Question 1: In the takeover market, private equity firms have become important participants. These firms offer to acquire a target group, often with the cooperation of target management, and then take the firm private. These transactions tend to be financed with a significant portion of debt.
a) What types of firms would make ideal candidates for a private equity buyout. Give at least one example of an ASX-listed firm that would meet these criteria.
b) How might the private equity purchaser add value to justify a high takeover premium?
Question 2: Cascade Brewing plans to acquire Hahn Brewing for $120 per share, a 40% premium over the current market price. The Financial Director of Cascade Brewing argues that this valuation can be justified, using a price-earning analysis. "Cascade brewing has a P/E ratio of 15, and we expect that we will be able to generate long-term earnings for Hahn of $10 per share. This implies that Hahn Brewing is worth $150 to us, well above our $120 offer price"
a) Do you agree with this analysis?
b) What are the Financial Director's key assumptions?
Question 3: There is often concern that companies involved in mergers and acquisitions have incentives to manage their earnings.
a) Explain how earnings management might achieve a better outcome in a merger situation. Include a numeral example to support your explanation.
b) What factors could limit the extent that companies are able to manage their earnings in a takeover situation?
Question 4: Under current IFRS standards, acquiring firms must treat any goodwill on acquisition as a deferred cost (i.e., capitalized) and report any subsequent declines in value as impairment charges. What performance measures would you use to determine whether goodwill has been impaired?
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