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I need help with part e of section 2. I have no idea on how to decide on the pricing and financing:
e. This report should clearly identify the following:
1) Your proposed acquisition terms
4) Potential negotiation strategies
I can calculate the price/earning ratios and so on but I'm not able make sense of this data.
I would like to see the calculations as well as their implications to get the big picture.
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In a 2500 word response, the solution first provides information about the synergies of a combination following by an analysis of the financial statements plus ratio analysis in order to compute an acquisition price. Preferred financing options are discussed.
The company that has been selected for acquisition is Corn Products International.
The company is a competitor of ADM and is having a lower average share return over the four years prior to take over.
There is also a higher growth-resource mismatch.
In addition if the ratios of Corn Products International are examined we find that the principle of Low average sales growth/ high average liquidity/ low average gearing applies.
The company is smaller than ADM; the five key ratios which are examined are favorable for the acquisition of Corn Products International
These ratios are
1. Acid-test ratio
2. Current ratio
3. Return on shareholder funds
4. Net profit margin before tax
5. Net profit after tax
Another reason why ADM should target Corn Products International is that Corn Products International has not used any defensive measures which would include
1. Lower profitability
2. Higher liquidity
3. Higher dividend payout
Although these methods of defending takeover have not been employed, it need not imply that the shareholders and managers are not committed to defend the company against takeover. The takeover bid may be used to hike up the price of the company.
ABD will be required to pay a premium on the share price which is likely to be close to 15% which is the US average.
Thus the price of the share offered by ADM for the shares of Corn Products International will include the premium of about 10.50$ and the offer price should be $65.
The proposed acquisition terms: The shares of Corn Products would be purchased by ABD for a period of one month at the price of $65. The offer would be valid provided the purchases equaled a total of 30% of the total value of the shares. Please note that this offer should not be made to the public because 87% of the shares are held by the institutions and about 6% of the shares are held by insiders. So if the limited offer of the share purchase is made to the institutions and the insiders, this offer is likely to be sufficient.
There is an assumption in this offer that 30% of the shares are adequate to take control of the management of the company and that the institutions will not be able to affect the day-to-day functioning of the company.
This is critical because without the control of management it will not be possible to have the synergy between ADM and Corn Products and the very purpose of the acquisition will be vitiated.
In case there the offers received for sales of stocks is above 30% then it will be the sole discretion of ADM either to accept the offer or select the persons/institutions from whom it will purchase the stocks.
Potential negotiation strategies Even though the company may make the offer, there may be counter offers or resistance from the financial institutions, the resistance may be in the form of loss of shareholder value in case of takeover. In this case ADM can offer to take up more shares of Corn Products.
Also, the financial companies may decide to fight under the monopolies law, however, there are many other companies, which are far larger than ADM.
Besides, there are many other competitors in various other sectors. One potential problem which can be faced by these ADM is that the financial companies may simply refuse to sell their stocks. There are two negotiation strategies which can be employed, first, the offer price of shares can be upped by a few dollars, in acquisitions there are companies which have paid up to 100% premium. If the financial institutions do not agree to sell the stocks then feelers should be sent to the market that ADM is willing to make an acquisition bid either for Cargill, A.E or Staley Manufacturing Co, which are other competitors of ADM. Usually, this send the financial institutions back to the negotiation table.
As explained in the earlier financing case the ADM should go in for equity financing. This is because its capital is highly geared and the projected increase in profit is greater in case of stock finance.
Recent empirical studies suggest that throughout the past three decades, the majority of M&A deals did not deliver what was expected nor did the companies involved do as well as peer companies that steered clear of M&A. It explores why M&A deals go awry by looking at how performance measures might be used to judge ...
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