Analysis of purchase control effectiveness - Investments

Analysis of purchase control effectiveness

Specifics of acquisitions are related to the repurchase of equity from the owners of the target company (we will designate it as the company B). Objective opportunities for creating new value through the combination of operating, investment and financial activities of companies, as well as market imperfection for example, the asymmetry of information) often give rise to the situation when the company B is redeemed not at the internal (genuine) market value, but at a price that the deal participants were able to agree on. The final price may be lower than the true market valuation of the target company, and higher, for example, expressed as MV B + Premium. Premium ( Premium) to the true price can be explained by the emergence of synergistic effects of combining assets, labor, information and entrepreneurial efforts.

Analysts of the largest consulting company McKinsey, conducted a study of mergers and acquisitions over the period 1996-2003, found that the owners of the target company receive a 30-40% premium to the market price of their shares company.

The market value of a combined company takes the following form:

where - the additional cost arising from the combination of assets and processes (the so-called synergy effect); Premium - the premium paid to the owners of capital and company management B, who transfer control over the company to new owners; - Premium - The net effect of the transaction.

The net effect of buying control is the difference between the effect of synergy from the transaction and the premium of the target company as a payment for control.

The quantitatively pure effect of a transaction can be written in the form of the following expression:

We can assume that the valuation of the combined company (capitalization) observed on the market will reflect the sum of the true values ​​of the two companies and the net effect of the transaction (on this assumption, most empirical studies were built).

The phenomenon of modern markets is that a pure control buying effect () can take both a positive and a negative value.

A large premium can generate the effect of eating (destroying) the value of the initiator of the transaction. This is due to the fact that due to mistakes in income forecasts, incorrect timing of their receipt, underestimation of the values ​​of one-time costs (which often turn out to be huge for hostile takeovers, when various protective tactics are used), the buyer company gives the target company not only the possible (hypothetical) additional value () in the form of premiums, but also part of the shareholder value of the company. This effect was called in the literature the "curse of the winner". It should be noted that most often such an effect occurs in hostile takeovers, when the top management of the target company does not agree to the proposed deal and applies various tactics to resist attempts to seize control (for example, the known tactics of the poisonous pill or scorched earth). .

The sign of the net effect of the purchase of control and its relative magnitude (for example, relative to the value of the target company or the synergy effect) depend on a number of macroeconomic, institutional and transaction-specific factors, the most significant of which are: > M & amp; A, information effectiveness, legal protection of property, company size and country affiliation, industry risks, the buyer's professional competence and the objectives of the purchase (strategist or portfolio investor Or), the financial side of the purchase (payment of money or other assets, buyback on own or borrowed money {leveraged buy-out, LB O) , etc.). Without taking these factors into account, it is impossible to diagnose in advance how much the deal turns out to be cost-effective and whether the emerging synergy effects will not be covered by the premium paid to owners and top management of the target company beyond the genuine value.

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)