Scribd Logo
Upload

Welcome to Scribd!

  • De Merger

    Uploaded by

    Prashant Sharma
    13 views9 pages
    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.

    Original Description:

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    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.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    13 views9 pages

    De Merger

    Uploaded by

    Prashant Sharma
    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.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    of 9

    UNIT 5

    REQUIRED RATE OF RETURN


    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

    You might also like