Mergers

Topics: Free cash flow, Discounted cash flow, Cash flow Pages: 4 (756 words) Published: December 14, 2014
Mergers are referring to the consolidation of two companies. After the merger the two companies became one but acqusition is different than merger because in the acqusition the firm which acquiries the other firm stays solid and the other firm becomes a part of the acquirer. In the mergers the concept which is often used is discounted cash flow method(DCF). This method is for valuation of the companies. There are both some advantages and disadvantages for Discounted Cash Flows. The advantages are the model allows for changes in cash flows in the future, the cash flows and estimated value are based on forecasted fundamentals and the model can adapted for different situations. Just like its advtanges there are also some disadvantages. These are for a fastly growing company, the FCF and net income may be misaligned, because of the uncertainty estimating cash flows will be difficult, as the discount rate are not stable and changing over time, it can be hard to estimate them and estimating the terminal value is difficult too. The cash flow that is most appropriate is the free cash flow (FCF), which is the cash flow after capital expenditures necessary to maintain the company as an ongoing concern. There are different types of mergers. One of them is hostile merger in which the target firm attempts to prevent the merger offer being successful. The other is friendly merger. In this one the boards negotiates and comes up with an offer. There are also horizontal mergers, vertical mergers and conglomerate mergers. In the horizontal mergers, the companies are in the same line of business but they are competitors. Walt Disney bought Lucasfilm two years ago. Vertical mergers are in the same line of production. The example for this one is Google acquiring Motorola Mobility Holdings a year ago. The last one is conglomerate mergers which happen between the companies which are in unrelated business practices. The example for this one is Berkshire Hathaway acquiries Lubrizol....

References: :
1) Wikipedia. (10 April 2014). Mergers and Acquisitions. Available: http://en.wikipedia.org/wiki/Mergers_and_acquisitions. Last accessed 13th April 2014.
2) Investopedia. (2013). Mergers and Acquisitions. Available: http://www.investopedia.com/terms/m/mergersandacquisitions.asp. Last accessed 12th April 2014.
3) Cfa Institute. (2012). Corporate Finance. Available: www.cfainstitute.org/learning/products/publications/corporate_finance_chp10.pptx. Last accessed 13th April 2014.
4) Lien,K. (12 December 2009). An Avenue for Profitable Trades.Available: http://www.investopedia.com/articles/forex/05/ma.asp. Last accessed 13th April 2014.
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