MONEY & BANKING

Merger in the textile sector

Nishat Mills Limited

Crescent Textile Mills Limited.

Instructor
Usama Wakil
Agenda

1 Types of Mergers Possible Post and Pre-offer Defense

5 Mechanisms Available to the
2 Merger Suitable for Them Targe

Hidden Value to be 6 company valuation

3
Unlocked:
7 Consolidated Accounts
Identification of Target and
4
Acquirer
Mergers and Acquisitions

Textile Sector
One of a merger in the textile
sector in Pakistan is the merger
between Nishat Mills Limited and
Crescent Textile Mills Limited.
Types of Mergers Possible

A horizontal merger between

Nishat Mills Limited and Crescent
Textile Mills Limited would be a
possible option.

A horizontal merger would allow

them to combine their production
capacities, distribution networks,
and expertise to achieve
economies of scale and enhance
their competitive position.
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Merger Suitable for Them
The merger suitable for Nishat
Mills Limited and Crescent Textile
Mills Limited would depend on
their specific circumstances and
objectives.

They could consider a merger of

equals, where both companies
merge to form a new entity,
sharing ownership and control
Hidden Value to be Unlocked

They can leverage their combined

resources, production facilities,
and supply chains to achieve cost
savings and operational
efficiencies

The merger can provide

opportunities for product
diversification, access to new
markets, and enhanced
bargaining power with customers
and suppliers.
Identification of Target and Acquirer

Nishat Mills Limited could be the

acquirer, while Crescent Textile
Mills Limited would be the target
company. However, the specific
roles of acquirer and target can
vary depending on the
negotiations and the terms
agreed upon by both companies.
Pre-offer Defense Mechanisms
Available to the Target

Poison Pill:
Implementing a poison pill strategy,
where the target company issues
additional shares to existing
shareholders in the event of a
hostile takeover attempt, making the
acquisition more expensive.

Staggered Board:
where only a portion of the board is
up for re-election each year, making
it more challenging for an acquirer
to gain control of the board.
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Post-offer Defense Mechanisms
Available to the Target
Negotiation and Rejection:
The target company's board of
directors can negotiate with the
acquirer to obtain a higher offer price
or better terms. They can reject the
initial offer if they believe it
undervalues the company
Seeking Alternatives:
Exploring alternative merger or
acquisition proposals from other
potential acquirers to create bidding
competition and potentially receive a
better offer.
Company Valuation
Using DCF Method

DCF is a valuation method that uses

expected future cash flows to estimate
the value of a company or investment.
DCF is used to determine the present
value of an investment, information
that would be helpful to anyone who
wants a more accurate assessment of
an investment opportunity
Forecast Future Cash Flows
Project the annual cash flows:
Year 1: $1 million
Year 2: $1.5 million
Year 3: $2 million
Year 4: $2.5 million
Year 5: $3 million

Terminal Value:
growth rate of 3%.
cash flow in Year 6 is $3.5 million.
discount rate of 10%.

Terminal Value = $3.5 million / (0.10 - 0.03) = $50 million.

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(WACC) to determine the discount rate.
cost of equity of 12% and a cost of debt of 5%
WACC = (Equity Weight * Cost of Equity) + (Debt Weight * Cost of Debt)
WACC = (0.80 * 0.12) + (0.20 * 0.05) = 0.096 or 9.6%

Present Value (PV) of Cash Flows:

Discount each projected cash flow and the terminal value to their
present values using the discount rate (WACC).

PV of Year 1 Cash Flow = $1 million / (1 + 0.096)^1 = $913,242.01 (rounded)

PV of Year 2 Cash Flow = $1.5 million / (1 + 0.096)^2 = $1,192,082.19 (rounded)
PV of Year 3 Cash Flow = $2 million / (1 + 0.096)^3 = $1,448,857.57 (rounded)
PV of Year 4 Cash Flow = $2.5 million / (1 + 0.096)^4 = $1,689,283.14 (rounded)
PV of Year 5 Cash Flow = $3 million / (1 + 0.096)^5 = $1,918,898.69 (rounded)

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PV of Terminal Value = $50 million / (1 + 0.096)^5 = $32,056,288.69

DCF Value:
DCF Value = Sum of PV of Cash Flows + PV of Terminal Value

DCF Value = $913,242.01 + $1,192,082.19 +

$1,448,857.57 + $1,689,283.14 + $1,918,898.69 +
$32,056,288.69 = $38,218,651.29 (rounded)

The company or asset is expected to generate cash flows

in this time frame. In other words, the value of money
today will be worth more in the future.

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