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Topics Covered
- Terminology of M&A
- Valuing acquisition targets
- Risks in M&A
- M&A deal stock price performance
- Acquisition of Family Dollar
Talk Citation
McDonald, M. (2015, May 19). Business valuation in M&A: the case of Family Dollar [Video file]. In The Business & Management Collection, Henry Stewart Talks. Retrieved December 14, 2024, from https://doi.org/10.69645/PGYK8541.Export Citation (RIS)
Publication History
Extended-form Case Study
Business valuation in M&A: the case of Family Dollar
Published on May 19, 2015
29 min
Transcript
Please wait while the transcript is being prepared...
0:00
Hello.
My name's Michael McDonald.
This is a case study
for Henry Stewart Talks.
Today study is entitled
Business Valuation
in Mergers and Acquisitions:
the Case of Family Dollar.
0:12
So what are mergers
and acquisitions?
Well, mergers and acquisitions
is just a couple terms
that describe the
process in which one
company acquires another company.
Usually, this is in the realm
of publicly traded companies,
but it doesn't have to be.
For example, sometimes
publicly traded companies
acquire small, or large,
privately held companies.
And sometimes, large privately
held companies will even
acquire publicly traded companies.
There's a few hundred mergers
and acquisitions every year.
The size the U.S. Stock Market
has shrunk in terms of number
of firms from roughly 8,000 firms in
the late 1990s to about 5,000 firms
today.
So much of that
shrinkage in the market
is a result of mergers
and acquisitions.
This implies, then,
that is there's maybe
200 M&A deals per year on average.
As a result it's very important
to understand this topic.
This is very common
for large companies
to have to deal with
this type of issue.
1:19
Now before we get to the valuation
on mergers and acquisitions,
it's important to understand
some of the terminology.
In particular, when one company is
looking to acquire another company,
the buying, or acquiring,
firm is called the suitor
firm, or the acquirer company.
The company that is going
to be bought, or acquired,
is called the target company, or
the acquiree, or the buyout target.
Suitor firms, generally,
are looking for target firms
that are a good fit
with their business,
and which can provide good
value to their shareholders.
After all, a responsible suitor
firm is trying to maximize the value
for their own shareholders.
So they would never do
an acquisition which
is destructive to that valuation.
We'll get to some
ways in which mergers
and acquisitions don't
always work out as intended
later on in the presentation.
But generally, suitor firms are
looking to buy, or takeover, target
firms at the lowest price they can.
Now, the reality is
that in an M&A deal,
there's almost always a
premium on the target firm's
stock price in the buyout deal.
In particular, if a target firm
is trading, at say, $50 a share
on June 1st, and a merger is
announced, on say, June 15th,
the target firm will almost
always be bought in that merger
at a price higher than $50.
In particular, there's
this premium over that $50
price, it is called a buyout premium.
That buyout premium is frequently
anywhere from 10%, so $5 per share,
to 20% or 30%, $10 or $15
a share, even a 40% or 50%
buyout premium is not unheard of.
Sometimes, if word of the merger
leaks before the announcement
of the actual acquisition itself,
some of that buyout premium will be
embedded in the stock price
in advance as investors
start to expect a buyout premium.
So why is a buyout premium
needed in cases like this?
What do you think?
Why would a target company have
a buyout premium on their stock?
And B for that matter, why would
a suitor firm be willing to agree
to pay more on June
15th for the stock,
than the stock was
trading for on June 1st.
Would a target firm ever accept
a buyout at that June 1st price,
at the price its stock
was currently trading at?
And then, for that matter, what do
you think would be likely to happen
to the target firm's stock price
assuming that the acquiring
company did try to buy
them at exactly the price
they were trading for?