CHN Incorporated is evaluating the purchase of Hope Enterprises. The company could enhance its position in the mid-market gaming casino hotel business with the acquisition of Hope Enterprises. Hope Enterprises is considered a prime acquisition because of its strategic location, customer segment, booming market .The overall gaming casino business is predicted to boom in the coming year, with revenues increasing by 15%. However, CHN has to evaluate the synergies with Hope enterprises and decide on whether to make the acquisition. The management believed that the acquisition of Hope Enterprises by CHN could improve CHN’s margins through economies of scale, reduce cost and promote a sales growth accelerated to 12% over the next 5 years. 1. Is Hope Enterprise a good strategic fit for CHN?
Hope Enterprises is a good strategic fit for CHN because CHN can improve economies of scale by reducing the per unit level of fixed expenses through expansion of sales volume and/or elimination of duplicate facilities and staff. The time was ripe for consolidation and three of the industry’s major players were aggressively on the hunt for acquisitions. Hope controls two casinos in Atlantic City and one in Las Vegas. It is considered a prime acquisition target because of the strategic location of its holdings and the kind of customers it attracts. Hope also has low volatility of earnings in comparison to many other competitors – it will help CHN to diversify risks. Also the current share price at $15 was undervalued.
2. What approaches would you use to place a value on Hope?
The merger should take place only if the expected market value of CHN and Hope combined exceeds the sum of their market values as individual entities. CHN can conduct the acquisition of Hope either through a cash purchase or through an exchange of stock. V (combined firm) = V (CHN) + V(Hope)+ V(additional value created by the merger)
We think that it is...