The document discusses factors to consider when determining the required rate of return for a merged company. It lists the acquirer's cost of capital, nature of the target company's operations, industry, and economic conditions as important considerations. It also notes that acquirers typically have hurdle rates of return that may be adjusted up or down based on perceived risk and strategic importance. Additional factors listed for determining required rates of return include prevailing risk-free rates, equity risk premiums, liquidity risk, company-specific risk, and debt capacity.
The document discusses factors to consider when determining the required rate of return for a merged company. It lists the acquirer's cost of capital, nature of the target company's operations, industry, and economic conditions as important considerations. It also notes that acquirers typically have hurdle rates of return that may be adjusted up or down based on perceived risk and strategic importance. Additional factors listed for determining required rates of return include prevailing risk-free rates, equity risk premiums, liquidity risk, company-specific risk, and debt capacity.
The document discusses factors to consider when determining the required rate of return for a merged company. It lists the acquirer's cost of capital, nature of the target company's operations, industry, and economic conditions as important considerations. It also notes that acquirers typically have hurdle rates of return that may be adjusted up or down based on perceived risk and strategic importance. Additional factors listed for determining required rates of return include prevailing risk-free rates, equity risk premiums, liquidity risk, company-specific risk, and debt capacity.
of Merged company The determination of an appropriate rate of return is a complex and subjective task that should take into account • the acquirer’ cost of capital, • the nature of the target company’s operations, • the industry in which it competes, and • prevailing economic conditions. Most corporate acquirers have target ‘hurdle’ rates of return that are used when assessing the value and price of acquisition candidates. These hurdle rates sometimes are adjusted (decreased or increased) to reflect such things as the buyer’s perceived risk and the perceived ‘strategic importance’ of the acquisition REQUIRED RATE OF RETURN The rate of return chosen by a corporate acquirer should reflect the risk that prospective discretionary cash flows will fall short of forecast. Accordingly, all things equal, the more optimistic the prospective financial results, the greater the level of risk in achieving those results, and the higher the required rate of return. However, the Acquirer, should consider the following factors when developing rates of return for the purpose of corporate acquisitions: (i) prevailing risk free rates; (ii) an equity risk premium; (iii) liquidity risk; (iv) company-specific risk; and (v) debt capacity. REQUIRED RATE OF RETURN (i) prevailing risk free rates; (ii) an equity risk premium; (iii) liquidity risk; (iv) company-specific risk whether its product and service offerings have a differential advantage, or alternatively whether the company must compete primarily on the basis of price; the degree of customer concentration and repeat business; the breadth, depth and commitment of the management team; whether historical operating results have been relatively stable or volatile; and industry-specific risk factors such as the competitive landscape, regulations, and major trends.
(i) debt capacity.
the level and stability of cash flows, which are required to service interest and principal repayments; and the quantum and nature of assets that can be used as security. Demergers • A de-merger is a corporate restructuring in which a business is broken into components, either to operate on their own, or to be sold or to be liquidated as a divestiture. A de-merger (or "demerger") allows a large company, such as a conglomerate, to split off its various brands or business units to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's coreproduct line, or to create separate legal entities to handle different operations SPINOFFS • In a spinoff, an undertaking or a division of a company is spun off into an independent company After the spinoff, the parent company and spun off company are separate corporate entities. • Eg. IT division of WIPRO Ltd was spun off as a separate co. in late 80s. Split up • A company is split up into 2 or more independent companies. Parent company disappears and in its place 2 separate companies emerge. • Eg.Ahmedabad Advance Mills was split up into 2 separate companies ie.New Ahmedabad Advance Mills and Tata Metal Strips. RATIONALE • Sharper focus • Improved incentives and accountabiity • Division of business empire TAX ASPECTS The demerger, to be entitled for tax concessions, must fulfill the following- • Properties and liabilities of the undertaking being transferred by demerged co should become the property of resulting co. • Properties and liabilities of the undertaking being transferred by demerged co are transferred at values in books immediately before the demerger. • The shareholders holding not less than ¾ in value of shares in the demerged company become shareholders of the resulting company