LO1 Display and apply extensive detailed knowledge of capital markets, long term finance and understand the concept and implications of market efficiency
LO2 Analyse financial and non-financial information and apply to business valuations decision making relating to mergers and takeovers
LO3 Critically review the validity of arguments in support of theoretical models such as the capital asset pricing model and investigate contradictory evidence.
Lessons to be learnt
(my compliments if you did not understand anything from LOs above)
– Market Efficiency, how it works
– Mergers and Acquisitions how it happens in the real life
– The role of financial intermediation
– Valuations and what is right for acquisitions
– Ethical behaviour
– Academic and business writing
– PR Strategy and dealing with sensitive insider information
Corporate Finance Assignment – The Game
- This is an assignment based on a game. The entire class is playing one single game. You can choose to work either in a group or individually.
- The essence of the game is that all groups and individuals operate in one single market. We do not know if it is efficient or not. Some participants sell their company, others buy/invest into a company. Also, there are some advisors who operate in the market trying to bring together the buyers and sellers and charge a fee for that service.
- For sake of simplicity we should assume that all companies that are sold have exactly the same information publically available to all market participants and that information is exactly the same. I shall give you the information below.
- Buyers are not defined and if you choose to be a buyer you can decide yourself what type of buyer you are. You might be a strategic buyer looking for some synergies arising from forward or backward integration or increase of market share to name a few possibilities. Alternatively, you might be bargain hunting as a financial investor or a conglomerate. You are welcome to decide a name to your group and use it throughout the game.
- Depending on the number of students in a group the group can take up one of the following roles:
- Management team selling the company ( 2-3 people)
- Investors/buyers ( 3-4 people)
- Advisory Service Provider/ Intermediary ( 1-2 people)
- The company for Sale has the following details:
- Expected annual Earnings £11.5m
- EPS 115p
- Share price currently trading at £15.5
- Number of shares issued 10m shares
- Industry average P/E ratio 13.47
- Strategic buyers can realise an annual synergy of £1m
- In case of horizontal merger there is a possibility to sell duplicate assets and
generate additional cash of £5m one off.
- Discount rate 10%
- You may ask me a question to clarify information. It is up to me to provide you
the requested information or reject the request. So, it is better to justify your request when approaching me. Also, I reserve the right to announce the answer to your question publically (on the discussion board) to make sure the game is fair.
Corporate Finance AC60051E
- The entire class is a market place. You decide your role as a buyer, seller or intermediary.
- The aim of the buyer is to pay as little as possible
- The aim of the seller is to obtain the maximum possible price
- The intermediaries try to speak to everyone and close as many deals as possible. They earn a commission of 1-7% of the transaction value. Fees are negotiable.
A discussion item on the discussion board of Blackboard will be set up for this assignment. All participants can make announcements or simply enter into public discussions. Please note that everyone can see the board. So, you should post only information that will not harm your transaction. Entries on the discussion board may be used in the marking. They may increase or reduce the mark. So is the absence of any communication.
One student will randomly be contacted and only one company that is sold will have slightly different information. This will be anonymous. It could be any information. If your group has not been contacted you need to figure out the true information of the participants.
Please note that no one is obliged to disclose any information unless asked to do so. However, deliberately lying will result in penalty of 10% of the mark for unethical behaviour and misleading actions.
Corporate Finance AC60051E What is required:
- Negotiate and agree a deal
You have one week from the release of this assignment to negotiate a deal. After that you need to send official announcement on the discussion board stating the two (or three or four, if one or two intermediaries were involved) parties closing the deal with the price and other details. After that the results of the game will be finalised and you can write and submit the report. It is strongly advised to make calculations before negotiating the deal. And please do not forget there is one company out there with a different information. Ask questions!
- Write a report
Please include the following in your report: Part 1 (10 +/-10 marks) max 400 words
Names and SIs of the students in the team. The name of your group. If you are a buyer, seller or intermediary
Justification for choosing this role: you can write a market analysis or describe the internal dynamics of the team.
Offers received or made with the names of the groups. This will be cross checked. So please report everything to enable your classmates achieve highest grades as you are validating their information.
Financial results will be compared at the end of the game. The top quarter of the students will receive 10 bonus marks and the bottom quarter will get 10 marks reduced. There will be three tables for each category (buyers, sellers and intermediaries).
Part 2 ( 50 marks) max 1000 words Your final outcome. Justification.
Calculations and explanations. You can use any or all valuation methods we discussed. Please justify why you used any specific method and comment on the results.
Part 3 (30 marks) Max 500 words
According to the academic evidence do you expect synergies to materialise? Please bring arguments in favour and against. Any concluding comments regarding your outcome versus academic knowledge
Please use academic references to build your argument.
Corporate Finance AC60051E Submission
Assignment 1 must be submitted only by one person in the group. The cover sheet must contain the name of the Group as played in the game and the Student IDs of all members of the group. Failure to mention clearly any student ID may result in ‘no submission’ if there is no other way to identify the student concerned.
The deals must be completed by 26 October, 2017. And a Blackboard Announcement in Game Discussion Section should be made by midnight of 26 October, 2017,
Completed assignments must be submitted via Turnitin by 3pm, 07 November 2017.
This assignment counts for 40% of the total mark available for the module.
Part 2 and 3 Assessment criteria
To obtain a good mark your assignment will need to set your discussion in a theoretical context and to demonstrate:
- a wide range of reading and research
- an understanding of differing views and opinions
- logical and relevant argument
Presentation and referencing 20%
- appropriate presentation and clarity of writing
- correct referencing
Corporate Finance AC60051E
Your groupwork report should be up to 2000 words in total (high marks will depend on quality, not length). Marks may be lost for exceeding the limit as excessive material may not be marked.
When referring to material from books and articles, or when quoting directly, clear references must be made. Copying sentences and paragraphs from books, articles or any other source without identifying that source is plagiarism and subject to the sanctions set out in the university’s policy on plagiarism. The text in your report other than that from clearly referenced sources must be your own “self -generated” words.
Reports must be word-processed
NB An electronic copy of each assignment must be submitted through Blackboard for plagiarism checking. Be warned that the software checks assignments against other assignments as well as articles and internet sources so your assignment must not be too similar to other students’ assignments as well as not being too closely extracted from articles and on-line sources.
Important tip: You can submit drafts through Blackboard from 2 weeks before the due date and view the “originality report” which will indicate the similarity your assignment has with other sources.
(This report normally takes an hour or two to be generated and sometimes longer so you should plan to return at a later time or the next day and not expect instant feedback)
If the report indicates your draft is not sufficiently original you can redraft it and resubmit it and view the revised report. You can if necessary repeat this process as many times as you like up until the due date. You cannot submit through Blackboard after the due date.
Warning: If you submit through Blackboard at the last minute e.g. on the due date, and the originality report indicates a high degree of similarity with other sources you will have no opportunity to revise it. Obtaining a last minute originality report which indicates your assignment may be too similar to other sources will not be accepted as a reason for an extension or late submission. Where an electronic draft has been submitted on or shortly before the due date and no final paper version has been submitted on time the last submitted electronic version may be taken as your final submission and where appropriate put through the University’s plagiarism procedures.
Corporate Finance AC60051E General assessment criteria that apply across all modules
of the course follow below
The following grading criteria are used to grade assignments on the BA Accounting assignments to ensure consistency across modules.
Grade Extent of achievement of criteria
Band (to be interpreted against level requirements)
Very poor or no knowledge or understanding demonstrated
Unable to analyse data or meaningless analysis performed
No ability to organise data
Cannot evaluate data or evidence. Unable to identify relevance or significance. Unable to identify problem
Very poor communicating in any format
Poor understanding of basic concepts and terminology
Almost totally unconvincing analysis or of very little relevance
Handles information in a totally confusing manner
Unreasoned and frequently incorrect evaluation of evidence. Wrong techniques used.
Identifies problem but no meaningful method applied to solve Communicates poorly in all formats
Unsatisfactory understanding of basic concepts and terminology
Unclear analysis. Some relevance but not very meaningful.
Some ability to collect and present data but no ability to use purposefully
Poor reasoning and often faulty, evaluation of evidence. Failure to identify the relative significance of arguments. Some randomness in techniques used.
Methods selected are inappropriate or wrongly applied to problem Unsatisfactory communication in any format
Corporate Finance AC60051E
Limited understanding of basic concepts and terminology
Some relevant and meaningful analysis but inconsistent and incomplete
Can present data and information but limited ability to use purposefully
Appropriate techniques used but inadequate reasoning and identification of significance
Problem identified but limited ability to select and apply methods for its solution
May communicate reasonably clearly in one format but limited communication skills in other required formats
Adequate understanding of basic concepts and terminology
Analysis is sufficiently clear and meaningful and mostly relevant
Can organise data and information in a manner which enables adequate (purposeful -level 1 creative –levels 2&3) use
Appropriate techniques used and acceptable reasoning behind evaluation of evidence
Able to identify and solve straightforward problems at a given level. Acceptable communication in all required formats
Good understanding of basic concepts and terminology
Clear, meaningful and relevant analysis using appropriate methods
Clear ability to organise and make (purposeful -level 1 creative –levels 2&3) use of data and information.
Selects appropriate methods and gives clearly reasoned evaluation of evidence. Can choose and apply appropriate methods to solve standard problems
Clear communication in a variety of formats
Very good understanding of basic concepts and terminology
Analysis shows insight and is always relevant using most appropriate methods
Ability to (categorise -level 1 reformat –level 2 transform –level 3) ideas and information towards a given purpose in a very clear and (useful-level 1) creative manner
Uses most appropriate methods and evaluates in a logical and critical manner. Can identify and define a problem and solve using most appropriate method.
Corporate Finance AC60051E
Effective communication in a variety of formats
Excellent understanding of basic concepts and terminology
Chooses and handles analytic tools excellently to provide very clear insight
Ability to (categorise -level 1 reformat –level 2 transform –level 3) ideas and information towards a given purpose in a strongly (useful-level 1) creative way
Excellent use of evaluative tools. Highly logical reasoning and criticism. Confidently solves complex problems
Can communicate and report at the level of a professional
Outstanding understanding of basic concepts and terminology
Able to select most appropriate of any required method and produce superb analysis
Ability to (categorise -level 1 reformat –level 2 transform –level 3) ideas and information towards a given purpose with outstanding (usefulness –level 1) creativity
Selects most appropriate tools and can critically evaluate contradictory arguments in a highly reasoned way.
Defines complex problem and selects most appropriate method for solution. Very effective communication in appropriate formats at a professional level
Near perfect understanding of basic concepts and terminology
Always selects most appropriate method to produce superbly clear and insightful analysis
Ability to (categorise -level 1 reformat –level 2 transform –level 3) ideas and information towards a given purpose with superb (usefulness –level 1) creativity
Always selects most appropriate tools and can critically evaluate contradictory arguments in a highly reasoned and impartial way
Always able to solve complex problems in most appropriate way. Superb communication skills always in most appropriate format
Concept and Implications of market efficiency
Merger and takeover can be defined as the term in which one company buys the other company for some valid consideration. For the merger or takeover process, there is need of at least three parties to be present here- the seller company, the buyer company and the intermediary. The buyer company is one which wants to buy the other company at minimum possible price. The seller may want to sell at maximum price. The third party, called intermediary, wants to take the maximum commission from both the seller and buyer.
Role of my company
In this game, I am playing the role of an intermediary. The benefit of being an intermediary is that there will be no loss on selling or buying process of the companies. The work of an intermediary is just to attract both the buyer and seller for the business. The commission received will be a fixed percentage on the selling price. The name of company I formed for the selling and buying companies is Adisons business sales limited. The role I m playing through intermediary is of broker business.
There are various types of takeover that can be divided into three parts, horizontal takeover, conglomerate takeover and vertical takeover. The company we are selling is the type of horizontal takeover. In the horizontal takeover, the two companies operate in the same industry and at similar stage of production. The benefit for the merger of two companies is that it becomes beneficial for the shareholders to take better returns on their investments. The justification for the takeover or merger is that shareholders wealth will increase.
The benefit for the horizontal acquisition is that it increases the market share. It helps to increase the monopoly profits of the company. The financial benefits for the justifications are that it becomes financially benefited for the investors. If the company is tax exhausted, then it becomes beneficial for that company to accept the merger option. Merger affects the capital market in the way that it becomes a decision point for the shareholders to invest in new merger company or take their values back and invest in another company. The main aim for companies going for merger and acquisition is to make a growth of the companies by investing in a single company. The shareholders of both the companies can enjoy the benefit of merger by taking the better return on investment. It is important to calculate the correct value of merger for calculating the correct profit.
Merger requires taking all the assets and liabilities of the company. The liabilities of the merging company are also the liabilities of the other company. The value at which the company is merging is the market value of the business (Jim Milliot, 2014). The merger and acquisition happens in real life in a little complicated process. Financial intermediation also helps the buyers by financial help. They charge their financing charges by providing the funds to the buyers.
The companies also go for the merger process when a similar company is not going so good but its existence affected the company’s growth. In this situation, the companies may deal with each other and merge the companies to gain the profit in the industry (Andrew J, Sherman, 2011). The company going through the minimum profit will be taken by the company achieving the high profit.
In the process of merging, there are various things that companies have to identify. There is need to identify the target company, identify the information about the targeted companies is also important. By using this information, the companies are able to understand the maximum purchase price in the market. It is difficult for the organizations to find so much information. Intermediaries help to find this information for the buying company. The buying or selling company does not need to go themselves to find out the company that will be beneficial for them (Stanley Foster Read, 2007). The intermediaries can find the information on the behalf of the companies. They decide the best way on which the companies can accept the target company. The intermediaries launch the bidding process for the company. The bid will be continued till the selling company gets satisfied.
Role of Financial Intermediation
Financial institutions also play role in the merger and acquisition process. My company is also a financial intermediary. We help the sellers and buyer in many aspects like advising on bid value and organizing the defence tactics. We charge the advertising fee for the selling and buying from the companies. There are too many valuation methods which we can use to merge the company. These methods include stock valuation method, asset based valuation method and income based valuation method (Jeffery A Krug, 2008). These methods can further be divided into more types. Stock market value method is defined as the number of issued shares to be divided by their market price. It reflects the minimum purchase price of a company. It is the useful method for the buying company.
As per the stock valuation method, the market value for the company can be calculated as follows:
= Number of market share * market value of shares
= 10m* 15.5 = 155£
The market value calculated is £155m.
The other method for calculating the market value of the company is capitalized earning value. This method requires finding the required earning yield of the company. This capitalization method used to reflect the factors such as size of the company and the industry in which the company operates.
Required Earning Yield = EPS/share price or reciprocal of price earnings ratio
= (1/13.47)*100= 7.4%
Capitalized earning value = Annual earning/required earning yields
= 11.5/7.4% = 155
On calculating the value using the above factors, the value that will be useful for the merger is after the additional cash flow and synergy treatment.
The value that we calculated is without using the discount factors in the calculation. There is also the point where strategic buyers can get the benefit of annual synergy of £1. On the sale of duplicate asset, there would be profit of generating £ 5m. If we use this in the market value will come at the 155+5-1= 159£. The value is less than the buyers are expecting to buy the company.
The value is not appropriate as per the seller point of view. There should be a value that will be greater than this value .Buyers are agree to buy at 180£ and sellers are agree at 210£, we must find the value that will be appropriate for all. The value must be calculated as per the method that is best using method.
The company receives offers from 5 sellers and 7 buyers in the industry. The buyers want to buy any company at minimum price. After looking at the buyer’s views, I have advertised for sale a business for 180 million. But the seller’s value is 210 million. So it is advisable to calculate a value that would be beneficial to all the buyers and sellers. The main aim is to provide the best intermediate facilities and charging the companies for the best commission price. The bid we have decided to make is going to be a large one.
Price/earnings ratio Valuation
This method clears about the valuation of company’s data using Target Company’s distributable earning. It is the most common method for calculating the measure for the value of the stock. This is the combined calculation of two factors of market value per share and earnings per share. Price earnings ratio depends upon the economic and financing condition of the market. It shows the direct relationship of the market price of the shares of the company. This ratio is the best method for the investment valuation. Shareholders after reviewing the new company’s price earnings ratio (Patrick, 2011).
The best method of calculating the value of merging value is stock valuation method. It increases the efficiency of the value based on stock. The buyer company will be interested in the stock value of the other company. The reason for calculating the value as per the stock valuation method is that it can clarify the value of shares. This method clears about the value of the number of share with the number of share. It explains the value of shares available in the new merged company (Timothy J. Galpin, 2007).
As being in the position of an intermediary, the motive for the calculation of all the factors is that it contributed to the value of the selling and buying process. The intermediary must calculated the value for the benefit for both of the companies that are buying and selling. Sellers may calculate only the values that are valuable from the point of view of the seller. They may want to take the value that will be highly possible (Kavita Shetty, 2011). The intermediary is the party which helps to take the effective and sufficient value from the buyer. The values calculated should be as per the proper formula and procedure. the intermediaries advised the company about the time for selling the company when there is enough demand for the companies in the industry (Edwin L, 2007).
In the evaluation of the report we may discuss the models such as capital asset pricing model. Capital asset pricing model describes the understanding of risks on an investment made by the investors. It uses the risk free rate and return on the market value. Return on market can be described as the value calculated by analyzing the value of risk the company have. Some companies have less risk and some charges high risk. The concept applied to the risk includes securities (Carry Cooper, 2016). In the capital asset pricing model, beta is the factor which evaluates the risk of the investment. The more the beta is, the less risk there would be in the industry. Risk free rate refers to the rate which includes the rate that is assumed to have no risk. This method clears about the price that an organization should take for the merger process. Because I am on the intermediary process, I will take the value that would be beneficial for the buyer as well as seller. In my company, the main motive is to attract the buyers and sellers towards the company. Best values can attract both the buyers as well as the sellers (Stephen, 2012).
The materialization of synergies is the great concept in finding the value of the merger. These are helpful for taking the decision for buying any company. Synergies can be determined as the process of growth opportunities, cost saving and other financial benefits. The estimation of synergies is the point of success in the organization (Ray K G, 2010). The negative value of synergies refers to the point that the companies should not be merged. The gain in the value of combined entity can be present value of the synergy cash flows. Synergies are the material factor in the process of merger (William J. Gole, 2008). There can be two types of strategies in the cash flow. These can be described as revenue synergy and cost synergy. Revenue synergies tend to be more attractive and speculative than the cost synergies.
The above methods of valuation of the merger value for the companies are calculated to the best of it can. The values of the above mentioned methods are the basis for the payment of the intermediary commission (James Scott, 2015). The commission received is 5% of the value on which the company is selling. When the company is sold, the first point to be considered for the payment is the commission of shareholder’s value.
The work of my company is to find a better buyer for the selling company. We will find the buyer at the value calculated as the above procedure. After finding the value of the company we are selling, the advertisement we make to the buyers will attract them toward the company. There are buyers who want to buy the company at maximum value of 180m. We can negotiate to them by attracting them towards the company they are buying. In this way, the companies may buy or sell the company at the adequate price.
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