more than double the turnover experienced in non‐merged firms. If  the  businesses  of  the  acquired  and  acquiring  companies  overlap,  then  such turnover  is  to be expected;  in other words,  there can only be one CEO, CFO, et cetera at a time. 

 

Valuation: 

Synergy benefits: 

1. Surplus warehouse (+) = 2m $. 2. Wage savings (+) = c/r = 3/0.12m $ = 25m $. 3. Redundancy cost (-) = 5m $.

Total synergy benefits = (2m+25m-5m) $ = +22m $.  

The minimum price placed by Wrekin‐plc = synergy benefits + market value of Wrekin‐plc  

= 22m $ + 65m $ =87m $ 

 

 

Acquisition premium: 

1. Bid value of Wrekin-plc share = 3(Telford share) *2 $ = 6 $ = 5 (Wrekin share)

2. Bid value of Wrekin’s per share = 6/5 $ =1.20 $ 3. Given actual price per share = 1 $

Acquisition premium per share = (1.20- 1.00) $ = 0.20 $ Acquisition premium in % = (0.20/1.00)*100% = 20%

 

 

   

Market value of asset: 

1. Market value of Telford = 2 $ * 50m = 100m $. 2. Market value of Wrekin = 1 $ * 20m = 20m $. 3. Synergy benefits = 22m $

Total market value of asset = 100m $ + 20m $ + 22m $                                                              = 142m $. 

Other issues: 

1. Now converted Wrekin’s share = 20m * 3/5 =12m. 2. So,total Telford share = 50m + 12m =62m. 3. Post acquisition share of Telford = 142/62 = 2.29 $.

Synergy benefits gained by Telford = (2.29 $ – 2 $) * 50m = 14.5m $. Synergy benefits gained by Wrekin = (22m $ -14.5m $) = 7.5m $.

 

Recommendations & suggestions: 

If this acquisition should go ahead then value of  Wrekin plc will increase 65m $ to 87m $ , synergy benefits will be 22m $ , acquisition premium will be 20% , total market value of asset will be 142m $ , synergy benefits gained by Telford will be 14.5m $ and synergy benefits gained by Wrekin will be 7.5m $. 

 Avobe discussions ensure that by this acquisition both company will be              benefited. So,it may proceed.  

Conclusions: 

Based on this study it can be said that if Telford plc acquires Wrekin plc then both companies will be benefited and both will be successful. 

Appendix 

• Wikipedia • Investment banking explained pp.223,224 • "Mergers and acquisitions explained". Retrieved 2009-06-30. • Harwood, 2005 • Reverse Merger in the glossary of mergers-acquisitions.org