e-Nagar

Recently my colleague and I were discussing the impact of the deal structuring on the valuation of the target company (from the eyes of the acquirer and its shareholders). Few of the points discussed here are as follows:
1. Any investment (Greenfield/brown-field/acquisition) should be aimed towards creating the highest NPV for the company. Also if the deal is profitable, then rarely do firms have issues in tapping the capital market. Hence structuring has only a marginal impact.
2. A company which is not excessively levered (manufacturing firms with huge debts) or is a bank with minimum capital requirements should always go for all cash deal rather than a stock deal. This is because of following reasons:
a. If the company has huge stockpiles of cash/cash equivalents, then most likely this money is earning a miniscule LIBOR rate and any wise business investments should beat this return by a huge margin. (low opportunity cost)
b. If the company does not have too much capital, then cash deal will force them to borrow and debt servicing often improves the financial prudence of the target.
c. I believe a bird in hand is better than 2 in the bush. A company should either return the surplus to the shareholders as dividends or it should invest. Otherwise management forgets its fiduciary duties and tends to squander away the money through pvt. Jets.
d. Also it puts a cap on the size of acquisitions and its frequency. Thereby minimizing the risk taken by share holders.
3. Seller financing is very common when a PE or financial firm is selling the asset. This involves the seller to fund the acquisition by loaning part of the proceeds (sometimes working capital/corporate debt to run the firm too). The only question one needs to ask themselves why was the seller in such a hurry to offload the asset that it did not even stop to collect the cheque? Any FCFE computation would look very rosy because of the reduced capital requirements, but one should not under estimate the risks.
4. Unless there is a severe liquidity crunch, share dilution rarely works in the benefit for the existing share holders. Lesser the mouths to feed, the more for me.
5. Not to mention that stock deal means 100% financing through equity. Since equity is more expensive then debt/free cash, unless the stock is over-priced it rarely makes a good business case.
6. Also because of the exit restrictions stock deal don’t have an earnout components (or have smaller mgmt retention bonus). Hence acquirer takes in more risks than the conventional deals.
7. EPS bump: A lot of firms trading at very high PE ratio believe that by acquiring another company trading at a much lower PE ratio, they increase the EPS of their company and hence create share holder wealth. But the challenge remains in convincing the investors that the bigger elephant will continue to grow at the same rate.

A father watched his young daughter make a snowman with her little friend. Smiling, he moved closer and overheard the little boy say, “To finish him, go to the kitchen and get us a carrot.” And his sweet young girl replied, “I’ll get two. We’re gonna need one for his nose, too!”

My wife left this note on the fridge: “It’s not working. I can’t take it anymore. Gone to stay with Mom.”
I opened the fridge, the light came on, and the beer was cold. Not sure what she was talking about!

What’s one way that men and women are alike?
They both need tissues during good movies!

If a bowel movement is a “call of nature,” does that make a fart a “missed call”?

The stock market is like a strapless bra: half of us wonder what holds it up while the other half wait for it to drop so they can grab the opportunity with both hands!

As a child, I actually used to wait for my 6monthly visit to the dentist. Reason: A trip to the ice-cream parlor immediately afterwards was the deal I had made with my parents. Even my dentist used to recommend it, because it was cold which soothes the swollen gums after the treatment and also is loaded with calories so it’s the best substitute for the liquid diet that is recommended after any dental procedure.

20 years ago there were not many ice-cream corporate chains, but still the owners were wise enough to know that it makes sense to open a store right next to the dental clinic. However in Bangalore that’s not the case anymore, I even don’t see any billboard/pamphlet directing me in the right direction. I wonder why? Is it a connection that is unique for me and does not work for the masses or the big marketing analytics team have overlooked the aspect.

I always believe that parents secretly feel guilty for forcing their kids to visit a doctor/dentist. Hence after the visit they are ready to reward the kids with anything!!