Question

do you agree with below statement ? why or why not ?give example .write 250-300 words.

The pricing of the M&A depends basically on the benefit emerging in the deal and cost which should be less then the anticipated earning. Pricing strategy should be the price level that makes sense of the business which takes account with the expense of integrating the acquisition with the operation and expected benefit. The essential component for pricing strategy is calculations of the initials price of the merger and adjustment of new information which is available during negotiations. Pricing is most importantly depends on enterprise value to cash earning, equity value as the debt and any excess cash in the business are necessary adjustments to arrive at the value of what the owner actually "owns" in the busness and finally adjustment which depends the valuation or deal structure adjustments. Excellent merger and acquisition deals can expand business, move into new business with new market segments or improve output with the involvement of different parties directly or indirectly involved like administrator, lawyer and investment banker. A company can do the payment by exchanging stocks, debt acquisition, paying cash, initial public offering, issuance of bonds, loans.Exchanging stock in merger and acquisition happens when the company has plentiful stock and a healthy balance sheet. As by exchanging share both the companies could share the risk but the buyer get befitted if the stock is overvalued. The stock deals offer the acquired company 's shareholders gain the profit from potential synergy with beyond the premium.In debt acquisition, when a company absorb large quantity of other's debt, it has greater management capabilities during liquidation. Paying cash is the mirror side of the exchanging stock but does not require the higher qualification of the managements. As paying cash is less dependent because of unstable exchange rate. Initial Public Offering really attractive to the investors as it is showing the long term strategy and desire to expand. Increasing the value of the IPO can increase the existing share price through the merger and acquisition. In Issuance of Bonds, a company may release time-definite with the interest rate and a buyer can be beneficial if they cheaply access the credit. Loans can be costly in merger and acquisition, in funding with debt merger put the interest rate as primary consideration. For my opinion, exchanging stock is much more beneficial then paying cash as it makes the cost high for companies who deals with billions. Many giant companies use stock as currency for buying another company as they do not need to borrow money from outside if they are shortage with money. The risk is divided between the companies and ownership is also secured. It is also sometimes noticed that acquire company ended up owning the negligible part of combined companies. Both cash and stock exchanging is popular among merger and acquisition. We can talk about the most recent acquisition of SoFi who is agreed to buy the Galileo for 1.2 billion. The whole deal going to happen in cash and stock basis as they want to launch a new product.They want to work together as Galileo take care more of the SoFi's competitors. The total deal consisted with $75million cash, $250 million debt and $875 million company stock negotiations.

Answer 1

One of the Best Way to Solve these types of question is to break this question in various part and then try to comment on them Individually.

Part 1: “The pricing of the M&A depends basically on the benefit emerging in the deal and cost which should be less than the anticipated earning. Pricing strategy should be the price level that makes sense of the business which takes account with the expense of integrating the acquisition with the operation and expected benefit. The essential component for pricing strategy is calculations of the initials price of the merger and adjustment of new information which is available during negotiations.”

My Comments: The above-mentioned Points is almost clear during M&A an acquirer will try to Value the Acquiree business (Try to Find a Reasonable Price), one of the fundamental methods to Value other company is to use Discounted Cash Flow Method. Now this Discounted Cash Flow is calculated by adding Non cash expenses to Expected Net Profit after taking into Consideration additional Capital required in fixed asset and Working Capital. Therefore, we can say that Price Paid for Acquisition is calculated after taking into consideration of:

1) Anticipated earning (expected benefit)

2) Anticipated expenses (expense of integrating the acquisition with the operation)

3) Potential Synergy (Will Discussed Later)

4) New information which is available during negotiations (E.g.: Management Change)

Part 2: “Pricing is most importantly depending on enterprise value to cash earning, equity value as the debt and any excess cash in the business are necessary adjustments to arrive at the value of what the owner actually "owns" in the business and finally adjustment which depends the valuation or deal structure adjustments.”

My Comments: I totally agree with above-mentioned Points. As already mentioned first step in M&A is to find out a Reasonable price for Acquisition, for which one of the fundamental methods is to use Discounted Cash Flow Method to Calculate Enterprise Value. This Enterprise Value is to be get Adjusted by Value of Cash and Debt. Market Value of Debt is deducted from Enterprise Value to calculate equity Value of Firm. Cash is divided into two parts Operating and Non-operating cash in this scenario value operating cash is calculated with other operating asset and Non-operating cash is added at later stage.

Part 3: “Excellent merger and acquisition deals can expand business, move into new business with new market segments or improve output with the involvement of different parties directly or indirectly involved like administrator, lawyer and investment banker.”

My Comments: I totally agree with above-mentioned Points. One of the main reasons for M&A is to Generate some Synergy with involvement of different parties directly or indirectly involved like administrator, lawyer and investment banker.

Some of the basic Sources of Synergy

1) Revenue Enhancement:

Marketing Gains

Strategic Benefits

Market or Monopoly Power

2) Cost Reduction:

Economy of Scale

Economies of Vertical Integration

Technology Transfer

Complementary Resources

Elimination of Inefficient Management

3) Tax Reduction

Part 4: A company can do the payment by exchanging stocks, debt acquisition, paying cash, initial public offering, issuance of bonds, loans.

1) Exchanging stock in merger and acquisition happens when the company has plentiful stock and a healthy balance sheet. As by exchanging share both the companies could share the risk but the buyer gets befitted if the stock is overvalued. The stock deals offer the acquired company’s shareholders gain the profit from potential synergy with beyond the premium.

My Comments: I agree with above statement buyer will get benefit if its share is overvalued, I mean you just have to pay less value for the seller asset. And on the other hand, the value of new company will increase after synergy which will increase its share price; hence seller is also benefited from stock Exchange.

2) In debt acquisition, when a company absorb large quantity of other's debt, it has greater management capabilities during liquidation. In Issuance of Bonds, a company may release time-definite with the interest rate and a buyer can be beneficial if they cheaply access the credit. Loans can be costly in merger and acquisition, in funding with debt merger put the interest rate as primary consideration.

My Comments: I agree with above statement this are following consequences from M&A

Part 5: For my opinion, exchanging stock is much more beneficial then paying cash as it makes the cost high for companies who deals with billions. Many giant companies use stock as currency for buying another company as they do not need to borrow money from outside if they are shortage with money. The risk is divided between the companies and ownership is also secured. It is also sometimes noticed that acquire company ended up owning the negligible part of combined companies. Both cash and stock exchanging are popular among merger and acquisition. We can talk about the most recent acquisition of SoFi who is agreed to buy the Galileo for 1.2 billion. The whole deal going to happen in cash and stock basis as they want to launch a new product. They want to work together as Galileo take care more of the SoFi's competitors. The total deal consisted with $75million cash, $250 million debt and $875 million company stock negotiations.

My Comments: It is not that true you cannot just comment on the fact that this is beneficial. It’s depended on situation to situation. Generally stock deal is beneficial reason is already stated that risk is divided between the companies and ownership is also secured. However it is true that cash and stock are the best way for payment in M&A deal.

Note: I try to Cover each and every aspects of the question. Since, the question is Essay Type you have to fill the gaps by some theory. I am unable to express my views on SoFi's deals, but you link any of the above point on that deal.

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