Marco Garibaldi was a computer hacker and began to develop computer programs in the basement of his parents’ home. His first software program named as “WordPro” aroused great interest among the academic and the business communities. That was the story behind the establishment of “CompuTech Industries” in 1983. The company went to public in 1990 for the first time. By the end of 1995, CompuTech’s stock price was $25 per share and its outstanding shares were 10,000,000.
CompuTech has developed a solid reputation especially for reliability and timely introduction of new products. Besides, it supplies a toll-free telephone service in order to identify and correct program bugs. Its products are perceived as innovative, easy to use and relatively free from errors. However, diversity of the products offered by the company is limited. CompuTech is expert on just one type of software: word processing and presentation programming. On the other hand, trends in the market are changing so fast, office packages that combine multiple programs and spreadsheets are so popular. Garibaldi thinks that CompuTech should combine its force with another software company, which specializes in accounting, finance and tax return software programs.
Computer Concepts Inc. (CCI) is considered as a potential candidate for the acquisition. CCI went public in 1993 and now it has 2.5 million shares sold with price of $1.25 per share. Management owns 30% of the company. Garibaldi doesn’t know whether management will be willing for merger or not. Yet, he is quite sure that CCI’s managers didn’t have discussions with anyone else about a merger. That’s a good point for CompuTech.
Whether CompuTech should make an offer and if so should it be friendly deal or hostile takeover will be analysed in this paper. Besides from these, there will be suggestions about the value of an offer and how they should make a payment. To sum up, M&A from all dimensions is the main concern of this report.
Rationale for Mergers and Acquisition
In today’s competitive world, companies should seek different alternatives for maximizing firm value. One of them is Mergers & Acquisitions (M&A) and there are basically five rationales claimed by proponents of mergers.
First of all, tax consideration is a motive. When acquirer has accounting profit whereas target firm has negative accounting profit, firms will enjoy tax advantages. Acquirer’s tax liability reduces depending upon the loss incurred by other firm. Thus, tax payment made by the firm with positive net income will be much more less in total. It is especially preferable when corporate tax rates are high.
Second, diversification benefits should be considered. Diversification is absolutely beneficial to employees, customers and managers of firms. From external investors point of view this doesn’t be a concern since they can create a portfolio, indeed easily than firms do, which eliminates unsystematic risk by diversification. Thus companies don’t need to do that internally at all. But the point is that diversification (especially from different industries) will reduce the variability on EBIT. Firm can get advantage of low cost of capital and debt. Decreased risk associated with the company reduces discount rate used by the firm as well. Consequently, management will be more confident about future earnings, and this gives them flexibility in financial decisions.
Third one is purchase assets below replacement cost. Purchasing assets is less costly than developing the necessary production capacity by itself as a single firm. Companies consider replacing systems or assets with the ones of acquired firm can purchase these assets below replacement cost. In order to determine whether the purchase of assets is reasonable or not, acquirer firm should implement a cost-benefit analysis for the assets of target firm. If benefits exceed the costs, we can say that merger will provide a...