M&a Practice QuestionsPRACTICE QUESTIONS1. Suppose Microsoft wants to acquire ExxonMobil and thinks that Newco’s DCF value will be $550 billion. (Currently, Microsoft and ExxonMobil’s market capitalizations are at $278 billion and $256 billion, respectively.) Suppose ExxonMobil thinks, however, that because the two companies’ businesses are so unrelated, Newco will suffer a diversification discount, and will have a DCF value of only $500 billion- even less than the sum of the two companies’ current market capitalizations.Additional Information: Microsoft is currently trading at $25.96, and Exxon Mobil, at $38.31 per share. Shares Outstanding are 10.7 bn and 6.8 bn for Microsoft and Exxon, respectively. What is the minimum DCF value for Newco that Microsoft must convince Exxon is possible in order for there to be a possibility for a win-win deal (where zone of possible agreement exists)?2. Two companies are in merger negotiations. The buyer’s and target’s shares are currently trading at $35 and $20, respectively. The buyer is projected to earn $200 million, and the target, $150 million. No synergies are expected from the deal. Each party has 80 million shares outstanding.Calculate the maximum and minimum exchange ratios for DCF values ranging from $3 billion to $7 billion and graph your results. If the projected stand-alone DCF value is $5 billion, can a deal be feasible?3a. On June 6, 2003, Oracle Corporation, a provider of software solutions, announced a hostile tender offer for PeopleSoft, a company specializing in software solutions for business. PeopleSoft’s stock was trading at $15.11; Oracle offered to pay $16.00 per share. Oracle’s own stock was trading at $13.36 a share. What is the exchange ratio implied in this offer?
3b. On June 16, 2003, Oracle raised its bid for PeopleSoft to $19.50 a share. What is the exchange ratio implied in this offer?Some data about the two companies follows:Data for fiscal year 2002 % contribution(In millions)OraclePeopleSoftOraclePeopleSoftRevenues 9,673 1,949 83.2%16.8%Operating expense 6,102 1,696 78.2%21.8%Operating income 3,571 253 93.4%6.6%Net income 2,224 183 92.4%7.6%Operating margin36.9%13.0%Net margin23.0%9.4%Total assets 10,800 2,849 79.1%20.9%Total shareholders’ equity 6,117 1,956 75.8%24.2%Outstanding shares 5,518 311 Market capitalization on May 15, 2003 71,237 5,038 93.4%6.6%3c. Use contribution analysis to evaluate the eventual exchange ratio offered, assuming the contributions are based on each company’s – a. Net income, b. Total Assets, c. Book value of Equity.
6. In conclusion, on April 30, 2003, Oracle’s total net income for fiscal year 2002 for the Company for which it has exercised any control was $724,571,049, up from $812,000,000 or $740,000,000 for the previous financial year. However, according to Oracle’s data in the third quarter of 2001, its Net income rose to $729,573,099 in its fiscal year end in 2001. The net income for the Company during that year was $12,750,000, up from $12,150,000 of which came from a net income of $9,400,000. The following comparison is between the three year financial information as a percentage of total revenue and operating profit and net profit for the three year financial information. Since there is no actual growth in revenue from the Company’s activities and growth in profit, the increase in net profit is indicative of the larger increase in net income for the Company’s three year reporting period. In the financial year ended March 20, 2003, there was no growth in revenues per head on the underlying underlying basis; sales per second were 5,000. In contrast, there was a 2% loss in revenue per head, one of which was compounded to a 3% rise at April 30, 2003. This data shows that the Company’s profit was approximately $1.2 trillion. Therefore, at this moment, the Company believes the performance will likely decline over the next four to seven years. Oracle is making significant progress in preparing Oracle’s corporate website and providing service and customer service for Oracle customers. For instance, following a two year strategy, Oracle recently launched a new service that is available on their website. The new service includes new revenue reporting tools to assess the Company’s status in the business of providing Oracle service to its customers. By analyzing the overall data and improving the overall presentation of our information, the Company concludes that Oracle is currently in a position to provide service to its customers, improve business decision making and increase revenues in the future.