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MAF703 Merger and Amalgamation

Select 1 listed company on the ASX or any major international stock exchange. Provide an executive summary on the company’s nature of operations, industry, current financial positions, risk profile and strategic directions. Expectation: Students should be able to describe the company’s profile in their own words. Extra marks will be given to students who can infer the unique opportunities available to the company,describe how the company positions itself within its own industry and how it compares with its peers,and outline its strengths and weaknesses.

The CEO of the above company is looking for some expansion opportunities. He/she approaches the Corporate Finance Division within the company for advice. Suppose you are one of the analysts in the Corporate Finance team. Your job is to identify a potential takeover target for the company and outline the reasons why such an acquisition is deemed to be beneficial. Complete a detailed analysis about the takeover deal. Your report should include but not be limited
 
If the company pays all or part of the acquisition by cash, how should the company finance the takeover
Expectation: This question, again, requires students to do research and provide the reasons why,based on the company’s situation, a particular capital raising method might be preferred by the company.
 
Outline the risk(s) involved with this takeover deal. State your assumptions and perform sensitivity analysis on the NPV of the merger and the wealth of the existing shareholders based on your synergy estimation.

Answer:

Merger and amalgamation are the key strategic option which assists company to expand the business in this competitive economy. The report explains the strategic opportunities which can be grabbed by a corporation in order to expand its business in long run. The motive of the report is to discuss the directions through which a company can survive for longer period of time and increase the growth and success probability of the business. The ways that can be taken up by the company to meet this objective are mergers, amalgamations, joint venture and others.

All such strategic alliances help the corporation to enhance the efficiency and productivity of their business as well as experience the growth at good pace. The main expansion strategy adopted by Woolworth Group Limited is to make a strategic alliance with a corporation that is involved in the business of manufacturing furniture. It is named as James Richardson Corporation and the company also deals in hospitality and real estate sector.

By merging its business with James Richardson, Woolworth can enjoy many benefits such as it can diversify its area of operations, stimulate backward integration and can use their assets and employees to create effective synergy in long run. The report identifies potential options and target areas that can be availed by Woolworths for the purpose of expanding its business in future and increases its competency in the market (Woolworths Company, 2017).

Task-2

            The chief executive officer of Woolworths Bradford Banducci has looked up to many opportunities which can help in the company’s expansion strategies. He has undertaken many plans that can allow them to make their business more effective and viable for the long run. The main reason for creating alliance with James Richardson is that Woolworths want to increase its market share in the Australian market. Along with this, the company is focused on extending its business activities.

If the firm takeover the corporation, it can easily get their core product that is furniture for the purpose of resale. Also, it will help Woolworths to have a backward integration in a way that it can stimulate the supply and manufacturing of furniture products with help of machineries available with James Richardson.  Overall, the outcomes of the merger will be positive and will definitely help the company to strengthen its operation and enjoy growth in coming years (Woolworths, 2017).

Description of James Richardson Corporation

James Richardson Corporation is an Australia based furniture, real estate, hospitality and retail corporation having its headquarters s


ituated at Melbourne. The company approximately have 2300 individuals working in the organization. It is considered to be the best company in terms of offering duty-free retail stores in airports and border crossings.  This company has strong client based mechanism which it has been using to customize its products and services offered in market (James Richardson, 2017).

Types of takeover and benefits associated with all deals 

Variety of takeovers and their respective benefits

There are several types of alliances which a company can take for expanding its businesses. Some of them are amalgamation, joint venture and mergers. As Woolworth has strong liquidity position, it can easily take over the James Richardson to meet its strategic objectives made in regarding of business expansion.

  • Joint Venture: Under this, two or more companies combine their assets and available resources for meeting a predetermined objective.
  • Takeover: It is defined as a procedure under which one company purchases more than 505 shareholdings of another company.
  • Merger: It is the strategic alliance where two companies combined and come together to form a new organization. In other words, it is also known as amalgamation that helps one company to create value on invested capital.

The above definitions of all the options suggested that the best method for Woolworths would be to takeover James as it wants to create diversity in its business. The takeover will ultimately result in the company’s market share and market capitalization. It will make Woolworths strong enough to survive in the competitive market. Furthermore, taking up the James Richardson would also attract potential customers for its business that will ultimately have a positive impact on company’s profitability

Sources of synergy 

Sources of synergy

There are several sources of synergy which can be used by Woolworth Group if it sticks to its objective of taking over James Richardson.

According to its recent annual report, the financial position of Woolworths is quite impressive and does reflect low financial risk. The Takeover option of James Richardson will require the company to issue shares to the shareholders of acquired company. As a result, the share capital will increase in the business and overall outcomes will strengthen the position of Woolworths.

Another source through which synergy can be created is to cut down the cost of production. The consolidation of positions, functions, assets and other sources of both the companies will ultimately result in increased productivity and enhanced revenue. This will eventually help the company to reduce the cost of production. By taking over James Richardson, Woolworth can easily use its assets and machinery to manufacture furniture products and resale them in the market (Warren, Reeve, andDuchac, 2011).

Combing the business will bring more expertise and knowledge in the company as the key managers and other executives of James will use their skills to make reliable and relevant decisions for the company. Taking over will allow Woolworths to integrate the pool of knowledge which can be used in taking decisions and making strategic alliance for future.

Team building will be another source of creating synergy. The takeover of James Richardson will bring the highly qualified and experienced employees in the organization. Along with this, providing them the proper training programs to all the employees will smooth the process of creating value for investment.

Market capitalisation of the target, the synergy and hence advise the management of the existing company on the offer price

Market capitalization defines the total market value of the company which is calculated by multiplying the current share price of the company with its number of shares outstanding. The value of enterprise is the theoretical takeover value which includes the capital required for outstanding number of shares (Nikolai, Bazley, and Jones, 2009).

It is basically the market value of company’s outstanding shares. The above formula is used to calculate the market cap of the firm. In order to derive the same, company need to gather following information of the target company (Warren, Reeve, andDuchac, 2011).

Computation of the market capitalization of the company

Particular

Amount in AUD $ Million)

Stockholders' equity Outstanding

 $                                      86.00

Offer price

 $                                                     10.00

Market capitalization

 $                                                   860.00

After assessing the details and information of the company, it could be inferred that the net market value of the business is AUD $ 135 which reflects that if Woolworths wants to buy the shares of the company then it will have to pay AUD $ 135 million to James Richardson (James Richardson, 2017).

The computation of the market capitalization of the James Richardson has been computed as below (Baker, Jabbouri, andDyaz, 2017).

Net value of Company  Amount in AUD $ Million)

Particular

 

Total Assets

219

Total Liabilities

84

Net Value of Business

135

Advise to the management of Woolworths

            The main advice to management of Woolworths Company is to offer its own shares at premium to the existing shareholders of James Richardson. It would allow company to align the interest of the shareholders of James Richardson with the organization development. Company could use these methods to create value on its investment. Nonetheless, those shareholders of James Richardson who are against this deal could be offered cash consideration for their shares. This will be based on the mutual understanding which they have with each other’s (Vogel, 2014).

It is analyzed that the estimated synergy which Woolworths and James Richardson would both have depends upon the associated factors. Company would have at least 25% synergy on the basis of economic condition and internal and external factors which are affecting the business growth (Warren, and Jones, 2018).

Estimated figures for the synergy for the Woolworths  (AUD $ in million

Net Value of Business

$                                                   135.00

Add % of synergy

25%

Estimated figure

$                                                     33.75

 Assumption based on the creation of the synergy

            The creation of the synergy is based on the effective business outcomes and team building approach. The main assumption of creating synergy is based on the team building and use of the existing market share of the James Richardson Corporation. This will allow Woolworths to grab more potential clients while diversifying the market. Company will combine its existing market share of the James Richardson Corporation and its own market share and after that by using the loyalty card approach it could easily increase the overall sale. The increased sales will allow company to strengthen overall market share and return on capital employed in long run. Woolworths Company should use the existing client based data program to strengthen the overall outcomes (Sinha, 2012).

(e) Option to pay off the takeover deal or consideration to shareholders

There are several options to pay off the takeover deal in this case. The Woolworths Company could easily pay off to the shareholders of the James Richardson Corporation by issues of shares of its own company and cash as well (Rao, 2011).

 This takeover option will be based on the decision of the Woolworths Company. If in case, Woolworths Company finds that there is no better option available to create value on its investment then it will use its liquid assets to buy the shares of the James Richardson Corporation. However, in this case, Woolworths Company could use the mix option to pay off the dead of takeover. Company will issue its own shares to allow shareholders of James Richardson Corporation to swipe their own shares. In addition to this, those shareholders who are rigid towards the deal can be paid off by giving the cash payment (Heitger, Mowen, and Hansen, 2007).

Now the main crux of this deal is that Woolworths Company should pay off this deal by undertaking partially cash payment and share stock payment (Krantz, and Johnson, (2014).

Computation of the cost of equity of company NPV and post-merger stock price 

Calculation of cost of capital

Calculation of Required rate of return

Risk free rate (A)

4%

Beta (B)

0.0024639

Market Risk premium (C)

6%

Required rate of return [A+(B*C)]

4.01%

 (Please see the more calculation in the attached excel fileComputation of the net present value of expected net results

 

Year

Particular

1

2

3

4

5

Sales (in units)

 $         52,000.00

 $         62,400.00

 $             74,880.00

 $           89,856.00

 $         107,827.20

Price

 $              777.00

 $              792.54

 $                  808.39

 $                824.56

 $                841.05

Total sales

 $  40,404,000.00

 $  49,454,496.00

 $      60,532,303.10

 $    74,091,539.00

 $    90,688,043.74

(-) Variable Costs

 $  16,380,000.00

 $  19,656,000.00

 $      23,587,200.00

 $    28,304,640.00

 $    33,965,568.00

Contribution

 $  24,024,000.00

 $  29,798,496.00

 $      36,945,103.10

 $    45,786,899.00

 $    56,722,475.74

(-) Fixed Cost

 $    6,500,000.00

 $    6,500,000.00

 $        6,500,000.00

 $      6,500,000.00

 $      6,500,000.00

Net Profit

 $  17,524,000.00

 $  23,298,496.00

 $      30,445,103.10

 $    39,286,899.00

 $    50,222,475.74

(-)Depreciation

 $    5,128,571.43

 $    5,128,571.43

 $        5,128,571.43

 $      5,128,571.43

 $      5,128,571.43

Net Profit before Tax

 $  12,395,428.57

 $  18,169,924.57

 $      25,316,531.68

 $    34,158,327.57

 $    45,093,904.31

(-) Tax @28%

 $    3,470,720.00

 $    5,450,977.37

 $        7,594,959.50

 $    10,247,498.27

 $    13,528,171.29

Net Profit after tax

 $    8,924,708.57

 $  12,718,947.20

 $      17,721,572.17

 $    23,910,829.30

 $    31,565,733.01

(+) Depreciation

 $  43,842,857.14

 $  43,842,857.14

 $      43,842,857.14

 $    43,842,857.14

 $    43,842,857.14

Cash Inflows

 $  52,767,565.71

 $  56,561,804.34

 $      61,564,429.32

 $    67,753,686.44

 $    75,408,590.16

(+) Salvage Value

 

 

 

 

 $      9,500,000.00

Cash Inflows

 $  52,767,565.71

 $  56,561,804.34

 $      61,564,429.32

 $    67,753,686.44

 $    84,908,590.16

*Present value factor @4%

 $                  0.96

 $                  0.92

 $                      0.89

 $                    0.85

 $                    0.82

Present Value

 $  50,738,043.96

 $  52,294,567.62

 $      54,730,553.49

 $    57,916,135.13

 $    69,788,671.85

Total Present values(A)

 

 

 

 

 $  285,467,972.04

(-)Cash Outflows

 

 

 

 

 

Additional expenses

 

 

 

 

 $      1,175,000.00

Total cash consideration to company

 

 

 

 

 $    19,981,000.00

Other expenses

 

 

 

 

 $    45,200,000.00

Total(B)

 

 

 

 

 $    66,356,000.00

Net Present Value(A-B)

 

 

 

 

 $  219,111,972.04

Post-Merger stock Price

The post-merger stock price of company is computed by analysing the share price and earning per share of both companies (Bragg, 2012).

Valuation in Efficient Markets - By evaluating share price and earning of James and Woolworths Company

 

Woolworths Company before merger

James Richardson Corporation before Takeover

Woolworths after the merger (AB) (Estimated

1. Earnings per share

3

2

4.55

2. Price per share

25

30

65

3. Price-earnings ratio

22

12

25

4. Number of shares

32 mil.

12 mil.

55 mil.

5. Total earnings

$30 mil.

$10 mil.

$55 mil.

6. Total market value

$1300 mil.

$700 mil.

$1,500 mil.

7. Earnings per dollar invested in

 

 

 

    the stock (line 1 ¸ line 2)

0.033

0.1

0.056

The post-merger share price of Woolworths Company is decided on the basis of the earning, total earning and price earnings ratio of company (Fridson, and Alvarez, 2011).

Company raise the capital using internal funds, debt, equity, hybrid securities or a combination of the above

Woolworths Company could undertake the following internal and external fund raising process to raise capital for this particular financial project.

Finance and funding from banks and financial institution- Woolworths has strong brand image in market and can apply for the loan from financial institutions and banks. Banks by creating the charge on the assets could provide funding and finance for the takeover project.

Retained earnings- It is the another option which will allow company to use the available funding and general reserve to finance this takeover deal.

Issue of the shares- Woolworths could issues public or right issues to raise funds. However, it will be costly as it has already issued capital in market.

Debt funding – It is the option in which Woolworths has to issue bonds and debentures to raise funds. It will allow company to keep the capital for long run.

The best option for Woolworths Company to finance its takeover option with the James Richardson Corporation would be use of the debt funding and bank loan. It will allow company to lower down its overall costing. Currently the existing financial leverage of company is low which could be used by company to increase its debt funding and keeping the cost of the capital low.

The main merit of these options is related to low cost of capital and low financial leverage. Woolworths could easily issue more debts in market and due to the strong brand image it would be easy for the company to raise capital from banks and financial institutions. However, retained earnings of AUD $ 221 million would also be useful for company to finance its takeover project. The main demerit is based on the cost of capital and compliance program while raising funds from the banks and financial institutions.

(B) If the capital required is raised via a share issue, should the company engage in a right issue or private placement?

If the capital is raised by issue of the shares then it will increase the overall costing of the business. Nonetheless, private funding will be the best option in this case as promoters could invest their own capital to finance this project (Gibson, 2011).

 The right issue could also be the one of the best option only when the shares are issued to existing shareholders on the 20% premium.

Capital raise option  

Pros

Cons

Right issue

It will allow easy availability of funds form the existing shareholders

It will align the interest of the existing shareholders with the organization development

It will be highly costly for the business.

It may require passing resolution and general meeting.

Private funding

Easy to invest without passing resolution.

It will increase the confidentiality of the decision.

Highly costly if the expected results are not achieved.

Share issue affects the wealth of the existing shareholders

The shares issue surely affect the wealth of the existing shareholders. If more shares are issued then there will be more potential number of shareholders who will be inclined towards driving return on their investment (Higgins, 2012). Company has to distribute the dividend and return to its shareholder by dividing the number of shares with the overall earning. The increased number of shareholders will lower down the return available to the equity shareholders on the particular shareholding.

On the other hand, when the shares are issued through the public funding, it may result to insider trading and sudden hike in the market share price of company. It will negatively impact business growth of the organization and return available to shareholders who want to keep their capital invested in Woolworths in long run (Palepu, Healy, and Peek, 20 Risk associated with the takeover deal of the Woolworths with the James Richardson Corporation

            There are several risks which need to be faced by Woolworths after acquiring the James Richardson Corporation (Woolworths plc, 2017). The main risk is based on the aligning the interest of the all the employees of the companies with the one object. In addition to this, inflation rate, inefficient business functioning and cultural issues are the some of the risk which will be faced by company after amalgamation with the James Richardson Corporation. However, company might also face high cost of capital while adapting with the changing business policies and process system. Company may also face destruction in its business and high financial risk if it fails to comply with the cost of capital and financial leverage in long run (Yahoo finance, 2017).

Sensitivity analysis

The sensitivity analysis assists in assessing the internal and external factors of the business and on the basis of same determine the changes in the net present value and possible business outcomes (Brigham, and Ehrhardt, 2013).

 

Year

Particular

1

2

3

4

5

Sales (in units)

 $         52,000.00

 $         54,600.00

 $         65,520.00

 $           78,624.00

 $           94,348.80

Price

 $              777.00

 $              792.54

 $              808.39

 $                824.56

 $                841.05

Total sales

 $  40,404,000.00

 $  43,272,684.00

 $  52,965,765.22

 $    64,830,096.62

 $    79,352,038.27

(-) Variable Costs

 $  16,380,000.00

 $  30,030,000.00

 $  38,329,200.00

 $    61,719,840.00

 $    83,781,734.40

Contribution

 $  24,024,000.00

 

 $  14,636,565.22

 $      3,110,256.62

-$     4,429,696.13

(-) Fixed Cost

 $    6,500,000.00

 $    6,500,000.00

 $    6,500,000.00

 $      6,500,000.00

 $      6,500,000.00

Net Profit

 $  17,524,000.00

-$   6,500,000.00

 $    8,136,565.22

-$     3,389,743.38

-$   10,929,696.13

(-)Depreciation

 $  43,842,857.14

 $  43,842,857.14

 $  43,842,857.14

 $    43,842,857.14

 $    43,842,857.14

Net Profit before Tax

-$ 26,318,857.14

-$ 50,342,857.14

-$ 35,706,291.93

-$   47,232,600.52

-$   54,772,553.27

(-) Tax @28%

-$   7,369,280.00

-$ 15,102,857.14

-$ 10,711,887.58

-$   14,169,780.16

-$   16,431,765.98

Net Profit after tax

-$ 18,949,577.14

-$ 35,240,000.00

-$ 24,994,404.35

-$   33,062,820.36

-$   38,340,787.29

(+) Depreciation

 $  43,842,857.14

 $  43,842,857.14

 $  43,842,857.14

 $    43,842,857.14

 $    43,842,857.14

Cash Inflows

 $  24,893,280.00

 $    8,602,857.14

 $  18,848,452.79

 $    10,780,036.78

 $      5,502,069.85

(+) Salvage Value

 

 

 

 

 $      9,500,000.00

Cash Inflows

 $  24,893,280.00

 $    8,602,857.14

 $  18,848,452.79

 $    10,780,036.78

 $    15,002,069.85

*Present value factor @12%

 $                  0.89

 $                  0.80

 $                  0.71

 $                    0.64

 $                    0.57

Present Value

 $  22,226,142.86

 $    6,858,145.04

 $  13,415,956.40

 $      6,850,908.26

 $      8,512,577.32

Total Present values(A)

 

 

 

 

 $    57,863,729.89

(-)Cash Outflows

 

 

 

 

 

Additional expenses

 

 

 

 

 $      1,175,000.00

Total cash consideration to company

 

 

 

 

 $         650,000.00

Other expenses

 

 

 

 

 $    19,981,000.00

Total(B)

 

 

 

 

 $    21,806,000.00

Net Present Value(A-B)

 

 

 

 

 $    36,057,729.89

After implementing the sensitivity analysis, it could be determined that by changing the growth rate in the sales, company would have AUD $ 36057729 amount of Net present value.

Growth rate- 5% Changed on the basis of changing business sales (Yahoo finance, 2017).

Maximization of the wealth of the shareholders of the both companies

After takeover with the James Richardson Corporation, the shareholders of both companies will face high value creation. This integration will allow company to increase the return on capital employed, increasing the value of the business and use of the diversified business approach (Yahoo finance, 2017).

Conclusion

            The financial analysis of both companies is required while undertaking the economic business decision. After assessing all the details and information in this case, it is evaluated that Woolworths will be highly benefited by acquiring the James Richardson Corporation. The main synergy would be from the team building, strong loyalty methods with the clients and strengthening the overall outcomes and efficiency of the business in long run. This has allowed company to create value on its investment and increase the overall sales by using the effective client centric work approach (Bessler, and Schneck, 2016).The takeover deal will be highly beneficial for Woolworths and will allow it to increase its overall sales in long run.

References

Baker, H.K., Jabbouri, I. andDyaz, C. (2017). Corporate finance practices in Morocco. Managerial Finance, 43(8), 865-880.

Bessler, W., and Schneck, C. (2016). Excess Takeover Premiums and Bidder Contests in Merger and Acquisitions: New Methods for Determining Abnormal Offer Prices. In Analysis of Large and Complex Data (pp. 323-333). Springer, Cham.

Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley and Sons.

Brigham, E.F. and Ehrhardt, M.C., (2013). Financial management: Theory and practice. Cengage Learning. 55 (4), pp.107-115

Fridson, M.S. and Alvarez, F. (2011). Financial statement analysis: a practitioner's guide (Vol. 597). New Jersey: John Wiley and Sons.

Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.

Godwin, N., and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Heitger, D.L., Mowen, M.M. and Hansen, D.R. (2007). Fundamental cornerstones of managerial accounting. USA: Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

James Richardson, (2017), Annual report., 

Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley and Sons.

Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning.

Rao, P.M. (2011). Financial Statement Analysis and Reporting. New Delhi: PHI Learning Private Limited.

Sinha, G. (2012). Financial statement analysis. New Delhi: PHI Learning Pvt. Ltd.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.

Warren, C. S., and Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.

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