Impact of Mergers on Company Value

This assignment examines the financial consequences of the merger between Heinz and Kraft, specifically analyzing changes in market capitalization and individual company share values. The text provides insights into how the merged entity's market cap exceeded that of the pre-merger companies, indicating a successful acquisition. It also references relevant academic literature to support its claims.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 1:.................................................................................................................................2
a) Compute the net present value of the project:........................................................................2
b) Depicting the relevant use of multivariate models over CAPM model:................................2
Question 2:.................................................................................................................................3
a) Evaluating the synergies identified from the mergers of Heinz and Kraft:...........................3
b) Providing relevant testing of the merger in equation:............................................................5
Reference and Bibliography:......................................................................................................9

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Question 1:
a) Compute the net present value of the project:
Year 0 1 2 3
Sales 360,000 415,800 480,249
Variable cost 216,000 244,728 277,277
Depreciation 60,000 60,000 60,000
Salvage value 40,000
Inspection fees 3,000
Profit 84,000 108,072 182,972
Tax 12,600 16,211 27,446
Total cash flow 131,400 151,861 215,526
Working capital 24,000
Capital investment 310,000 131,400 151,861 239,526
NPV 98,874.37
b) Depicting the relevant use of multivariate models over CAPM model:
The multivariate models such as Arbitrage pricing model is mainly an adequate option
for over CAPM models, as it uses more than one factors to analyse the data. The relevant

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CAPM model only uses beta as its factor, which has different types of limitations. Moreover,
CAPM model mainly uses beta to determine the future returns that might be generated from a
particular stock. On the other hand, Arbitrage pricing model uses more than one factor, which
helps in gauging into the return provided from a particular stock.
Question 2:
a) Evaluating the synergies identified from the mergers of Heinz and Kraft:
After the overall merger of Heinz and Kraft there were many synergies, which could
be identified in their operations. Furthermore, the overall identified synergies mainly allow
the merged organisation to increase their profitability and reduce cost of the organisation. In
this context, Chih and Chih (2014) mentioned that after merger positive synergies allows the
company to increase their production, while reducing relevant costs, which helps in boosting
their profitability. The main synergies were identified from the opportunities such as strong
platform for organic growth in North America. In addition, the global expansion is also a
possibility, which could allow the merged company in capturing new market and increase its
international presence. The increased presence in the international market mainly allows the
merged company to obtain relevant growth both in revenue and operations. On the other
hand, Fu and Zeng (2015) stated that mergers conducting between companies with different
industry mainly reduces synergies and raises relevant cost of the merged organisation. The
following synergies could be identified from the operations, which allowed the merged
company to increase their profitability.
Decline in overall cost:
The first synergy that was identified from the operations of merged Kraft and Heinz
was the reduction in cost obtained by the company. From the merger it was mainly estimated

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that an annual cost saving of $1.5 billion is possible due to the positive synergies of both the
company. This drastic decline in cost mainly portrays the financial benefit, which allowed the
organisation to raise the level of income from operations. This estimated cost saving was
mainly anticipated to occur by the end of 2017, as both the companies would be utilising their
best practices for reducing their profitability. Therefore, this positive synergy directly allows
the organisation to generate higher cost saving by reducing relevant costs factors, which in
turn increase its profitability. On the contrary, Grinblatt and Titman (2016) argued that the
identified negative synergies of the organisation could directly increase expenses, while
reducing total profits of the company. Therefore, the reduction in cost could be estimated,
which directly allow the company in generating higher revenue from investment.
Increasing higher revenue:
The increment in revenue from the merger of both Heinz and Kraft could be identified
from operations, which directly increases profits of the merged company. In addition, the
merger directly allows the company to create iconic brand, which in turn helps in generating
their value from its operations. Furthermore, the merged organisation directly helps in
creating higher customer base, which in turn could generate higher revenue from investment.
This increased customer base directly helps in generating higher revenue from operations,
where the brand presence of both the company could help in generating higher revenue from
investment. This merger has allowed both the companies to utilise their synergies in boosting
profitability and accumulating the required level of customer base. Therefore, the merged
company directly increases their exposure in domestic market as well as in internal market.
Evaluating historical transaction:
The last synergy is mainly evaluated from the historical transaction that has been
conducted by both the companies. The historical transactions conducted by the company

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could eventually help in generating higher revenue from investment, as both the companies
had positive accounts receivables. Furthermore, both the companies are in food industry,
which is directly providing higher revenue from investment. In this context, Leary and
Roberts (2014) mentioned that the costs factors and revenue factors have mainly allowed the
organisation to create positive synergies that could generate higher revenue from operations.
b) Providing relevant testing of the merger in equation:
Particulars Kraft Heinz Pro Forma
adjustment
Pro Forma
2014
Pro Forma
2016
Net sales 18,200.00 10,922.00 29,122.00 27,447.00
Cost of products sold 13,248.00 7,645.00 (747.00) 20,146.00 18,299.00
Gross profit 4,952.00 3,277.00 747.00 8,976.00 9,148.00
Selling, general and
administrative expenses
3,062.0
0
1,709
.00 (178.00)
4,5
93.00
4,61
3.00
Operating income 1,890.00 1,568.00 925.00 4,383.00 4,535.00
Interest expense 507.00 686.00 (80.00) 1,113.00 1,528.00
Other expense/(income),
net
(22.00
)
7
9.00 - 57.00
28
9.00
Income before income
taxes
1,405.0
0
80
3.00 1,005.00
3,2
13.00
2,71
8.00
Provision for income taxes 363.00 131.00 386.00 880.00 944.00
Net income 1,042.00 672.00 619.00 2,333.00 1,774.00
Net income attributable to
no controlling interest -
1
5.00 - 15.00
1
3.00
Net income attributable to 1,042.0 65 2,3 1,76

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Kraft Heinz 0 7.00 619.00 18.00 1.00
Preferred dividends - 720.00 - 720.00 900.00
Net (loss)/income
attributable to common
shareholders
1,042.0
0
(63
.00) 619.00
1,5
98.00
86
1.00
Particulars Kraft Heinz Merged
ASSETS
Cash and cash equivalents 2,298.00 2,476.00 4,837.00
Trade receivables 690.00 1,074.00 871.00
Sold receivables 161.00 583.00
Inventories 1,185.00 1,332.00 2,618.00
Other current assets 581.00 253.00 871.00
Total current assets 4,915.00 5,135.00 9,780.00
Property, plant and equipment, net 2,365.00 2,459.00 6,524.00
Goodwill 14,959.00 3,079.00 43,051.00
Intangible assets, net 13,188.00 1,416.00 62,120.00
Other assets 1,144.00 850.00 1,498.00
TOTAL ASSETS 36,571.00 12,939.00 122,973.00
LIABILITIES AND EQUITY
Trade payables 1,651.00 3,652.00 2,844.00
Accrued marketing 297.00 313.00 856.00
Accrued postemployment costs 15.00 706.00 328.00
Income taxes payable 232.00 115.00 417.00
Interest payable 167.00 - 401.00

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Dividends payable - - 762.00
Other current liabilities 730.00 - 1,324.00
Total current liabilities 3,092.00 4,786.00 6,932.00
Long-term debt 13,358.00 3,848.00 25,151.00
Deferred income taxes 3,867.00 678.00 21,497.00
Accrued postemployment costs 287.00 - 2,405.00
Other liabilities 282.00 747.00 752.00
TOTAL LIABILITIES 20,886.00 10,059.00 56,737.00
Redeemable no controlling interest 29.00 29.00 23.00
9.00% Series A cumulative redeemable
preferred stock
8,320.00 - 8,320.00
Equity:
Common stock, $.01 par value 4.00 107.00 12.00
Warrants 367.00 - -
Additional paid-in capital 7,320.00 608.00 58,375.00
Retained earnings/(deficit) - 7,907.00 -
Accumulated other comprehensive
income/(losses)
(574.00) (4,647.00) (671.00)
Treasury stock, at cost - (1,172.00) (31.00)
Total shareholders' equity 7,117.00 2,803.00 57,685.00
Non-controlling interest 219.00 48.00 208.00
TOTAL EQUITY 7,336.00 2,851.00 57,893.00
TOTAL LIABILITIES AND EQUITY 36,571.00 12,939.00 122,973.00

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The above table directly helps in identifying the overall income statement of the both
the companies in 2014 and 2016. The data is mainly segregated in 2014, while in 2016
merged data is provided for the companies. This mainly helps in depicting the overall
revenue, which is generated from operations of both the companies. In addition, the
increment in profit and revenue generation capability of the merged companies in comparison
to the single company is identified. The total revenue earned in 2014 was mainly at
29,122,000, while in 2016 the revenue decline to 27,447,000, which indicates the reduce
capability of the merged company. Therefore, it could be understood that the merged
company was not able to generate the required level of revenue from operations, which was
anticipated by the management (Mathuva 2015). Hence, the decline in revenue generation
capacity of the company is directly hampering its profit generation capability in comparison
from 2014 in 2016. The profits of the merged organisation in 2016 was mainly at 1,598,000,
which was relevantly not high as anticipated by the management.
Particulars Combined Kraft Heinz
Outstanding shares 1,218,250,000.00 587,331,944.00 248,586,011.86
Share price 79.54 57.49 72.49
Market cap 96,899,605,000.00 33,765,713,460.56 18,020,000,000.00
Furthermore, the above table depicts the Market Cap of combined and individual
companies in 2014 and 2016. The merged company has higher Market Cap, which directly
indicates higher value obtained by the company. The relevant Heinz and Kraft merger
directly states the rising share value, which was obtained by the merged company (Wang,
Dou and Jia 2016). The share price and Market Cap of Kraft was relevantly lower, when the
company was not merged, while the merged value was relevantly higher.