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FINANCING BUSINESS INITIATIVES.

   

Added on  2020-02-12

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FINANCING BUSINESSINITIATIVES

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Question 1Porter five forces model on cloud computing industry.............................................1Question 2 Identification and explanation of characteristics of good LBO candidate................2Question 3 Ways in which PE firm 3M can align its interests to mangers of relevant company 2Question 4Debt structures and sources of finance......................................................................3Question 5DCF model and explanation on calculations ............................................................3LBO model..................................................................................................................................6Question 7 Exit strategies in LBO ...........................................................................................10Question 8 Private equity fund structures, fund terms, economic terms and corporate governance terms used by PE firms 11Reflective.......................................................................................................................................12CONCLUSION..............................................................................................................................13REFERENCES..............................................................................................................................14

Index of TablesTable 1Calculation of free cash flow...............................................................................................6Table 2Cost sheet.............................................................................................................................7Table 3PV at 10% WACC...............................................................................................................7Table 4Terminal values....................................................................................................................7Table 5Equity value.........................................................................................................................8Table 6Intrinsic value of shares.......................................................................................................8Table 7Financing structure of LBO.................................................................................................9Table 8Implied debt burden table....................................................................................................9Table 9Debt split of overall debt amount across years....................................................................9Table 10Interest rate......................................................................................................................10Table 11Calculation.......................................................................................................................10Table 12Calculation of free cash flow...........................................................................................10Table 13Cash flows calculation.....................................................................................................11Table 14Cash conversion table......................................................................................................11Table 15EBITDA and FCF............................................................................................................11Table 16Debt pay down table........................................................................................................11Table 17Cash flow available for debt repayment..........................................................................12Table 18IRR table..........................................................................................................................12

INTRODUCTIONFinance is the vast domain and number of things are performed under it. Every year number of firms acquired other one acrossthe globe. There are number of tools that are used by these firms to make decisions like discounted cash flow model and leveragebuyout model. There is great use of both models for the firms. In case of discounted cash flow model real value of shares is computedand on that basis it is identified whether shares are available at higher or low price. Apart from this, in the report leverage buyoutmodel is applied on cash flows and on that basis it is identified whether investment must be made in the firm. It can be said thatcomplex calculations are performed and interpreted in current report.Question 1Porter five forces model on cloud computing industryPorter five forces model is the one of the important tool that is used for analysis of industry. There are some components ofthis model and same are explained below.New market entrants: There is moderate threat of new entrants for Bottomline Technologies because usually in enter to thisindustry one needs to make heavy capital investment. As every firm cannot arrange such amount of money. There are alreadylarge number of giant firms in the mentioned industry and due to this reason it is very difficult for any firm to enter in to thisindustry (Cloud computing, 2017). It can be said that if 3M acquired Bottomline technologies then in that case same will bebeneficial for it. This is because there is less threat of new entrants and if same is acquired then in that case firm will have tocompete with existing players only.Bargaining power of suppliers: There is less bargaining power of suppliers in the mentioned industry. There is very tightcompetition among firms that are providing cloud related services. Hence, no firm can easily increase price of services in themarket. Hence, it can be said that there is less bargaining power of suppliers in the market. 3M if acquired Bottomlinetechnologies then it will have less bargaining power. Which means that by innovating existing technology base at rapid ratefirm can accelerate its growth rate.

Bargaining power of buyers: There is high bargaining power of buyers because they have options and on the basis of qualityof service they can switch to any supplier of services. Hence, it can be said that there is high bargaining power of buyers in thecloud computing market. There is risk in acquisition of Bottomline technologies as number of alternatives are available to thecustomers and they can switch anytime to any product. It can be said that it will be very difficult task for the firm to retain itscustomers. Threat from substitutes: There is less threat from substitutes in the market because alternatives of the product are not soavailable in the market. Means that in large number alternatives of the product are not available in the market. It can be saidthat varied firms are making available almost same services in the market. Technology is not changing at very fast rate and dueto this reason there is no substitute of the current services (Latham and Braun, 2011). This is positive point for 3M and byconsidering this factor it can take decision to purchase Bottomline technologies.Threat from new competitors: There is less competition to the existing firms from the newly entered company. This is becausefirms that are operating from three or four years have strong infrastructure then those newly enter in the market. It is thesecond risk that is associated with the acquisition of Bottomline technologies. In case rivals innovate their services it becomedifficult for 3M to gain benefits from LBO deal.Question 2 Identification and explanation of characteristics of good LBO candidateCharacteristics for good LBO candidate is given below.Consistency in cash flows: If firm to which any company wants to acquire have elevation in cash flows in previous yearsconsistently. Then in that case relevant firm is good candidate (Ivashina and Kovner 2011).Large amount of tangible assets: Bottomline technologies must be large amount of assets in its business to become bestcandidate of LBO for 3M. Assets of purchased company are kept as collateral by 3M while taking loan from market. In case

there are large assets then some of its portion will remain completely in hands of firm by selling which it can good amount ofrevenue. Limited working capital requirements: If in any business working capital requirement is less than it is best candidate becausewith small amount same can be operated by any company.Question 3 Ways in which PE firm 3M can align its interests to mangers of relevant company There are many ways in which 3M can align its interest with managers of Bottomline technology and under this it cancommunicate them that they wants to sale a firm stake so that money can be received for investment in the business. In order toimprove business performance firm needs intellectual capital that invest money in right way (Turco 2010). That capital can beinvested in prudent manner by receiving guidance from the PE firm. Thus, in this way 3M can align its interests with the Bottomlinetechnology. Apart from this providing a reasonable amount of money to firm in LBO is another incentive that can be provided totarget company managers.Question 4Debt structures and sources of financeRevolving credit facility (Revolver): Under this approach firm can take debt up to certain limit as specified by the bank andrepay the debt amount when it have surplus cash in its business. This method is used to finance LBO deals at large scale by thebusiness firms.Bank debt:Debt is also taken from the banks and other financial institutions and under this at specific rate debt is availablewhich is used to purchase debt of the target bank under LBO deal (Kim and McCue 2012). It is the commonly used source offinance under LBO deals.Mezzanine: It is also known as subordinated debt and under this debt is raised from the market in conjunction to senior debtand it have features of both debt and equity. Along with above it is third alternative that is quite popular among firms.

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