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Corporate Finance: KKP and Ideko

"While comparables provide a useful starting point, whether this acquisition is a successful investment for KKP depends on Ideko's post-acquisition performance."

What does this statement mean? How can a firm measure the post-acquisition performance of a firm it is acquiring before that performance occurs?

Please see the attached PDF file for page 644 of the textbook:
Jonathan Berk & Peter DeMarzo. Corporate Finance. Pearson


Solution Preview

First, let's take a look at what impact occurs when there is an acquisition. Essentially KKP will acquire Ideko, meaning that they will acquire the assets, along with the liabilities and the sales performance potential. Assets are acquired for two reasons:

1) To increase sales, thereby increasing market share - and this is projected for Ideko at 1% per year for the next 5 years (from 10 - 15%). Market size for 2006 is projected at 10,500,000 units @ $76.50/unit = $803,250,000, and at a 1% increase, represents an additional $8,032,500 in new sales. Extending that logic, and using the power of compounding ...

Solution Summary

How to analyze the value of an acquisition is covered within this discussion. In addition, factors to be considered within the framework of an acquisition are also presented.