{\rtf1\ansi\ansicpg1252\uc2 \deff0 \deflang1033{\fonttbl{\f0\froman\fcharset0\fprq2{\*\panose 02020603050405020304}Times New Roman;} {\f1\fswiss\fcharset0\fprq2{\*\panose 020b0604020202020204}Arial;}} {\colortbl;\red0\green0\blue0;} {\info{\author hellopdf.com Inc}{\operator hellopdf.com Inc} {\creatim\yr2007\mo12\dy11\hr12\min0} {\revtim\yr2007\mo12\dy11\hr12\min0}{\version4} {\edmins15}{\nofpages49}{\nofwords0}{\nofchars0}{\vern77}} \paperw20275\paperh18859 \margl0\margr0\margt0\margb0 \viewkind1\viewscale100 \sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6169\posy6117\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs92\expnd5\expndtw-1\kerning0\loch Acquisition Valuation}\par}{\pard \qj\phpg\pvpg\posx8268\posy8549\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 1}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5605\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Issues in Acquisition Valuation}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Acquisition valuations are complex, because the valuation often}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch involved issues like synergy and control, which go beyond just valuing}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch a target firm. It is important on the right sequence, including}\par}{\pard \qj\phpg\pvpg\posx4480\posy6425\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch When should you consider synergy?}\par}{\pard \qj\phpg\pvpg\posx4480\posy7141\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Where does the method of payment enter the process.}\par}{\pard \qj\phpg\pvpg\posx4249\posy7833\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Can synergy be valued, and if so, how?}\par}{\pard \qj\phpg\pvpg\posx3532\posy8025\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8652\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch What is the value of control? How can you estimate the value?}\par}{\pard \qj\phpg\pvpg\posx3532\posy8844\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\

dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 2}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3813\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Steps involved in an Acquisition Valuation}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Step 1}\i0 \par}{\pard \qj\phpg\pvpg\posx5529\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch : Establish a}\par}{\pard \qj\phpg\pvpg\posx8140\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch motive}\b0\par}{\pard \qj\phpg\pvpg\posx9625\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch for the acquisition}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5120\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Step 2:}\i0 \par}{\pard \qj\phpg\pvpg\posx5682\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Choose a}\par}{\pard \qj\phpg\pvpg\posx7833\posy5120\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch target}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy5312\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5861\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Step 3:}\i0 \par}{\pard \qj\phpg\pvpg\posx5810\posy5861\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value}\b0\par}{\pard \qj\phpg\pvpg\posx7090\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the target with the}\par}{\pard \qj\phpg\pvpg\posx11058\posy5861\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch acquisition motive}\b0\par}{\pard \qj\phpg\pvpg\posx15052\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch built in.}\par}{\pard \qj\phpg\pvpg\posx3532\posy6053\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy6604\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Step 4}\i0 \par}{\pard \qj\phpg\pvpg\posx5529\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch : Decide on the}\par}{\pard \qj\phpg\pvpg\posx8754\posy6604\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch mode of payment}\b0\par}{\pard \qj\phpg\pvpg\posx12544\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch - cash or stock, and if cash,}\par}{\pard \qj\phpg\pvpg\posx3532\posy6796\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy7218\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch arrange for financing - debt or equity.}\par}{\pard \qj\phpg\pvpg\posx4249\posy7961\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Step 5:}\i0 \par}{\pard \qj\phpg\pvpg\posx5682\posy7961\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Choose the}\par}{\pard \qj\phpg\pvpg\posx8242\posy7961\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch accounting method}\b0\par}{\pard \qj\phpg\pvpg\posx12389\posy7961\

dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch for the merger/acquisition -}\par}{\pard \qj\phpg\pvpg\posx3532\posy8153\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch purchase or pooling.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 3}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5042\posy2304\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Step 1: Motives behind acquisitions}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy4428\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch (1) Simplest rationale is}\par}{\pard \qj\phpg\pvpg\posx8268\posy4428\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch undervaluation}\b0\par}{\pard \qj\phpg\pvpg\posx11289\posy4428\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch , i.e., that firms that are undervalued by}\par}{\pard \qj\phpg\pvpg\posx4249\posy4992\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch financial markets, relative to true value, will be targeted for acquisition by}\par}{\pard \qj\phpg\pvpg\posx4249\posy5529\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch those who recognize this anomaly.}\par}{\pard \qj\phpg\pvpg\posx3557\posy6194\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch (2) A more controversial reason is}\par}{\pard \qj\phpg\pvpg\posx10316\posy6194\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch diversification}\b0\par}{\pard \qj\phpg\pvpg\posx13132\posy6194\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch , with the intent of stabilizing}\par}{\pard \qj\phpg\pvpg\posx4249\posy6757\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch earnings and reducing risk.}\par}{\pard \qj\phpg\pvpg\posx3557\posy7424\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch (3)}\par}{\pard \qj\phpg\pvpg\posx4300\posy7424\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Synergy}\b0\par}{\pard \qj\phpg\pvpg\posx6092\posy7424\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch refers to the potential additional value from combining two firms,}\par}{\pard \qj\phpg\pvpg\posx4249\posy7961\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch either from operational or financial sources.}\par}{\pard \qj\phpg\pvpg\posx4453\posy8652\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Operating Synergy can come from}\par}{\pard \qj\phpg\pvpg\posx10828\posy8652\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch higher growth}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx13234\posy8652\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch or}\par}{\pard \qj\phpg\pvpg\posx13772\posy8652\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch lower costs}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx4453\posy9241\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch

Financial Synergy can come from}\par}{\pard \qj\phpg\pvpg\posx11058\posy9241\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch tax savings}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx13004\posy9241\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch ,}\par}{\pard \qj\phpg\pvpg\posx13285\posy9241\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch increased debt capacity}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx17356\posy9241\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch or}\par}{\pard \qj\phpg\pvpg\posx18021\posy9241\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch cash}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx5042\posy9753\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch slack.}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx3557\posy10316\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch (4)}\par}{\pard \qj\phpg\pvpg\posx4096\posy10316\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Poorly managed firms are taken over and restructured}\b0\par}{\pard \qj\phpg\pvpg\posx15077\posy10316\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch by the new owners,}\par}{\pard \qj\phpg\pvpg\posx4249\posy10880\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch who lay claim to the additional value.}\par}{\pard \qj\phpg\pvpg\posx3557\posy11545\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch (5)}\par}{\pard \qj\phpg\pvpg\posx4224\posy11545\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Managerial self-interest}\b0\par}{\pard \qj\phpg\pvpg\posx8908\posy11545\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch and hubris are the primary, though unstated, reasons}\par}{\pard \qj\phpg\pvpg\posx4249\posy12082\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch for many takeovers.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 4}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3250\posy2304\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Step 2: Choose a target firm for the acquisition}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy4377\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch If motive is Target firm}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx3557\posy4992\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Undervaluation trades at a price below the estimated value}\par}{\pard \qj\phpg\pvpg\posx3557\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Diversification is in a business which is different from the acquiring firms}\par}{\pard \qj\phpg\pvpg\posx7346\posy6117\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch business}\par}{\pard \qj\phpg\pvpg\posx3557\posy6706\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Operating Synergy have the characteristics that create the operating synergy}\par}{\pard \qj\phpg\pvpg\posx7346\posy7321\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost Savings}\i0 \par}{\pard \qj\phpg\pvpg\

posx9753\posy7321\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : in same business to create economies of scale.}\par}{\pard \qj\phpg\pvpg\posx7346\posy7936\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Higher growth}\i0 \par}{\pard \qj\phpg\pvpg\posx10085\posy7936\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : should have potential for higher growth.}\par}{\pard \qj\phpg\pvpg\posx3557\posy8549\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Financial Synergy}\par}{\pard \qj\phpg\pvpg\posx7346\posy8549\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Tax Savings}\i0 \par}{\pard \qj\phpg\pvpg\posx9600\posy8549\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : provides a tax benefit to acquirer}\par}{\pard \qj\phpg\pvpg\posx7346\posy9164\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Debt Capacity}\i0 \par}{\pard \qj\phpg\pvpg\posx10034\posy9164\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : is unable to borrow money or pay high rates}\par}{\pard \qj\phpg\pvpg\posx7346\posy9778\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cash slack}\i0 \par}{\pard \qj\phpg\pvpg\posx9369\posy9778\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : has great projects/ no funds}\par}{\pard \qj\phpg\pvpg\posx3557\posy10393\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Control badly managed firm whose stock has underperformed the}\par}{\pard \qj\phpg\pvpg\posx7346\posy10880\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch market.}\par}{\pard \qj\phpg\pvpg\posx3557\posy11493\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Managers Interests has characteristics that best meet CEOs ego and power}\par}{\pard \qj\phpg\pvpg\posx7346\posy12005\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch needs.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 5}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3328\posy2304\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Step 3: Value Target Firm with motive built in}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy4377\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch If motive is Target firm}\i0 \par}{\pard \qj\phpg\pvpg\posx3557\posy4992\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Undervaluation Value target firm as stand-alone entity: No extra premium}\par}{\pard \qj\phpg\pvpg\posx3557\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Diversification Value target firm as stand-alone entity: No extra premium}\par}{\pard \qj\phpg\pvpg\posx3557\posy6220\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Operating Synergy Value the firms independently.}\par}{\pard \qj\phpg\pvpg\posx7346\posy6834\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Value the combined firm with the operating synergy}\par}{\

pard \qj\phpg\pvpg\posx7346\posy7449\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Synergy is the difference between the latter and former}\par}{\pard \qj\phpg\pvpg\posx7346\posy8064\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Target Firm Value = Independent Value + Synergy}\par}{\pard \qj\phpg\pvpg\posx3557\posy8652\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Financial Synergy Tax Benefits: Value of Target Firm + PV of Tax Benefits}\par}{\pard \qj\phpg\pvpg\posx7346\posy9266\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Debt Capacity: Value of Target Firm + Increase in Value}\par}{\pard \qj\phpg\pvpg\posx7346\posy9778\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch from Debt}\par}{\pard \qj\phpg\pvpg\posx7346\posy10393\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cash Slack: Value of Target Firm + NPV of Projects/ Target}\par}{\pard \qj\phpg\pvpg\posx3557\posy11008\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Control Value of Target Firm run optimally}\par}{\pard \qj\phpg\pvpg\posx3557\posy11596\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Managers Interest Value of Target Firm: No additional premium}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 6}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6834\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch The Valuation Process}\par}{\pard \qj\phpg\pvpg\posx9164\posy4466\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs22\expnd5\expndtw-1\kerning0\loch VALUING AN ACQUISITION}\b0\par}{\pard \qj\phpg\pvpg\posx5888\posy5426\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Component Valuation Guidelines Should you pay?}\par}{\pard \qj\phpg\pvpg\posx7500\posy6041\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Value the combined firm with synergy built in}\i0 \par}{\pard \qj\phpg\pvpg\posx11904\posy6041\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch . This may include}\par}{\pard \qj\phpg\pvpg\posx13874\posy6041\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Which firm is}\par}{\pard \qj\phpg\pvpg\posx7500\posy6297\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch a. a higher growth rate in revenues:}\par}{\pard \qj\phpg\pvpg\posx11033\posy6297\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch growth synergy}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy6297\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch indispensable for the}\par}{\pard \qj\phpg\pvpg\posx7500\posy6528\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch b. higher margins, because of}\par}{\pard \qj\phpg\pvpg\posx10469\posy6528\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch economies of scale}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy6528\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch synergy?}\par}{\pard \qj\phpg\pvpg\posx7500\posy6757\dfrmtxtx0\

dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch c. lower taxes, because of tax benefits:}\par}{\pard \qj\phpg\pvpg\posx11340\posy6757\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch tax synergy}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy6757\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch If it is the target, you}\par}{\pard \qj\phpg\pvpg\posx6041\posy6988\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Synergy}\par}{\pard \qj\phpg\pvpg\posx7500\posy7013\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch d. lower cost of debt:}\par}{\pard \qj\phpg\pvpg\posx9522\posy7013\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch financing synergy}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy7013\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch should be willing to}\par}{\pard \qj\phpg\pvpg\posx7500\posy7244\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch e. higher debt ratio because of lower risk:}\par}{\pard \qj\phpg\pvpg\posx11596\posy7244\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch debt capacity}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy7244\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch pay up to the}\par}{\pard \qj\phpg\pvpg\posx7500\posy7500\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Subtract the value of the target firm (with control premium) +}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy7500\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch synergy.}\par}{\pard \qj\phpg\pvpg\posx7500\posy7730\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch value of the bidding firm (pre-acquisition). This is the value of}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy7730\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch If it is the bidder, you}\par}{\pard \qj\phpg\pvpg\posx7500\posy7986\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch the synergy.}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy7986\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch should not.}\par}{\pard \qj\phpg\pvpg\posx7500\posy8677\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Value the company as if optimally managed. This}\par}{\pard \qj\phpg\pvpg\posx13874\posy8832\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch If motive is control or}\par}{\pard \qj\phpg\pvpg\posx7500\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch will usually mean that investment, financing and}\par}{\pard \qj\phpg\pvpg\posx13874\posy9088\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch in a stand-alone}\par}{\pard \qj\phpg\pvpg\posx7500\posy9164\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch dividend policy will be altered:}\par}{\pard \qj\phpg\pvpg\posx13874\posy9317\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch valuation, this is the}\par}{\pard \qj\phpg\pvpg\posx7500\posy9394\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Investment Policy: Higher returns on projects and}\par}{\pard \qj\phpg\pvpg\posx13874\posy9573\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch maximium you should}\par}{\pard \qj\

phpg\pvpg\posx8805\posy9650\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch divesting unproductive projects.}\par}{\pard \qj\phpg\pvpg\posx6041\posy9778\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Control}\par}{\pard \qj\phpg\pvpg\posx13874\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch pay.}\par}{\pard \qj\phpg\pvpg\posx7500\posy9881\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Financing Policy: Move to a better financing}\par}{\pard \qj\phpg\pvpg\posx6041\posy10009\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Premium}\par}{\pard \qj\phpg\pvpg\posx8805\posy10137\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch structure; eg. optimal capital structure}\par}{\pard \qj\phpg\pvpg\posx7500\posy10368\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Dividend Policy: Return unused cash}\par}{\pard \qj\phpg\pvpg\posx7500\posy10624\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Practically,}\par}{\pard \qj\phpg\pvpg\posx7500\posy10853\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch 1. Look at industry averages for optimal (if lazy)}\par}{\pard \qj\phpg\pvpg\posx7500\posy11084\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch 2. Do a full-fledged corporate financial analysis}\par}{\pard \qj\phpg\pvpg\posx13874\posy11801\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch If motive is}\par}{\pard \qj\phpg\pvpg\posx6041\posy11954\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Status Quo}\par}{\pard \qj\phpg\pvpg\posx7500\posy11954\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Value the company as is, with existing inputs}\par}{\pard \qj\phpg\pvpg\posx13874\posy12032\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch undervaluation, this is}\par}{\pard \qj\phpg\pvpg\posx6041\posy12185\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Valuation}\par}{\pard \qj\phpg\pvpg\posx7500\posy12185\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch for investment, financing and dividend policy.}\par}{\pard \qj\phpg\pvpg\posx13874\posy12261\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch the maximum you}\par}{\pard \qj\phpg\pvpg\posx13874\posy12517\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch should pay.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 7}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6656\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing NCR for AT & T}\par}{\pard \qj\phpg\pvpg\posx9164\posy4466\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs22\expnd5\expndtw-1\kerning0\loch VALUING NCR for AT & T}\b0\par}{\pard \qj\phpg\pvpg\posx5888\posy5426\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Component Valuation Guidelines Value}\par}{\pard \qj\phpg\pvpg\posx7500\posy6041\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\

loch Value the combined firm with synergy built in}\i0 \par}{\pard \qj\phpg\pvpg\posx11904\posy6041\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch . This may include}\par}{\pard \qj\phpg\pvpg\posx13874\posy6041\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch $ 11,278 million}\par}{\pard \qj\phpg\pvpg\posx7500\posy6297\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch a. a higher growth rate in revenues:}\par}{\pard \qj\phpg\pvpg\posx11033\posy6297\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch growth synergy}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy6297\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch - $ 6,723 million}\par}{\pard \qj\phpg\pvpg\posx7500\posy6528\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch b. higher margins, because of}\par}{\pard \qj\phpg\pvpg\posx10469\posy6528\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch economies of scale}\i0 \par}{\pard \qj\phpg\pvpg\posx13874\posy6528\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch = $ 4,552 million}\par}{\pard \qj\phpg\pvpg\posx7500\posy6757\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch c. lower taxes, because of tax benefits:}\par}{\pard \qj\phpg\pvpg\posx11340\posy6757\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch tax synergy}\i0 \par}{\pard \qj\phpg\pvpg\posx6041\posy6988\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Synergy}\par}{\pard \qj\phpg\pvpg\posx7500\posy7013\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch d. lower cost of debt:}\par}{\pard \qj\phpg\pvpg\posx9522\posy7013\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch financing synergy}\i0 \par}{\pard \qj\phpg\pvpg\posx7500\posy7244\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch e. higher debt ratio because of lower risk:}\par}{\pard \qj\phpg\pvpg\posx11596\posy7244\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch debt capacity}\i0 \par}{\pard \qj\phpg\pvpg\posx7500\posy7500\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Subtract the value of the target firm (with control premium) +}\i0 \par}{\pard \qj\phpg\pvpg\posx7500\posy7730\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch value of the bidding firm (pre-acquisition). This is the value of}\i0 \par}{\pard \qj\phpg\pvpg\posx7500\posy7986\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch the synergy.}\i0 \par}{\pard \qj\phpg\pvpg\posx7500\posy8677\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Value the company as if optimally managed. This}\par}{\pard \qj\phpg\pvpg\posx13874\posy8832\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch $ 6,723 million -}\par}{\pard \qj\phpg\pvpg\posx7500\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch will usually mean that investment, financing and}\par}{\pard \qj\phpg\pvpg\posx13874\posy9088\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch $ 5,949 million}\par}{\pard \qj\phpg\pvpg\posx7500\posy9164\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch dividend policy will be altered:}\par}{\

pard \qj\phpg\pvpg\posx13874\posy9317\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch = $ 774 million}\par}{\pard \qj\phpg\pvpg\posx7500\posy9394\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Investment Policy: Higher returns on projects and}\par}{\pard \qj\phpg\pvpg\posx8805\posy9650\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch divesting unproductive projects.}\par}{\pard \qj\phpg\pvpg\posx6041\posy9778\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Control}\par}{\pard \qj\phpg\pvpg\posx7500\posy9881\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Financing Policy: Move to a better financing}\par}{\pard \qj\phpg\pvpg\posx6041\posy10009\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Premium}\par}{\pard \qj\phpg\pvpg\posx8805\posy10137\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch structure; eg. optimal capital structure}\par}{\pard \qj\phpg\pvpg\posx7500\posy10368\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Dividend Policy: Return unused cash}\par}{\pard \qj\phpg\pvpg\posx7500\posy10624\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Practically,}\par}{\pard \qj\phpg\pvpg\posx7500\posy10853\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch 1. Look at industry averages for optimal (if lazy)}\par}{\pard \qj\phpg\pvpg\posx7500\posy11084\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch 2. Do a full-fledged corporate financial analysis}\par}{\pard \qj\phpg\pvpg\posx13874\posy11801\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch $ 5,949 million}\par}{\pard \qj\phpg\pvpg\posx6041\posy11954\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Status Quo}\par}{\pard \qj\phpg\pvpg\posx7500\posy11954\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Value the company as is, with existing inputs}\par}{\pard \qj\phpg\pvpg\posx6041\posy12185\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch Valuation}\par}{\pard \qj\phpg\pvpg\posx7500\posy12185\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs20\expnd5\expndtw-1\kerning0\loch for investment, financing and dividend policy.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 8}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3557\posy1458\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Step 4: Decide on payment mechanism: Cash}\b0\par}{\pard \qj\phpg\pvpg\posx8524\posy2304\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch versus Stock}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Generally speaking, firms which}\par}{\pard \qj\phpg\pvpg\posx11058\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch believe that their stock is under}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\

phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch valued}\b0\par}{\pard \qj\phpg\pvpg\posx5708\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch will not use stock to do acquisitions.}\par}{\pard \qj\phpg\pvpg\posx4249\posy5733\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Conversely, firms which believe that their stock is}\par}{\pard \qj\phpg\pvpg\posx14668\posy5733\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch over or correctly}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy5925\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch valued will use stock}\b0\par}{\pard \qj\phpg\pvpg\posx8729\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch to do acquisitions.}\par}{\pard \qj\phpg\pvpg\posx4249\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Not surprisingly, the}\par}{\pard \qj\phpg\pvpg\posx8601\posy7090\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch premium paid is larger}\b0\par}{\pard \qj\phpg\pvpg\posx13644\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch when an acquisition is}\par}{\pard \qj\phpg\pvpg\posx3532\posy7282\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy7705\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch financed with stock}\b0\par}{\pard \qj\phpg\pvpg\posx8498\posy7705\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch rather than cash.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8448\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch There might be an}\par}{\pard \qj\phpg\pvpg\posx8114\posy8448\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch accounting rationale}\b0\par}{\pard \qj\phpg\pvpg\posx12594\posy8448\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch for using}\par}{\pard \qj\phpg\pvpg\posx14693\posy8448\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch stock}\b0\par}{\pard \qj\phpg\pvpg\posx15820\posy8448\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch as opposed to}\par}{\pard \qj\phpg\pvpg\posx3532\posy8640\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy9061\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch cash. You are allowed to use pooling instead of purchase.}\par}{\pard \qj\phpg\pvpg\posx4249\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch There might also be a}\par}{\pard \qj\phpg\pvpg\posx8908\posy9804\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch tax rationale}\b0\par}{\pard \qj\phpg\pvpg\posx11698\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch for using stock. Cash acquisitions}\par}{\pard \qj\phpg\pvpg\posx3532\posy9996\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10418\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch create tax liabilities to the selling firms

stockholders.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18892\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 9}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4249\posy1458\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch The Exchange Ratio in a Stock for Stock}\b0\par}{\pard \qj\phpg\pvpg\posx8960\posy2304\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Exchange}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Correct Exchange Ratio}\b0\par}{\pard \qj\phpg\pvpg\posx9548\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch to use in a Valuation = Value per Share of}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Target Firm (with control premium and target-controlled synergies) /}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value per Share of Bidding Firm}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If the exchange ratio is set}\par}{\pard \qj\phpg\pvpg\posx9753\posy6348\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch too high}\b0\par}{\pard \qj\phpg\pvpg\posx11545\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , there will be a}\par}{\pard \qj\phpg\pvpg\posx14693\posy6348\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch transfer of wealth}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy6540\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy6962\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch from the bidding firms}\b0\par}{\pard \qj\phpg\pvpg\posx9548\posy6962\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch stockholders}\b0\par}{\pard \qj\phpg\pvpg\posx12416\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch to the target firms}\par}{\pard \qj\phpg\pvpg\posx4249\posy7577\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch stockholders.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8320\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If the exchange ratio is set}\par}{\pard \qj\phpg\pvpg\posx9753\posy8320\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch too low}\b0\par}{\pard \qj\phpg\pvpg\posx11340\posy8320\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , there will be}\par}{\pard \qj\phpg\pvpg\posx14284\posy8320\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch transfer of wealth}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy8512\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy8933\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch from the target firm}\b0\par}{\pard \qj\phpg\pvpg\posx8677\posy8933\dfrmtxtx0\

dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch to the bidding firms stockholders.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 10}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3584\posy1458\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Step 5: Choose an accounting method for the}\b0\par}{\pard \qj\phpg\pvpg\posx9344\posy2304\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch merger}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy4377\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Purchase Method:}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx3506\posy4530\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4453\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch The acquiring firm records the assets and liabilities of the acquired firm at market}\par}{\pard \qj\phpg\pvpg\posx5042\posy5452\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch value, with}\par}{\pard \qj\phpg\pvpg\posx7040\posy5452\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch goodwill}\i0 \par}{\pard \qj\phpg\pvpg\posx8601\posy5452\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch capturing the difference between market value and the value}\par}{\pard \qj\phpg\pvpg\posx5042\posy5913\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch of the assets acquired.}\par}{\pard \qj\phpg\pvpg\posx4453\posy6450\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch This goodwill will then be amortized , though the amortization}\par}{\pard \qj\phpg\pvpg\posx16997\posy6450\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch is not tax}\par}{\pard \qj\phpg\pvpg\posx5042\posy6885\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch deductible. If a firm pays cash on an acquisition, it has to use the purchase method}\par}{\pard \qj\phpg\pvpg\posx5042\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch to record the transaction.}\par}{\pard \qj\phpg\pvpg\posx4249\posy7858\dfrmtxtx0\dfrmtxty0{\b\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Pooling of Interests}\i0 \b0\par}{\pard \qj\phpg\pvpg\posx7986\posy7858\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch :}\i0 \par}{\pard \qj\phpg\pvpg\posx3506\posy8012\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4453\posy8498\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch The book values of the assets and liabilities of the merging firms are added to}\par}{\pard \qj\phpg\pvpg\posx5042\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch arrive at values for the combined firm. Since the market value of the transaction is}\par}{\pard \qj\phpg\pvpg\posx5042\posy9394\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch not recognized, no goodwill is created or amortized.}\par}{\pard \qj\phpg\pvpg\posx4453\posy9932\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\

expnd5\expndtw-1\kerning0\loch This approach is allowed only if the acquiring firm exchanges its common stock}\par}{\pard \qj\phpg\pvpg\posx5042\posy10368\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch for common stock of the acquired firm.}\par}{\pard \qj\phpg\pvpg\posx4453\posy10930\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Since earnings are not affected by the amortization of goodwill, the reported}\par}{\pard \qj\phpg\pvpg\posx5042\posy11365\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch earnings per share under this approach will be greater than the reported earnings}\par}{\pard \qj\phpg\pvpg\posx5042\posy11801\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch per share in the purchase approach.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 11}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx7168\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch The Value of Control}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The value of control should be}\par}{\pard \qj\phpg\pvpg\posx10777\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch inversely proportional to the}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch perceived quality}\b0\par}{\pard \qj\phpg\pvpg\posx8012\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch of that management and its capacity to maximize}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch firm value.}\par}{\pard \qj\phpg\pvpg\posx4249\posy6553\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of control will be much greater for a poorly managed firm}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy6745\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy7168\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch that operates at below optimum capacity than it is for a well managed}\par}{\pard \qj\phpg\pvpg\posx4249\posy7781\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch firm.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8704\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Control = Value of firm, with restructuring - Value of firm,}\par}{\pard \qj\phpg\pvpg\posx3532\posy8896\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy9317\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch without restructuring}\par}{\pard \qj\phpg\pvpg\posx4249\posy10240\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Negligible or firms which are operating at or close to their optimal}\par}{\pard \qj\phpg\pvpg\posx3532\posy10432\dfrmtxtx0\

dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10853\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch value}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 12}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3634\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Empirical Evidence on the Value of Control}\par}{\pard \qj\phpg\pvpg\posx7218\posy5029\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch Target Characteristics - Hostile vs. Friendly Takeovers}\i0 \par}{\pard \qj\phpg\pvpg\posx10469\posy5797\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch Target 5-yr stock}\par}{\pard \qj\phpg\pvpg\posx6578\posy6233\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch Target ROE -}\par}{\pard \qj\phpg\pvpg\posx10572\posy6233\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch returns - Market}\par}{\pard \qj\phpg\pvpg\posx14821\posy6233\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch % of Stock held}\par}{\pard \qj\phpg\pvpg\posx6528\posy6668\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch Industry ROE}\par}{\pard \qj\phpg\pvpg\posx11264\posy6668\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch Returns}\par}{\pard \qj\phpg\pvpg\posx15257\posy6668\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch by insiders}\par}{\pard \qj\phpg\pvpg\posx3993\posy7154\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch 20.00%}\par}{\pard \qj\phpg\pvpg\posx3993\posy7845\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch 15.00%}\par}{\pard \qj\phpg\pvpg\posx3993\posy8512\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch 10.00%}\par}{\pard \qj\phpg\pvpg\posx4197\posy9202\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch 5.00%}\par}{\pard \qj\phpg\pvpg\posx4197\posy9868\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch 0.00%}\par}{\pard \qj\phpg\pvpg\posx4044\posy10533\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch -5.00%}\par}{\pard \qj\phpg\pvpg\posx8524\posy11660\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch Hostile Takeovers Friendly Takeovers}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 13}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6272\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch After the hostile takeover..}\par}{\pard \qj\phpg\pvpg\posx4249\posy4352\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Many of the hostile takeovers were followed by an}\par}{\pard \qj\phpg\pvpg\posx16306\posy4352\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch increase in}\b0\par}{\pard \qj\

phpg\pvpg\posx3532\posy4544\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy4914\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch leverage}\b0\par}{\pard \qj\phpg\pvpg\posx6066\posy4914\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , which resulted in a downgrading of the debt. The leverage}\par}{\pard \qj\phpg\pvpg\posx4249\posy5452\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch was quickly reduced, however, with proceeds from sale of assets.}\par}{\pard \qj\phpg\pvpg\posx4249\posy6144\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch There was}\par}{\pard \qj\phpg\pvpg\posx7040\posy6144\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch no significant}\b0\par}{\pard \qj\phpg\pvpg\posx10624\posy6144\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch change in the amount of capital}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy6336\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy6681\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch investment}\b0\par}{\pard \qj\phpg\pvpg\posx6656\posy6681\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch in these firms, but investment was more focused on core}\par}{\pard \qj\phpg\pvpg\posx4249\posy7244\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch business.}\par}{\pard \qj\phpg\pvpg\posx4249\posy7909\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Almost 60% of the takeovers were followed by}\par}{\pard \qj\phpg\pvpg\posx16562\posy7909\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch significant}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy8101\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8473\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch divestitures}\b0\par}{\pard \qj\phpg\pvpg\posx6784\posy8473\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , where half or more of the firm was divested.}\par}{\pard \qj\phpg\pvpg\posx18048\posy8473\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The}\par}{\pard \qj\phpg\pvpg\posx4249\posy9010\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch overwhelming majority of the divestitures were of units which were in}\par}{\pard \qj\phpg\pvpg\posx4249\posy9573\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch business areas}\par}{\pard \qj\phpg\pvpg\posx7424\posy9573\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch unrelated to the company's core business}\b0\par}{\pard \qj\phpg\pvpg\posx16690\posy9573\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , i.e., they}\par}{\pard \qj\phpg\pvpg\posx4249\posy10137\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch constituted reversal of earlier corporate diversification.}\par}{\pard \qj\phpg\pvpg\posx4249\posy10802\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch There were}\par}{\pard \qj\phpg\pvpg\posx6784\posy10802\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\

loch significant management changes}\b0\par}{\pard \qj\phpg\pvpg\posx13952\posy10802\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch in 17 of the 19 hostile}\par}{\pard \qj\phpg\pvpg\posx3532\posy10994\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy11365\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch takeovers, with the entire corporate management team replaced in 7 of}\par}{\pard \qj\phpg\pvpg\posx4249\posy11904\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the takeovers.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 14}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3584\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Stand Alone Valuation: Digital - Status Quo}\par}{\pard \qj\phpg\pvpg\posx4249\posy4352\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Digital had earning before interest and taxes of $391.38 million in}\par}{\pard \qj\phpg\pvpg\posx3532\posy4544\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy4914\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 1997, which translated into a}\par}{\pard \qj\phpg\pvpg\posx4480\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch A pre-tax operating margin of 3% on its revenues of $13,046 million}\par}{\pard \qj\phpg\pvpg\posx4480\posy6220\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch An after-tax return on capital of 8.51%}\par}{\pard \qj\phpg\pvpg\posx4249\posy6809\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Based upon its beta of 1.15, an after-tax cost of borrowing of 5% and a}\par}{\pard \qj\phpg\pvpg\posx3532\posy7001\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch debt ratio of approximately 10%, the cost of capital for Digital in 1997}\par}{\pard \qj\phpg\pvpg\posx4249\posy7909\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch was}\par}{\pard \qj\phpg\pvpg\posx4480\posy8601\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost of Equity = 6% + 1.15 (5.5%) = 12.33%}\par}{\pard \qj\phpg\pvpg\posx4480\posy9216\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost of Capital = 12.33% (.9) + 5% (.1) = 11.59%}\par}{\pard \qj\phpg\pvpg\posx4249\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Digital had capital expenditures of $475 million, depreciation of $ 461}\par}{\pard \qj\phpg\pvpg\posx3532\posy9996\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10368\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch million and working capital was 15% of revenues.}\par}{\pard \qj\phpg\pvpg\posx4249\posy11033\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Operating income,

net cap ex and revenues are expected to grow 6% a}\par}{\pard \qj\phpg\pvpg\posx3532\posy11225\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy11596\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch year for the next 5 years, and 5% thereafter.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 15}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5861\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Digital: Status Quo Valuation}\par}{\pard \qj\phpg\pvpg\posx3557\posy4377\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Year FCFF Terminal Value PV}\par}{\pard \qj\phpg\pvpg\posx3557\posy4992\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1 $133.26}\par}{\pard \qj\phpg\pvpg\posx15897\posy4992\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch $119.42}\par}{\pard \qj\phpg\pvpg\posx3557\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 2 $141.25}\par}{\pard \qj\phpg\pvpg\posx15897\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch $113.43}\par}{\pard \qj\phpg\pvpg\posx3557\posy6220\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 3 $149.73}\par}{\pard \qj\phpg\pvpg\posx15897\posy6220\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch $107.75}\par}{\pard \qj\phpg\pvpg\posx3557\posy6834\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 4 $158.71}\par}{\pard \qj\phpg\pvpg\posx15897\posy6834\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch $102.35}\par}{\pard \qj\phpg\pvpg\posx3557\posy7449\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 5 $168.24 $2,717.35 $1,667.47}\par}{\pard \qj\phpg\pvpg\posx3557\posy8064\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Terminal Year $156.25}\par}{\pard \qj\phpg\pvpg\posx3557\posy8652\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Firm Value =}\par}{\pard \qj\phpg\pvpg\posx6169\posy8652\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch $2,110.41}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy9266\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch The capital expenditures are assumed to be 110% of revenues in stable}\par}{\pard \qj\phpg\pvpg\posx3506\posy9420\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy9778\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch growth; working capital remains 15%;}\par}{\pard \qj\phpg\pvpg\posx4249\posy10393\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Debt ratio remains at 10%, but after-tax cost of debt drops to 4%. Beta}\par}{\pard \qj\phpg\pvpg\posx3506\posy10546\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10880\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch declines to 1.}\par}

{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 16}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6348\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Digital: Change in Control}\par}{\pard \qj\phpg\pvpg\posx4249\posy4352\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Digital will raise its debt ratio to 20%. The beta will increase, but the}\par}{\pard \qj\phpg\pvpg\posx3532\posy4544\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy4914\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch cost of capital will decrease.}\par}{\pard \qj\phpg\pvpg\posx4480\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch New Beta = 1.25 (Unlevered Beta = 1.07; Debt/Equity Ratio = 25%)}\par}{\pard \qj\phpg\pvpg\posx4480\posy6220\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost of Equity = 6% + 1.25 (5.5%) = 12.88%}\par}{\pard \qj\phpg\pvpg\posx4480\posy6834\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch New After-tax Cost of Debt = 5.25%}\par}{\pard \qj\phpg\pvpg\posx4480\posy7449\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost of Capital = 12.88% (0.8) + 5.25% (0.2) = 11.35%}\par}{\pard \qj\phpg\pvpg\posx4249\posy8012\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Digital will raise its return on capital to 11.35%, which is its cost of}\par}{\pard \qj\phpg\pvpg\posx3532\posy8204\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch capital. (Pre-tax Operating margin will go up to 4%)}\par}{\pard \qj\phpg\pvpg\posx4249\posy9241\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The reinvestment rate remains unchanged, but the increase in the}\par}{\pard \qj\phpg\pvpg\posx3532\posy9433\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch return on capital will increase the expected growth rate in the next 5}\par}{\pard \qj\phpg\pvpg\posx4249\posy10368\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch years to 10%.}\par}{\pard \qj\phpg\pvpg\posx4249\posy11033\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch After year 5, the beta will drop to 1, and the after-tax cost of debt will}\par}{\pard \qj\phpg\pvpg\posx3532\posy11225\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy11596\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch decline to 4%.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 17}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \

qj\phpg\pvpg\posx4761\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Digital Valuation: Change in Control}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Year FCFF Terminal Value PV}\par}{\pard \qj\phpg\pvpg\posx4249\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 1 $156.29}\par}{\pard \qj\phpg\pvpg\posx14514\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $140.36}\par}{\pard \qj\phpg\pvpg\posx4249\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 2 $171.91}\par}{\pard \qj\phpg\pvpg\posx14514\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $138.65}\par}{\pard \qj\phpg\pvpg\posx4249\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 3 $189.11}\par}{\pard \qj\phpg\pvpg\posx14514\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $136.97}\par}{\pard \qj\phpg\pvpg\posx4249\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 4 $208.02}\par}{\pard \qj\phpg\pvpg\posx14514\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $135.31}\par}{\pard \qj\phpg\pvpg\posx4249\posy8064\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 5 $228.82 $6,584.62 $3,980.29}\par}{\pard \qj\phpg\pvpg\posx3557\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Terminal Year $329.23}\par}{\pard \qj\phpg\pvpg\posx3557\posy9548\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of the Firm: with Control Change =}\par}{\pard \qj\phpg\pvpg\posx14949\posy9548\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $ 4,531 million}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy10290\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of the Firm: Status Quo =}\par}{\pard \qj\phpg\pvpg\posx14821\posy10290\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $ 2,110 million}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy11008\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Control}\par}{\pard \qj\phpg\pvpg\posx14514\posy11008\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch =}\par}{\pard \qj\phpg\pvpg\posx14949\posy11008\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $2,421 million}\b0\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 18}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx8012\posy2304\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Synergy}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The key to the existence of synergy is that the}\par}{\pard \qj\phpg\pvpg\posx14080\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch target firm controls a}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch

s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch specialized resource}\b0\par}{\pard \qj\phpg\pvpg\posx8704\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch that becomes more valuable if combined with}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the bidding firm's resources. The specialized resource will vary}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch depending upon the merger:}\par}{\pard \qj\phpg\pvpg\posx4480\posy6988\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5068\posy6988\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch In horizontal mergers:}\i0 \par}{\pard \qj\phpg\pvpg\posx9317\posy6988\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch economies of scale, which reduce costs, or from}\par}{\pard \qj\phpg\pvpg\posx5068\posy7552\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch increased market power, which increases profit margins and sales.}\par}{\pard \qj\phpg\pvpg\posx5068\posy8114\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch (Examples: Bank of America and Security Pacific, Chase and Chemical)}\par}{\pard \qj\phpg\pvpg\posx4480\posy8780\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5068\posy8780\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch In vertical integration:}\i0 \par}{\pard \qj\phpg\pvpg\posx9522\posy8780\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Primary source of synergy here comes from}\par}{\pard \qj\phpg\pvpg\posx5068\posy9317\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch controlling the chain of production much more completely.}\par}{\pard \qj\phpg\pvpg\posx4480\posy9984\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5068\posy9984\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch In functional integration}\i0 \par}{\pard \qj\phpg\pvpg\posx9701\posy9984\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch :}\par}{\pard \qj\phpg\pvpg\posx10162\posy9984\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch When a firm with strengths in one functional}\par}{\pard \qj\phpg\pvpg\posx5068\posy10546\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch area acquires another firm with strengths in a different functional area,}\par}{\pard \qj\phpg\pvpg\posx5068\posy11084\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch the potential synergy gains arise from exploiting the strengths in these}\par}{\pard \qj\phpg\pvpg\posx5068\posy11648\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch areas.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 19}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\

posx6629\posy2304\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing operating synergy}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (a) What}\par}{\pard \qj\phpg\pvpg\posx5554\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch form}\b0\par}{\pard \qj\phpg\pvpg\posx6629\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch is the synergy expected to take? Will it}\par}{\pard \qj\phpg\pvpg\posx15154\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch reduce costs}\b0\par}{\pard \qj\phpg\pvpg\posx17842\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch as a}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch percentage of sales and increase profit margins (as is the case when}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch there are economies of scale)? Will it}\par}{\pard \qj\phpg\pvpg\posx12416\posy5632\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch increase future growth}\b0\par}{\pard \qj\phpg\pvpg\posx17509\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (as is}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the case when there is increased market power)? )}\par}{\pard \qj\phpg\pvpg\posx3557\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (b)}\par}{\pard \qj\phpg\pvpg\posx4377\posy6962\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch When can the synergy be reasonably expected to start}\b0\par}{\pard \qj\phpg\pvpg\posx16793\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch affecting}\par}{\pard \qj\phpg\pvpg\posx4249\posy7577\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch cashflows? (Will the gains from synergy show up instantaneously after}\par}{\pard \qj\phpg\pvpg\posx4249\posy8192\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the takeover? If it will take time, when can the gains be expected to}\par}{\pard \qj\phpg\pvpg\posx4249\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch start showing up? )}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 20}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5785\posy2304\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch A procedure for valuing synergy}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (1) the firms involved in the merger are}\par}{\pard \qj\phpg\pvpg\posx13056\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch valued independently}\b0\par}{\pard \qj\phpg\pvpg\posx17893\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , by}\par}{\pard \qj\phpg\pvpg\

posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch discounting expected cash flows to each firm at the weighted average}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch cost of capital for that firm.}\par}{\pard \qj\phpg\pvpg\posx3557\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (2) the}\par}{\pard \qj\phpg\pvpg\posx5221\posy6348\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch value of the combined firm, with no synergy}\b0\par}{\pard \qj\phpg\pvpg\posx15436\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , is obtained by}\par}{\pard \qj\phpg\pvpg\posx4249\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch adding the values obtained for each firm in the first step.}\par}{\pard \qj\phpg\pvpg\posx3557\posy7705\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (3) The}\par}{\pard \qj\phpg\pvpg\posx5401\posy7705\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch effects of synergy are built into expected growth rates and}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy8320\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch cashflows}\b0\par}{\pard \qj\phpg\pvpg\posx6373\posy8320\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch , and the combined firm is re-valued with synergy.}\par}{\pard \qj\phpg\pvpg\posx3660\posy9061\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Synergy = Value of the combined firm, with synergy - Value of}\par}{\pard \qj\phpg\pvpg\posx7884\posy9676\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the combined firm, without synergy}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 21}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4889\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Synergy Effects in Valuation Inputs}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If synergy is Valuation Inputs that will be affected are}\i0 \par}{\pard \qj\phpg\pvpg\posx3557\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Economies of Scale}\par}{\pard \qj\phpg\pvpg\posx7833\posy5120\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Operating Margin}\i0 \par}{\pard \qj\phpg\pvpg\posx11596\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch of combined firm will be greater}\par}{\pard \qj\phpg\pvpg\posx7833\posy5733\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch than the revenue-weighted operating margin of}\par}{\pard \qj\phpg\pvpg\posx7833\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch individual firms.}\par}{\pard \qj\phpg\pvpg\posx3557\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Growth Synergy More projects:}\par}{\pard \qj\phpg\pvpg\posx10828\

posy7090\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Higher Reinvestment Rate}\i0 \par}{\pard \qj\phpg\pvpg\posx16204\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (Retention)}\par}{\pard \qj\phpg\pvpg\posx7833\posy7833\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Better projects:}\par}{\pard \qj\phpg\pvpg\posx11084\posy7833\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Higher Return on Capital}\i0 \par}{\pard \qj\phpg\pvpg\posx16357\posy7833\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (ROE)}\par}{\pard \qj\phpg\pvpg\posx7833\posy8576\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Longer Growth Period}\i0 \par}{\pard \qj\phpg\pvpg\posx7833\posy9292\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Again, these inputs will be estimated for the}\par}{\pard \qj\phpg\pvpg\posx7833\posy9906\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch combined firm.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 22}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4914\posy2304\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Synergy: Compaq and Digital}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch In 1997, Compaq acquired Digital for $ 30 per share + 0.945 Compaq}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch shares for every Digital share. ($ 53-60 per share) The acquisition was}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch motivated by the belief that the combined firm would be able to find}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch investment opportunities}\par}{\pard \qj\phpg\pvpg\posx10162\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch and compete better than the firms}\par}{\pard \qj\phpg\pvpg\posx4249\posy6860\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch individually could.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 23}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx7680\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Background Data}\par}{\pard \qj\phpg\pvpg\posx11749\posy4352\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Compaq Digital: Opt Mgd}\i0 \par}{\pard \qj\phpg\pvpg\posx3557\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Current EBIT}\par}{\pard \qj\phpg\pvpg\posx11749\posy5017\

dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $ 2,987 million $ 522 million}\par}{\pard \qj\phpg\pvpg\posx3557\posy5708\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Current Revenues $25,484 mil $13,046 mil}\par}{\pard \qj\phpg\pvpg\posx3557\posy6373\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Capital Expenditures - Depreciation $ 184 million $ 14 (offset)}\par}{\pard \qj\phpg\pvpg\posx3557\posy7040\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Expected growth rate -next 5 years 10% 10%}\par}{\pard \qj\phpg\pvpg\posx3557\posy7730\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Expected growth rate after year 5 5% 5%}\par}{\pard \qj\phpg\pvpg\posx3557\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Debt /(Debt + Equity) 10% 20%}\par}{\pard \qj\phpg\pvpg\posx3557\posy9266\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch After-tax cost of debt 5% 5.25%}\par}{\pard \qj\phpg\pvpg\posx3557\posy9932\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Beta for equity - next 5 years 1.25 1.25}\par}{\pard \qj\phpg\pvpg\posx3557\posy10624\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Beta for equity - after year 5 1.00 1.0}\par}{\pard \qj\phpg\pvpg\posx3557\posy11289\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Working Capital/Revenues 15% 15%}\par}{\pard \qj\phpg\pvpg\posx3557\posy11954\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Tax rate is 36% for both companies}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 24}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx7808\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Compaq}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Year FCFF Terminal Value PV}\par}{\pard \qj\phpg\pvpg\posx4249\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 1 $1,518.19}\par}{\pard \qj\phpg\pvpg\posx14720\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,354.47}\par}{\pard \qj\phpg\pvpg\posx4249\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 2 $1,670.01}\par}{\pard \qj\phpg\pvpg\posx14720\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,329.24}\par}{\pard \qj\phpg\pvpg\posx4249\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 3 $1,837.01}\par}{\pard \qj\phpg\pvpg\posx14720\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,304.49}\par}{\pard \qj\phpg\pvpg\posx4249\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 4 $2,020.71}\par}{\pard \qj\phpg\pvpg\posx14720\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,280.19}\par}{\pard \qj\phpg\pvpg\posx4249\posy8064\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 5

$2,222.78 $56,654.81 $33,278.53}\par}{\pard \qj\phpg\pvpg\posx3557\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Terminal Year $2,832.74}\par}{\pard \qj\phpg\pvpg\posx14720\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $38,546.91}\par}{\pard \qj\phpg\pvpg\posx4249\posy9548\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Compaq = $ 38,547 million}\par}{\pard \qj\phpg\pvpg\posx3532\posy9740\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10290\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch After year 5, capital expenditures will be 110% of depreciation.}\par}{\pard \qj\phpg\pvpg\posx3532\posy10482\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 25}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6400\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Combined Firm Valuation}\par}{\pard \qj\phpg\pvpg\posx4249\posy4377\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch The Combined firm will have some economies of scale, allowing it to increase}\par}{\pard \qj\phpg\pvpg\posx3506\posy4530\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy4889\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch its current after-tax operating margin slightly. The dollar savings will be}\par}{\pard \qj\phpg\pvpg\posx4249\posy5376\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch approximately $ 100 million.}\par}{\pard \qj\phpg\pvpg\posx4453\posy6016\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Current Operating Margin = (2987+522)/(25484+13046) = 9.11%}\par}{\pard \qj\phpg\pvpg\posx4453\posy6553\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch New Operating Margin = (2987+522+100)/(25484+13046) = 9.36%}\par}{\pard \qj\phpg\pvpg\posx4249\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch The combined firm will also have a slightly higher growth rate of 10.50% over}\par}{\pard \qj\phpg\pvpg\posx3506\posy7244\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy7577\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch the next 5 years, because of operating synergies.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8192\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch The beta of the combined firm is computed in two steps:}\par}{\pard \qj\phpg\pvpg\posx3506\posy8345\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4453\posy8832\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Digitals Unlevered Beta = 1.07; Compaqs Unlevered Beta=1.17}\par}{\pard \qj\phpg\pvpg\posx4453\posy9369\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Digitals

Firm Value = 4.5; Compaqs Firm Value = 38.6}\par}{\pard \qj\phpg\pvpg\posx4453\posy9906\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Unlevered Beta = 1.07 * (4.5/43.1) + 1.17 (38.6/43.1) = 1.16}\par}{\pard \qj\phpg\pvpg\posx4453\posy10469\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Combined Firms Debt/Equity Ratio = 13.64%}\par}{\pard \qj\phpg\pvpg\posx4453\posy11008\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch New Levered Beta = 1.16 (1+(1-0.36)(.1364)) = 1.26}\par}{\pard \qj\phpg\pvpg\posx4453\posy11545\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch Cost of Capital = 12.93% (.88) + 5% (.12) = 11.98%}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 26}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6400\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Combined Firm Valuation}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Year FCFF Terminal Value PV}\par}{\pard \qj\phpg\pvpg\posx4249\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 1 $1,726.65}\par}{\pard \qj\phpg\pvpg\posx14514\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,541.95}\par}{\pard \qj\phpg\pvpg\posx4249\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 2 $1,907.95}\par}{\pard \qj\phpg\pvpg\posx14514\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,521.59}\par}{\pard \qj\phpg\pvpg\posx4249\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 3 $2,108.28}\par}{\pard \qj\phpg\pvpg\posx14514\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,501.50}\par}{\pard \qj\phpg\pvpg\posx4249\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 4 $2,329.65}\par}{\pard \qj\phpg\pvpg\posx14514\posy7346\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,481.68}\par}{\pard \qj\phpg\pvpg\posx4249\posy8064\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 5 $2,574.26 $66,907.52 $39,463.87}\par}{\pard \qj\phpg\pvpg\posx3557\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Terminal Year $3,345.38}\par}{\pard \qj\phpg\pvpg\posx3557\posy9548\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Combined Firm}\par}{\pard \qj\phpg\pvpg\posx14514\posy9548\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch =}\par}{\pard \qj\phpg\pvpg\posx15077\posy9548\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $ 45,511}\b0\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 27}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6988\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\

expnd5\expndtw-1\kerning0\loch The Value of Synergy}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Combined Firm wit Synergy = $45,511 million}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Compaq + Value of Digital}\par}{\pard \qj\phpg\pvpg\posx3532\posy5312\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx7244\posy5861\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch = 38,547 + 4532 = $ 43,079 million}\par}{\pard \qj\phpg\pvpg\posx4249\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Total Value of Synergy}\par}{\pard \qj\phpg\pvpg\posx14617\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch = $ 2,432 million}\par}{\pard \qj\phpg\pvpg\posx3532\posy6796\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 28}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6604\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Digital: Valuation Blocks}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Firm - Status Quo = $ 2,110 million}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch + Value of Control}\par}{\pard \qj\phpg\pvpg\posx12773\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch = $ 2,521 million}\par}{\pard \qj\phpg\pvpg\posx3557\posy5861\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Firm - Change of Control = $ 4,531 million}\b0\par}{\pard \qj\phpg\pvpg\posx3557\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch + Value of Synergy}\par}{\pard \qj\phpg\pvpg\posx12773\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch = $ 2,432 million}\par}{\pard \qj\phpg\pvpg\posx3557\posy7346\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Total Value of Digital with Synergy = $ 6,963 million}\b0\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 29}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx3276\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Estimating Offer Prices and Exchange Ratios}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch There are 146.789 million Digital shares outstanding, and Digital had}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch

s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $1,006 million in debt outstanding. Estimate that maximum price you}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch would be willing to offer on this deal.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Assume that Compaq wanted to do an exchange offer, where it would}\par}{\pard \qj\phpg\pvpg\posx3532\posy8768\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy9189\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch exchange its shares for Digital shares. Assuming that Compaq stock is}\par}{\pard \qj\phpg\pvpg\posx4249\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch valued at $27 per share, what would be the exchange ratio?}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 30}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6169\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Evaluating Compaqs Offer}\par}{\pard \qj\phpg\pvpg\posx3557\posy4352\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Value of Digital with Synergy = $6,963 mil}\par}{\pard \qj\phpg\pvpg\posx3557\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch - Value of Cash paid in deal = $ 30 * 146.789 mil shrs = $4,403 mil}\par}{\pard \qj\phpg\pvpg\posx3557\posy5708\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch - Digitials Outstanding Debt (assumed by Compaq) $1,006 mil}\par}{\pard \qj\phpg\pvpg\posx3557\posy6373\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Remaining Value}\par}{\pard \qj\phpg\pvpg\posx16460\posy6373\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $ 1,554 mil}\par}{\pard \qj\phpg\pvpg\posx3557\posy7040\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch / number of Shares outstanding}\par}{\pard \qj\phpg\pvpg\posx16460\posy7040\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch 146.789}\par}{\pard \qj\phpg\pvpg\posx3557\posy7730\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch = Remaining Value per Share}\par}{\pard \qj\phpg\pvpg\posx16460\posy7730\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $ 10.59}\par}{\pard \qj\phpg\pvpg\posx3557\posy8396\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Compaqs value per share at time of Exchange Offer $ 27}\par}{\pard \qj\phpg\pvpg\posx3557\posy9088\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Appropriate Exchange Ratio = 10.59/27 = 0.39 Compaq shares for every}\par}{\pard \qj\phpg\pvpg\posx4249\posy9625\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Digital share}\par}{\pard \qj\phpg\pvpg\posx3557\posy10316\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Actual Exchange

Ratio = 0.945 Compaq shares/Digital Share}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 31}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6732\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Citicorp + Travelers = ?}\par}{\pard \qj\phpg\pvpg\posx7193\posy4581\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Citicorp Travelers Citigroup}\par}{\pard \qj\phpg\pvpg\posx3506\posy5120\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Net Income $ 3,591 $ 3,104 $ 6,695}\par}{\pard \qj\phpg\pvpg\posx3506\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch BV of Equity $ 20,722 $ 20,736 $ 41,458}\par}{\pard \qj\phpg\pvpg\posx3506\posy6117\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch ROE 17.33% 14.97% 16.15%}\par}{\pard \qj\phpg\pvpg\posx3506\posy6604\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Dividends $ 1,104 $ 587 $ 1,691}\par}{\pard \qj\phpg\pvpg\posx3506\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Payout Ratio 30.74% 18.91% 25.27%}\par}{\pard \qj\phpg\pvpg\posx3506\posy7602\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Retention Ratio 69.26% 81.09% 74.73%}\par}{\pard \qj\phpg\pvpg\posx3506\posy8089\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Expected growth 12.00% 12.14% 12.07%}\par}{\pard \qj\phpg\pvpg\posx3532\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Growth Period 5 5 5}\par}{\pard \qj\phpg\pvpg\posx3532\posy9061\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Beta 1.25 1.40 1.33}\par}{\pard \qj\phpg\pvpg\posx3506\posy9573\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Risk Premium 4.00% 4.00% 4.00%}\par}{\pard \qj\phpg\pvpg\posx3506\posy10060\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch MV of Equity (bil) 81 84 165.00}\par}{\pard \qj\phpg\pvpg\posx3506\posy10546\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Cost of Equity 11.00% 11.60% 11.31%}\par}{\pard \qj\phpg\pvpg\posx3532\posy11033\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Beta - stable 1.00 1.00 1.00}\par}{\pard \qj\phpg\pvpg\posx3506\posy11545\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Growth-stable 6.00% 6.00% 6.00%}\par}{\pard \qj\phpg\pvpg\posx3506\posy12032\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Payout-stable 65.38% 59.92% 62.85%}\par}{\pard \qj\phpg\pvpg\posx3532\posy12517\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch DDM $ 70,743 $ 53,464 $ 124,009}\par}{\pard \qj\phpg\pvpg\posx3506\posy13184\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch DDM/share 155.84 46.38}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\

phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 32}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6272\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch The Right Exchange Ratio}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Based upon these numbers, what exchange ratio would you agree to as}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch a Citicorp stockholder?}\par}{\pard \qj\phpg\pvpg\posx4249\posy7961\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The actual exchange ratio was 2.5 shares of Travelers for every share}\par}{\pard \qj\phpg\pvpg\posx3532\posy8153\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch of Citicorp. As a Citicorp stockholder, do you think that this is a}\par}{\pard \qj\phpg\pvpg\posx4249\posy9189\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch reasonable exchange ratio?}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 33}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4146\posy7168\dfrmtxtx142\dfrmtxty0{\pict\dibitmap0\wbmbitspixel32\wbmplanes1\wbmwidthbytes48\picw12\pich102\picwgoal487\pichgoal3714 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posy5708\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch create wealth for two publicly traded firms, with diversified stockholders,}\par}{\pard \qj\phpg\pvpg\posx5068\posy6272\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch but it could create wealth for private firms or closely held publicly traded}\par}{\pard \qj\phpg\pvpg\posx5068\posy6809\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch firms.}\par}{\pard \qj\phpg\pvpg\posx4480\posy7474\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5068\posy7474\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cash Slack}\i0 \par}{\pard \qj\phpg\pvpg\posx7116\posy7474\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : When a firm with significant excess cash acquires a firm,}\par}{\pard \qj\phpg\pvpg\posx5068\posy8037\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch with great projects but insufficient capital, the combination can create}\par}{\pard \qj\phpg\pvpg\posx5068\posy8576\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch value.}\par}{\pard \qj\phpg\pvpg\posx4480\posy9241\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5068\posy9241\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Tax Benefits}\i0 \par}{\pard \qj\phpg\pvpg\posx7346\posy9241\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : The tax paid by two firms combined together may be lower}\par}{\pard \qj\phpg\pvpg\posx5068\posy9804\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch than the taxes paid by them as individual firms.}\par}{\pard \qj\phpg\pvpg\posx4480\posy10469\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5068\posy10469\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Debt Capacity}\i0 \par}{\pard \qj\phpg\pvpg\posx7730\posy10469\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch : By combining two firms, each of which has little or no}\par}{\pard \qj\phpg\pvpg\posx5068\posy11033\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch capacity to carry debt, it is possible to create a firm that may have the}\par}{\pard \qj\phpg\pvpg\posx5068\posy11570\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch capacity to borrow money and create value.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 35}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4581\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch I. Diversification: No Value Creation?}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch A takeover, motivated only by diversification considerations, has no}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\

expnd5\expndtw-1\kerning0\loch effect on the combined value of the two firms involved in the takeover.}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The value of the combined firms will always be the sum of the values}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch of the independent firms.}\par}{\pard \qj\phpg\pvpg\posx4249\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch In the case of private firms or closely held firms, where the owners}\par}{\pard \qj\phpg\pvpg\posx3532\posy7154\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy7577\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch may not be diversified personally, there might be a potential value gain}\par}{\pard \qj\phpg\pvpg\posx4249\posy8192\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch from diversification.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 36}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx8242\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch II. Cash Slack}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Managers}\par}{\pard \qj\phpg\pvpg\posx6528\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch may reject profitable investment opportunities}\b0\par}{\pard \qj\phpg\pvpg\posx17152\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch if they}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch have to raise new capital to finance them.}\par}{\pard \qj\phpg\pvpg\posx4249\posy5733\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch It may therefore make sense for a company with}\par}{\pard \qj\phpg\pvpg\posx14642\posy5733\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch excess cash and no}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy5925\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch investment opportunities}\b0\par}{\pard \qj\phpg\pvpg\posx9804\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch to take over a cash-poor firm with good}\par}{\pard \qj\phpg\pvpg\posx4249\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch investment opportunities, or vice versa.}\par}{\pard \qj\phpg\pvpg\posx4249\posy7705\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The}\par}{\pard \qj\phpg\pvpg\posx5196\posy7705\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch additional value}\b0\par}{\pard \qj\phpg\pvpg\posx8704\posy7705\

dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch of combining these two firms lies in the}\par}{\pard \qj\phpg\pvpg\posx17202\posy7705\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch present}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy7897\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8320\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch value of the projects}\b0\par}{\pard \qj\phpg\pvpg\posx9010\posy8320\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch that would not have been taken if they had}\par}{\pard \qj\phpg\pvpg\posx4249\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch stayed apart, but can now be taken because of the availability of cash.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 37}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx7346\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Cash Slack}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Assume that Netscape has a severe capital rationing problem, that}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch results in approximately}\par}{\pard \qj\phpg\pvpg\posx10162\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $500 million of investments,}\par}{\pard \qj\phpg\pvpg\posx17280\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch with a}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch cumulative net present value of $100 million, being rejected.}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch IBM has far more cash than promising projects, and has accumulated}\par}{\pard \qj\phpg\pvpg\posx3532\posy6540\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch $4 billion in cash that it is trying to invest. It is under pressure to return}\par}{\pard \qj\phpg\pvpg\posx4249\posy7577\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the cash to the owners.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8320\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If IBM takes over Netscape Inc, it can be argued that the value of the}\par}{\pard \qj\phpg\pvpg\posx3532\posy8512\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch q}\par}{\pard \qj\phpg\pvpg\posx4249\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch combined firm will increase by the synergy benefit of $100 million,}\par}{\pard \qj\phpg\pvpg\posx4249\posy9548\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\

kerning0\loch which is the net present value of the projects possessed by the latter}\par}{\pard \qj\phpg\pvpg\posx4249\posy10162\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch that can now be taken with the excess cash from the former.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 38}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx7961\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch III. Tax Benefits}\par}{\pard \qj\phpg\pvpg\posx3557\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (1) If one of the firms has tax deductions that it cannot use because it is}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch losing money, while the other firm has income on which it pays}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch significant taxes, the combining of the two firms can lead to tax}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch benefits that can be shared by the two firms. The value of this synergy}\par}{\pard \qj\phpg\pvpg\posx4249\posy6860\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch is the present value of the tax savings that accrue because of this}\par}{\pard \qj\phpg\pvpg\posx4249\posy7474\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch merger.}\par}{\pard \qj\phpg\pvpg\posx3557\posy8192\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch (2) The assets of the firm being taken over can be written up to reflect}\par}{\pard \qj\phpg\pvpg\posx4249\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch new market value, in some forms of mergers, leading to higher tax}\par}{\pard \qj\phpg\pvpg\posx4249\posy9420\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch savings from depreciation in future years.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 39}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5120\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Tax Benefits: Tax Losses}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Assume that you are Best Buys, the electronics retailer, and that you}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch would like to enter the hardware component of the market. You have}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch been approached by investment bankers for Zenith, which

while still a}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch recognized brand name, is on its last legs financially. The firm has net}\par}{\pard \qj\phpg\pvpg\posx4249\posy6860\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch operating losses of $ 2 billion. If your tax rate is 36%, estimate the tax}\par}{\pard \qj\phpg\pvpg\posx4249\posy7474\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch benefits from this acquisition.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If Best Buys had only $500 million in taxable income, how would you}\par}{\pard \qj\phpg\pvpg\posx3532\posy9125\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy9548\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch compute the tax benefits?}\par}{\pard \qj\phpg\pvpg\posx4249\posy11033\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If the market value of Zenith is $800 million, would you pay this tax}\par}{\pard \qj\phpg\pvpg\posx3532\posy11225\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy11648\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch benefit as a premium on the market value?}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 40}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4581\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Tax Benefits: Asset Write Up}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch One of the earliest leveraged buyouts was done on Congoleum Inc., a}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch diversified firm in ship building, flooring and automotive accessories,}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch in 1979 by the firm's own management.}\par}{\pard \qj\phpg\pvpg\posx4480\posy6373\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch After the takeover, estimated to cost $400 million, the firm would be}\par}{\pard \qj\phpg\pvpg\posx5068\posy6937\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch allowed to write up its assets to reflect their new market values, and claim}\par}{\pard \qj\phpg\pvpg\posx5068\posy7500\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch depreciation on the new values.}\par}{\pard \qj\phpg\pvpg\posx4480\posy8165\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch The estimated change in depreciation and the present value effect of this}\par}{\pard \qj\phpg\pvpg\posx5068\posy8704\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch depreciation, discounted at the

firm's cost of capital of 14.5% is shown}\par}{\pard \qj\phpg\pvpg\posx5068\posy9266\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch below:}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 41}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6272\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Congoleums Tax Benefits}\par}{\pard \qj\phpg\pvpg\posx3557\posy4377\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Year Deprec'n Deprec'n Change in Tax Savings PV}\i0 \par}{\pard \qj\phpg\pvpg\posx5657\posy4992\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch before after Deprec'n}\i0 \par}{\pard \qj\phpg\pvpg\posx3557\posy5605\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1980 $8.00 $35.51 $27.51 $13.20 $11.53}\par}{\pard \qj\phpg\pvpg\posx3557\posy6220\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1981 $8.80 $36.26 $27.46 $13.18 $10.05}\par}{\pard \qj\phpg\pvpg\posx3557\posy6834\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1982 $9.68 $37.07 $27.39 $13.15 $8.76}\par}{\pard \qj\phpg\pvpg\posx3557\posy7449\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1983 $10.65 $37.95 $27.30 $13.10 $7.62}\par}{\pard \qj\phpg\pvpg\posx3557\posy8064\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1984 $11.71 $21.23 $9.52 $4.57 $2.32}\par}{\pard \qj\phpg\pvpg\posx3557\posy8652\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1985 $12.65 $17.50 $4.85 $2.33 $1.03}\par}{\pard \qj\phpg\pvpg\posx3557\posy9266\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1986 $13.66 $16.00 $2.34 $1.12 $0.43}\par}{\pard \qj\phpg\pvpg\posx3557\posy9881\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1987 $14.75 $14.75 $0.00 $0.00 $0.00}\par}{\pard \qj\phpg\pvpg\posx3557\posy10496\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1988 $15.94 $15.94 $0.00 $0.00 $0.00}\par}{\pard \qj\phpg\pvpg\posx3557\posy11109\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1989 $17.21 $17.21 $0.00 $0.00 $0.00}\par}{\pard \qj\phpg\pvpg\posx3557\posy11724\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch 1980-89 $123.05 $249.42 $126.37 $60.66 $41.76}\i0 \par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 42}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx7653\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch IV. Debt Capacity}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Diversification will lead to an}\par}{\pard \qj\phpg\pvpg\posx11212\posy4402\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\

kerning0\loch increase in debt capacity}\b0\par}{\pard \qj\phpg\pvpg\posx17049\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch and an}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch increase in the value of the firm}\b0\par}{\pard \qj\phpg\pvpg\posx11161\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch .}\par}{\pard \qj\phpg\pvpg\posx4249\posy5733\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Has to be weighed against the immediate transfer of wealth that occurs}\par}{\pard \qj\phpg\pvpg\posx3532\posy5925\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch to existing bondholders in both firms from the stockholders.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 43}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx6912\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Valuing Debt Capacity}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch When two firms in different businesses merge, the combined firm will}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch have less variable earnings, and may be able to borrow more (have a}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch higher debt ratio) than the individual firms.}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch In the following example, we will combine two firms, with optimal}\par}{\pard \qj\phpg\pvpg\posx3532\posy6540\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy6962\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch debt ratios of 30% each, and end up with a firm with an optimal debt}\par}{\pard \qj\phpg\pvpg\posx4249\posy7577\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch ratio of 40%.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 44}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx4069\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Effect on Costs of Capital of Added debt}\par}{\pard \qj\phpg\pvpg\posx8192\posy4377\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Firm A Firm B AB -No AB - Added}\par}{\pard \qj\phpg\pvpg\

posx10802\posy4889\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch New Debt Debt}\par}{\pard \qj\phpg\pvpg\posx3557\posy5504\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Debt (%) 30% 30% 30% 40%}\par}{\pard \qj\phpg\pvpg\posx3557\posy6117\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost of debt 6.00% 5.40% 5.65% 5.65%}\par}{\pard \qj\phpg\pvpg\posx3557\posy6706\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Equity(%) 70% 70% 70% 60%}\par}{\pard \qj\phpg\pvpg\posx3557\posy7321\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Cost of equity 13.60% 12.50% 12.95% 13.65%}\par}{\pard \qj\phpg\pvpg\posx3557\posy7936\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch WACC - Year 1 11.32% 10.37% 10.76% 10.45%}\par}{\pard \qj\phpg\pvpg\posx3557\posy8549\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch WACC- Year 2 11.32% 10.37% 10.76% 10.45%}\par}{\pard \qj\phpg\pvpg\posx3557\posy9164\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch WACC- Year 3 11.32% 10.37% 10.77% 10.45%}\par}{\pard \qj\phpg\pvpg\posx3557\posy9778\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch WACC-Year 4 11.32% 10.37% 10.77% 10.45%}\par}{\pard \qj\phpg\pvpg\posx3557\posy10393\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch WACC-Year 5 11.32% 10.37% 10.77% 10.45%}\par}{\pard \qj\phpg\pvpg\posx3557\posy11008\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch WACC-after year 5 10.55% 10.37% 10.45% 9.76%}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 45}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5632\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Effect on Value of Added Debt}\par}{\pard \qj\phpg\pvpg\posx7372\posy4352\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Firm A Firm B AB -No new AB - Added}\par}{\pard \qj\phpg\pvpg\posx9804\posy4914\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Debt Debt}\par}{\pard \qj\phpg\pvpg\posx3557\posy5580\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch FCFF in year 1 $120.00 $220.00 $340.00 $340.00}\par}{\pard \qj\phpg\pvpg\posx3557\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch FCFF in year 2 $144.00 $242.00 $386.00 $386.00}\par}{\pard \qj\phpg\pvpg\posx3557\posy6937\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch FCFF in year 3 $172.80 $266.20 $439.00 $439.00}\par}{\pard \qj\phpg\pvpg\posx3557\posy7602\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch FCFF in year 4 $207.36 $292.82 $500.18 $500.18}\par}{\pard \qj\phpg\pvpg\posx3557\posy8268\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch FCFF in year 5 $248.83 $322.10 $570.93 $570.93}\par}{\pard \qj\phpg\pvpg\posx3557\posy8960\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch

Terminal Value $5,796.97 $7,813.00 $13,609.97 $16,101.22}\par}{\pard \qj\phpg\pvpg\posx3557\posy9625\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Present Value $4,020.91 $5,760.47 $9,781.38 $11,429.35}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy10316\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The value of the firm, as a consequence of the added debt, will}\par}{\pard \qj\phpg\pvpg\posx3532\posy10508\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10853\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch increase from $9,781.38 million to $11,429.35 million.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 46}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5477\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Empirical Evidence on Synergy}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch If synergy is perceived to exist in a takeover,}\par}{\pard \qj\phpg\pvpg\posx15129\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the value of the}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch combined firm should be greater than the sum of the values of the}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch bidding and target firms, operating independently.}\par}{\pard \qj\phpg\pvpg\posx4249\posy6348\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch V(AB) > V(A) + V(B)}\par}{\pard \qj\phpg\pvpg\posx4249\posy7090\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Bradley, Desai and Kim (1988) use a sample of 236 inter-firm tender}\par}{\pard \qj\phpg\pvpg\posx3532\posy7282\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy7705\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch offers between 1963 and 1984 and report that the}\par}{\pard \qj\phpg\pvpg\posx14770\posy7705\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch combined value of}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy8320\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch the target and bidder firms increases 7.48%}\b0\par}{\pard \qj\phpg\pvpg\posx14080\posy8320\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch ($117 million in 1984}\par}{\pard \qj\phpg\pvpg\posx4249\posy8933\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch dollars), on average, on the announcement of the merger.}\par}{\pard \qj\phpg\pvpg\posx4249\posy9676\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Operating synergy}\b0\par}{\pard \qj\phpg\pvpg\posx8421\posy9676\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch was the

primary motive in}\par}{\pard \qj\phpg\pvpg\posx14514\posy9676\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch one-third of hostile}\b0\par}{\pard \qj\phpg\pvpg\posx3532\posy9868\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy10290\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch takeovers}\b0\par}{\pard \qj\phpg\pvpg\posx6373\posy10290\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch . (Bhide)}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 47}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5093\posy2329\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Operational Evidence on Synergy}\par}{\pard \qj\phpg\pvpg\posx4249\posy4377\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch A stronger test of synergy is to}\par}{\pard \qj\phpg\pvpg\posx10624\posy4377\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch evaluate whether merged firms improve}\b0\par}{\pard \qj\phpg\pvpg\posx3506\posy4530\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx4249\posy4889\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch their performance (profitability and growth),}\b0\par}{\pard \qj\phpg\pvpg\posx13312\posy4889\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch relative to their competitors,}\par}{\pard \qj\phpg\pvpg\posx4249\posy5376\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch after takeovers.}\par}{\pard \qj\phpg\pvpg\posx4453\posy6016\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch McKinsey and Co. examined 58 acquisition programs between 1972 and 1983 for}\par}{\pard \qj\phpg\pvpg\posx5042\posy6450\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch evidence on two questions -}\par}{\pard \qj\phpg\pvpg\posx5349\posy7040\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5810\posy7040\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Did the return on the amount invested in the acquisitions exceed the cost of capital?}\par}{\pard \qj\phpg\pvpg\posx5349\posy7500\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx5810\posy7500\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Did the acquisitions help the parent companies outperform the competition?}\par}{\pard \qj\phpg\pvpg\posx4453\posy7961\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch They concluded that}\par}{\pard \qj\phpg\pvpg\posx8524\posy7961\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch 28 of the 58 programs failed both tests}\b0\par}{\pard \qj\phpg\pvpg\posx15333\posy7961\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\kerning0\loch , and 6 failed at least}\par}{\pard \qj\phpg\pvpg\posx5042\posy8396\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs40\expnd5\expndtw-1\

kerning0\loch one test.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8908\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch Large number of acquisitions that are reversed within fairly short time}\b0\par}{\pard \qj\phpg\pvpg\posx3506\posy9061\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch }\par}{\pard \qj\phpg\pvpg\posx4249\posy9420\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch periods}\b0\par}{\pard \qj\phpg\pvpg\posx5708\posy9420\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch . About 20.2% of the acquisitions made between 1982 and 1986 were}\par}{\pard \qj\phpg\pvpg\posx4249\posy9906\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch divested by 1988. In studies that have tracked acquisitions for longer time}\par}{\pard \qj\phpg\pvpg\posx4249\posy10418\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch periods (ten years or more) the}\par}{\pard \qj\phpg\pvpg\posx10752\posy10418\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch divestiture rate of acquisitions rises to}\b0\par}{\pard \qj\phpg\pvpg\posx4249\posy10905\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs45\expnd5\expndtw-1\kerning0\loch almost 50%.}\b0\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 48}\i0 \par}{ \sect}\sectd \pgwsxn20275\pghsxn18859\linex0 {\pard \qj\phpg\pvpg\posx5580\posy2304\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs70\expnd5\expndtw-1\kerning0\loch Who gets the benefits of synergy?}\par}{\pard \qj\phpg\pvpg\posx4249\posy4402\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch The sharing of the benefits of synergy among the two players will}\par}{\pard \qj\phpg\pvpg\posx3532\posy4594\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy5017\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch depend in large part on whether the bidding firm's contribution to the}\par}{\pard \qj\phpg\pvpg\posx4249\posy5632\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch creation of the synergy is unique or easily replaced}\b0\par}{\pard \qj\phpg\pvpg\posx16025\posy5632\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch . If it can be}\par}{\pard \qj\phpg\pvpg\posx4249\posy6245\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch easily replaced, the bulk of the synergy benefits will accrue to the}\par}{\pard \qj\phpg\pvpg\posx4249\posy6860\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch target firm. It is unique, the sharing of benefits will be much more}\par}{\pard \qj\phpg\pvpg\posx4249\posy7474\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch equitable.}\par}{\pard \qj\phpg\pvpg\posx4249\posy8192\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch Bradley, Desai and Kim (1988) conclude that the benefits of synergy}\par}{\pard \qj\phpg\pvpg\posx3532\posy8384\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs37\expnd5\expndtw-1\kerning0\loch s}\par}{\pard \qj\phpg\pvpg\posx4249\posy8805\

dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch accrue primarily to the target firms when there are}\par}{\pard \qj\phpg\pvpg\posx15308\posy8805\dfrmtxtx0\dfrmtxty0{\b\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch multiple}\b0\par}{\pard \qj\phpg\pvpg\posx17125\posy8805\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch bidders}\par}{\pard \qj\phpg\pvpg\posx4249\posy9420\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch involved in the takeover. They estimate that the market-adjusted stock}\par}{\pard \qj\phpg\pvpg\posx4249\posy10034\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch returns around the announcement of the takeover for the successful}\par}{\pard \qj\phpg\pvpg\posx4249\posy10649\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch bidder to be 2%, in single bidder takeovers, and -1.33%, in contested}\par}{\pard \qj\phpg\pvpg\posx4249\posy11264\dfrmtxtx0\dfrmtxty0{\cf1\f0\fs50\expnd5\expndtw-1\kerning0\loch takeovers.}\par}{\pard \qj\phpg\pvpg\posx1408\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch Aswath Damodaran}\i0 \par}{\pard \qj\phpg\pvpg\posx18688\posy13874\dfrmtxtx0\dfrmtxty0{\i\cf1\f0\fs34\expnd5\expndtw-1\kerning0\loch 49}\i0 \par}{ \sect}}