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.The ratio of the number of shares currently held to the number of shares to be received from the buyer is called the exchange ratio.For example, when Hewlett-Packard agreed to buy Compaq in September 2001, each Compaq shareholder was given 0.63 Hewlett-Packard share for each share of Compaq that he or she currently held.The value of a Hewlett-Packard share was determined to be higher than that of a Compaq share, so Compaq shareholders received only a frac-tion (63 percent) of a share of Hewlett-Packard for each Compaq share.The stock method is relatively straightforward and easy for investors to understand.The purchase price is tied to something they recognize—their own stock value.It is also easy to determine the relative values of each party to the transaction.One potential issue arises in situations where there is a long time between announcing a deal and the ultimate closing of the deal.This delay can result from contract negotiations, remaining due diligence items, antitrust scrutiny, or a waiting period for regulatory approval.The problem arises when the relative value of theFinal Bid Strategies/Structuring the Deal 109firms’ shares changes between announcement and closing.If a fixed exchange ratio is agreed to up front and the relative values change, the deal could be unfair to one of the parties.Most contracts will include an adjustment clause to account for changes in these relative values.If the trading values of the two companies stay within a specified band, the exchange ratio agreed to up front will remain in effect.If the values trade outside this band, an adjustment mechanism comes into play.This mechanism can be anything from a simple restatement of the exchange ratio to a full reopening of the negotiations around the deal.Determining Purchase Price—Asset MethodAnother type of purchase price calculation can be tied to the balance sheet value of the target company.Exhibit 8-1 provides data on the purchase of Jean Inc.by Grey Industries.The steps in determining purchase price under a balance sheet method include the following: 1.Obtain the target’s balance sheet.The target needs to generate a balance sheet at the date of the due diligence or the announcement of the deal.This may be somewhat difficult for the target because M&A announcements and closings rarely coincide with the end of an accounting period.The target’s finance staff must often estimate assets and liabilities as of this artificial interim period rather than at the normal closing at the end of a quarter or a year.2.Calculate net investment.Calculate the total asset value of the target less its nondebt liabilities.This is referred to as the “net investment” of the target, or the real value being purchased.Note that it is assumed that the target’s debt will be either assumed as is or paid off by the buyer at the closing, so that the seller has no remaining obligation.In the case of Jean Inc., the net investment equaled $2.1 billion on the date the agreement was announced.3.Negotiate the premium.Most sellers will want a premium (i.e., a gain) if they are to sell the company.In this case, Jean and Grey negotiated a $600 million premium, or 29 percent over Jean’s book value, to close the deal.Premiums will generally depend on the quality of theproperty being sold, the number of bidders interested, and the overall desirability of the target.110CHAPTER 8E X H I B I T 8-1Grey Industries Buys Jean Inc.—Purchase Price Calculation (in millions)Jean Balance SheetNov.15Dec.31Purchase Price CalculationCash$100$150Nov.15Dec.31Accounts Receivable1,100700Net Investment$2,100$670Inventory500100Fixed Premium600600Fixed Assets700100Total Price$2,700$1,270Other100120Total Assets$2,500$1,170Premium %29%90%LiabilitiesAccounts Payable$300$200Accrued Liabilities100300Net Investment$2,100$6704.Calculate the purchase price.The total purchase price equals the net investment of $2.1 billion plus a premium of $600 million, for a total price of $2.7 billion.5.Adjust at time of closing.A contract provision is necessary to adjust for potential changes in value betweenwhen a deal is awarded and when it closes.For example, Jean’s net value at November 15 was $2.1 billion.However, because of a reduction in accounts receivable, inventory, and fixed assets and higher liabilities, net investment had declined to $670 million by December 31.The balance sheet method automatically adjusts the purchase price for this change in value.The new purchase price at closing (December 31) is $670 million of netinvestment plus a $600 million premium, or $1,270 mil-lion, making it a fairer deal for the buyer than the original price of $2.2 billion given the change in asset balances.As with the stock method, there is normally a band indicating how much the target value can change without a complete renegotiation of the purchase price being necessary.As noted previously, the purchase price for Jean was automatically adjusted to reflect the change in the value of the company from signing to closing.However, such a dramatic change in value can also change the per-Final Bid Strategies/Structuring the Deal 111centage premium paid.At November 15, the buyer’s premium was $600/$2,100, or 29 percent.Because of the decrease in Jean’s value, this percentage had increased to 90 percent ($600/$670) by December 31.Therefore, although the formula technically works, the buyer’s premium has gone up substantially on a percentage basis [ Pobierz całość w formacie PDF ]