Mergers & Acquisitions: The Case of Microsoft and Nokia
Mergers & Acquisitions:
The Case of Microsoft and Nokia
Luís Franco Hilário
Advisor: Peter Tsvetkov
Dissertation submitted in partial fulfillment of requirements for the degrees of MSc in
Business Administration, at the Universidade Católica Portuguesa
SEPTEMBER 2011
1
Abstract
Due to the financial downturn and the emergence of new devices in the global handset market has led companies to change their business strategies. Indeed, Mergers and
Acquisition are considered one of the best strategies to increase shareholder value despite its hardship to be well-implemented. For this reason, a consolidation between
Microsoft and Nokia may create new opportunities to challenge the market. Thereby, the focus of this dissertation will be the calculation of the additional value created by combining both firms bearing in mind the companies’ financial situations. All this considered, Nokia’s average share price during the last year is considered to have a
0.14% upside potential and synergies are estimated around 13% of Nokia’s average market capitalization. As a result, an offer at 19.4% premium over Nokia’s average market capitalization will be suggested with 100% in cash.
2
Acnowledgments
The author would like to thank: Professor Peter Tsvetkov, the Dissertation Advisor, who has provided several thoughtful comments and an immeasurable help throughout the thesis. ; his friends, who provided assistance and feedback by detecting and reporting errors; finally to his family for their forbearance and support.
3
Table of Contents
1. INTRODUCTION ............................................................................................................. 7
2. LITERATURE REVIEW .................................................................................................. 8
2.1 Valuation Methodologies ................................................................................................................. 8
2.1.1.
The Case of Microsoft and Nokia
Luís Franco Hilário
Advisor: Peter Tsvetkov
Dissertation submitted in partial fulfillment of requirements for the degrees of MSc in
Business Administration, at the Universidade Católica Portuguesa
SEPTEMBER 2011
1
Abstract
Due to the financial downturn and the emergence of new devices in the global handset market has led companies to change their business strategies. Indeed, Mergers and
Acquisition are considered one of the best strategies to increase shareholder value despite its hardship to be well-implemented. For this reason, a consolidation between
Microsoft and Nokia may create new opportunities to challenge the market. Thereby, the focus of this dissertation will be the calculation of the additional value created by combining both firms bearing in mind the companies’ financial situations. All this considered, Nokia’s average share price during the last year is considered to have a
0.14% upside potential and synergies are estimated around 13% of Nokia’s average market capitalization. As a result, an offer at 19.4% premium over Nokia’s average market capitalization will be suggested with 100% in cash.
2
Acnowledgments
The author would like to thank: Professor Peter Tsvetkov, the Dissertation Advisor, who has provided several thoughtful comments and an immeasurable help throughout the thesis. ; his friends, who provided assistance and feedback by detecting and reporting errors; finally to his family for their forbearance and support.
3
Table of Contents
1. INTRODUCTION ............................................................................................................. 7
2. LITERATURE REVIEW .................................................................................................. 8
2.1 Valuation Methodologies ................................................................................................................. 8
2.1.1.
Bibliography: benefits from M&A, and therefore the additional value originated by the combined entity is usually scarce since it is incorrectly estimated (Damodaran, 2005), destroying Damodaran (2005) defines synergy as the additional value generated by combining two entities, which create opportunities impossible to achieve operating each one (Luehrman, 1997). Thus, the best form to minimize those biases is firstly, value both companies independently, then values the combined organization, as the sum of the and take strategic decisions based on those values (Luehrman, 1997), in a word, valuation knowledge is basically a requisite for a participation in a firm’s resource allocation choices (Myers, 1974). Based on the sizeable “portfolio” of existing valuation approaches, each organization should adopt the valuation method that better matches its insights into specific drivers creating value in the industry (Lie and Lie, 2002). Jointly, Young, M 1996). According to Oded, J. (2007), there are four cash-flow methods to value a company: Adjusted Present Value (APV), Capital Cash Flows (CCF), Cash Flows to