INFORMATION

TO ANALYSE ACQUISITION

INFORMATION TO ANALYSE ACQUISITION

In general, we can evaluate an acquisition in much same manner and with much the same kind of information that we use for evaluating an investment proposal generated internally. Investment proposals can consist of acquisition of a company or part there off.

INFORMATION TO ANALYSE ACQUISITION

In principle, the prospective acquisition is much the same as any investment proposal. In principle, the prospective acquisition is much the same as any investment proposal. There is an initial outlay followed by expected future benefits.

INFORMATION TO ANALYSE ACQUISITION

Acquisition of another company can be treated as capital budgeting decision. There is an initial outlay which is expected to be followed by free cash flows. These are the cash flows in excess of necessary investments in working capital and fixed assets.

INFORMATION TO ANALYSE ACQUISITION

Measuring Free cash flows The expected future cash flows must be expressed on a basis consistent with those for investment proposals generated internally. The buying company should first estimate the future cash income that the acquisition is expected to add. Synergy Synergy is the economies realized in the merger through increased revenue or cost reductions.

INFORMATION TO ANALYSE ACQUISITION

In an acquisition there are usual problems in estimating future cash flows. The company is acquired as a going concern. The acquiring company buys more than assets, it buys experience, an organization and proven performance.

INFORMATION TO ANALYSE ACQUISITION

1. 2. 3. From EBITDA, we subtract three things Expected taxes to be paid. Likely future capital expenditure. The expected net additions to working capital that is receivables and inventory. The residual represent free cash flow for the period. For each period, we begin with incremental EBITDA.

INFORMATION TO ANALYSE ACQUISITION

Preparing cash flow for analysis In case of an acquisition investment, the life of the project is indefinite. Cash flow into perpetuity is denoted by g In addition to expected free cash flows, the acquiring firm may wish to specify other possible cash series.

INFORMATION TO ANALYSE ACQUISITION

Such cash flows were discounted at an appropriate required return to get expected P.V of the acquisition. The cash price is subtracted from the expected P.V to get expected NPV.

INFORMATION TO ANALYSE ACQUISITION

Non cash payments and liability assumption Payment to acquired shareholders may involve common stock, preferred stock, debt, cash or some combination. If securities other than cash are used, it should be converted into cash-equivalent market values. In this way, we are able to separate the investment worth of an acquisition from the way it is financed.