JB HI Fi Company: Amalgamation and Merger for Business Finance

This report is accompanied with the detail analysis of the synergy and competitive advantage which company could get after entering into the strategic alliance such as merger, amalgamation and takeover. The main suitable target for the JB HI-FI Company would be CVE Technology who is also the closet rival for the organization. The report also includes the computation of the market capitalisation of the target, the synergy and hence advise the management of the existing company on the offer price. It also includes the computation of the cost of equity of company NPV and post-merger stock price.

JB HI Fi Company
Amalgamation and Merger
Business Finance
University Name-

Task-1
EXECUTIVE SUMMARY
This report is accompanied with the detail analysis of the synergy and competitive
advantage which company could get after entering into the strategic alliance such as merger,
amalgamation and takeover. This report focuses on the JB HI-FI Company and how this
company could have synergy in its business by entering into the strategic alliance. JB HI-FI
Company needs to develop core competency in its cost leadership strategy to win over its
existing and future rivals. The JB HI-FI Company is Australian retailer of consumer goods,
specialised in video games, HD ultra-blue rays, DVD and CD electronic hardware and
appliances which is indulged in offering mobile phones and other services. All the employees
are accustomed to act as suggested by its current CEO Richard Murray. Currently, share price
of company is traded at JBH (ASX) A$ 25.00 -0.28 (-1.11%) and founder of company is John
Barbuto. This company is indulged in providing electronic goods to its clients and had
mission to develop core competency in its product differentiation and cost leadership. The
retail industry has shown the overall turnover of AUD $ 1125 billion. The JB HI-FI Company
has net income of AUD $ 152 million which is 12% higher as compared to last three years.
The current financial position of company is strong and reflecting that company needs to
establish the equilibrium points between its financial risk and cost of capital. With the
increasing financial risk, it might have low cost of capital but it will also hamper the
sustainable position of company in long run. The strategic direction of company is to
strengthen its overall market share and create strong brand image in international and
domestic Australian market.
1

Table of Contents
Task-1.........................................................................................................................................1
EXECUTIVE SUMMARY........................................................................................................1
INTRODUCTION......................................................................................................................2
Task-2.........................................................................................................................................3
(a) Brief overview of the CVE technologies Group.........................................................3
(b) Types of takeover and benefits associated with all deals............................................3
© Sources of synergy.............................................................................................................4
(D) Market capitalisation of the target, the synergy and hence advise the management of
the existing company on the offer price.................................................................................6
(e) Option to pay off the takeover deal or consideration to shareholders..............................7
(f) Computation of the cost of equity of company NPV and post-merger stock price..........8
Cost of equity of company.................................................................................................8
Computation of the Net present value................................................................................8
Post-Merger stock Price...................................................................................................10
Task-3.......................................................................................................................................11
(a) Company raise the capital using internal funds, debt, equity, hybrid securities or a
combination of the above.....................................................................................................11
© Share issue affects the wealth of the existing shareholders.............................................13
Task-4.......................................................................................................................................13
(A) Risk involved in takeover deal......................................................................................13
Sensitivity analysis...............................................................................................................14
Wealth maximization of the shareholder.............................................................................15
Conclusion................................................................................................................................16
References................................................................................................................................17
2

3

INTRODUCTION
This report focuses on the strategic direction and opportunities which could be availed
by Organizaiton to expand its business in long run. The main empirical of this report is to
identify the how well company could sustain its business in long run by undertaking the new
strategic approaches and strategic alliance. It is analyzed that company should undertake
strategic alliance such as joint venture, merger and amalgamation to strengthen its overall
business outcomes and efficient business functioning. The main expansion strategy for JB
HI-FI Company would be to undertake strategic alliance with its rivals so that it could use
their machines and assets to create effective synergy in long run. This report identifies the
potential targets and options which could be availed by JB HI-FI Company to strengthen its
overall business and creating core competency in market. The main suitable target for the JB
HI-FI Company would be CVE Technology who is also the closet rival for the organization
(JB HI-FI, 2017).
(JB HI-FI, 2017).
4

Task-2
The current CEO Richard Murray has identified several expansion opportunities for
tis business and by undertaking these possible plans company could easily make its business
more sustainable in long run. However, JB HI-FI Company has been facing high financial
risk in its business which might negatively impact the business growth and future
sustainability in long run. Nonetheless, if company takeovers the CVE technologies in its
business it could easily strengthen the overall outcomes and create synergy in its business (JB
HI-FI, 2017).
(a) Brief overview of the CVE technologies Group
This company is indulged in offering cost-saving, flexible solutions to meet the reverse
logistics needs of clients around the world. This company was founded as an affiliate of
Cache Valley Electric in 1955 with a view to offer best electronic equipment’s and process
system. It is also indulged in hosting cyber computing business system.
(b) Types of takeover and benefits associated with all deals
There are several strategic plans which could be undertaken by the JB HI-FI Company to
increase the overall business outcomes such as Joint venture, merger, Amalgamation.
Nonetheless, JB HI-FI Company has strong financial position and liquid assets which may be
positive for the business growth and creating synergy in its business by undertaking merger
with its potential competitors (Bekaert, & Hodrick, 2017).
Joint venture- This is the strategic alliance in which two companies is ready to pool their
assets and resources to accomplish the set object in effective manner.
Merger- It is combination of two organization which come together to create synergy from
the business. It is also called amalgamation which will allow JB Hi-Fi Company to create
value on invested capital (Bessler, & Schneck, 2016).
Takeover- It is the process in which one company buys more than 50% shares in another
company. It is analyzed that for JB Hi-Fi Company, it would be beneficial to takeover CVE
Technologies Company.
5

After analysing all the different options, it could be inferred that Takeover option would be
beneficial for JB Hi-Fi Company if it wants to create synergy in it business. However, it will
help company to increase the market share and grab the potential clients for its business
(Lunev, et al. (2016).
© Sources of synergy
There are several sources of the synergy which could be developed by JB HI-FI Company if
it aligns its business with its takeover targets (Brigham, & Ehrhardt, 2013).
The financial position of JB HI-FI Company is reflecting high financial risk which might be
negative indicator for the future growth of the Organizaiton. The merger option with CVE
Technology group will require issue of shares to the shareholders of the acquired company.
This will strengthen the overall outcomes increase the share capital in its business.
Another source of creation of the synergy would be related to reduce cost of production. If
these two companies combine their business with each other’s then they will also have to
combine their assets and undertaken strategic work. It will ultimately increase the overall
revenue as compared to the revenue which these both companies would have if they were to
run their business individually (JB HI-FI, 2017).
There are several key decision makers and managers who will also combine their knowledge
and innovative design mind set with each other. It will allow company to combine the pool of
knowledge while taking the strategic alliances and decisions in long run. It is analyzed that
JB HI-FI Company would have to face less risky business and losses in its business process
system which will eventually increase the overall outcomes and business efficiency in long
run (Garrett, Hoitash, &Prawitt, 2014).
Another source of synergy after takeover of CVE technology group would be team building.
Both organizations have highly experienced team of employees in the business. It is analyzed
that proper training and development program is followed in the process then it will assist
organization to create value on the investment.
This CVE technology group is accompanied with the strong brand image and high market
turnover. If JB HI-FI Company could use the loyalty card program of this company then it
would be easy for it to grab the potential clients in easy manner. The loyalty card approach of
6

CVE technology group reflects high coverage of clients which will be beneficial for JB HI-FI
Company while introducing new products and services in market (JB HI-FI, 2017).
7

(D) Market capitalisation of the target, the synergy and hence advise the
management of the existing company on the offer price
Market capitalization is the total market value to buy whole company which is equal to price
of the total number of shares outstanding in market. The enterprises value is the theoretical
takeover price which includes the required amount of capital for the outstanding number of
shares (Abbott, et al. 2017).
It is the most recent market value of the company’s outstanding shares. The market
capitalization would be equal to current share price multiplied by the number of the shares
outstanding (Kundakchyan, and Zulfakarova, 2014).
For the computation of the market capitalization, company needs to compute net assets value
of the target company (Uechi, et al. 2015).
Net value of Company Amount in AUD $ Million)
Particular
Total Assets 40933
Total Liabilities 20952
Net Value of Business 19981
The net assets value of CVE technologies would be AUD $ 19981 million which is reflecting
that company should offer its shares at AUD $ 10 to its new shareholders as consideration for
swapping the shares of CVE technologies with its own company.
The Market capitalization of the CVE technologies target company would be as below.
Computation of the market capitalization of the company
8

Particular Amount in AUD $ Million)
Stockholders' equity Outstanding 1998
Offer price 10
Market capitalization 19980
Advise to the management of JB HI FI Company
The JB Hi-Fi Company should offer its shares at 10% premium to the existing
shareholders of CVE technologies for swapping their shares with the company. The share
price of company is costly as compared to CVE technologies but keeping the share price of
its own shares for the existing shareholders may result to destruction of its own takeover deal.
Therefore, it is advised to the company that it should offer its shares at 10 % premium only
(Vogel, 2014).
The estimated figures for the synergy for the company would be more than 20% as compared
to the individual collective results. It will be based on the team work, lower cost of capital
and increased return on capital employed. However, in qualitative terms the estimated figure
will be based on the net value of the business + 20% premium (Delen, Kuzey, & Uyar,
2013).
Estimated figures for the synergy for the JB HI-FI company (AUD $ in million
Net Value of Business 19981
Add % of synergy 20%
Estimated figure 3996.2
Assumption based on the creation of the synergy
In terms of the total revenue, JB HI-FI Company would have higher amount of values
in its business. It has gained increase the market share and grab the potential clients for its
business which could add value for the increased business outcomes. The pool of talented
experts and managers will be great help in creating the effective strategic planning to
strengthen the overall outcomes and avoiding the possible losses. The use of loyalty card
approach, increased business value of both business and availability of the expert employees
will be the base for creating the synergy in organization (Ehiedu, 2014).
(e) Option to pay off the takeover deal or consideration to shareholders
It is analyzed that JB Hi-Fi Company would follow the process of takeover to establish the
strategic alliance with the CVE technologies.
9

The merger should be partially paid off by the issue of the shares and partially through the
cash (Delen, Kuzey, and Uyar, 2013).
It is analyzed that those shareholders of the CVE technologies who are ready to swap the
shares with the JB HI FI should be paid off by swapping the shares. In addition to this, those
minority shareholders who are not selling their shares should be given cash consideration for
their shares(JB HI-FI, 2017).
Therefore, it could be inferred that the takeover of company could be done by cash and share
issued combined option only (Innocent, Mary, and Matthew, 2013).
(f) Computation of the cost of equity of company NPV and post-merger
stock price
Cost of equity of company
Calculation of Required rate of return
Risk free rate (A) 4%
Beta (B)
-
0.10125
2
Market Risk premium (C) 6%
Required rate of return [A+
(B*C)] 3.39%
(Please see the attached excel file herewith attached)
Computation of the Net present value
Year
Particular 1 2 3 4 5
Sales (in units)
$
92,000.00
$
110,400.0
0
$
132,480.00
$
158,976.00
$
190,771.20
Price
$
687.00
$
700.74
$
714.75
$
729.05
$
743.63
Total sales
$
63,204,00
0.00
$
77,361,69
6.00
$
94,690,715.
90
$
115,901,43
6.27
$
141,863,35
7.99
(-) Variable Costs
$
28,980,00
0.00
$
-
$
-
$
-
$
-
10

Contribution
$
34,224,00
0.00
$
77,361,69
6.00
$
94,690,715.
90
$
115,901,43
6.27
$
141,863,35
7.99
(-) Fixed Cost $
6,500,000.
00
$
6,500,000.
00
$
6,500,000.0
0
$
6,500,000.
00
$
6,500,000.
00
Net Profit $
27,724,00
0.00
$
70,861,69
6.00
$
88,190,715.
90
$
109,401,43
6.27
$
135,363,35
7.99
(-)Depreciation $
43,842,85
7.14
$
43,842,85
7.14
$
43,842,857.
14
$
43,842,857
.14
$
43,842,857
.14
Net Profit before Tax -$
16,118,85
7.14
$
27,018,83
8.86
$
44,347,858.
76
$
65,558,579
.12
$
91,520,500
.85
(-) Tax @28% -$
4,513,280.
00
$
8,105,651.
66
$
13,304,357.
63
$
19,667,573
.74
$
27,456,150
.25
Net Profit after tax -$
11,605,57
7.14
$
18,913,18
7.20
$
31,043,501.
13
$
45,891,005
.39
$
64,064,350
.59
(+) Depreciation $
43,842,85
7.14
$
43,842,85
7.14
$
43,842,857.
14
$
43,842,857
.14
$
43,842,857
.14
Cash Inflows $
32,237,28
0.00
$
62,756,04
4.34
$
74,886,358.
28
$
89,733,862
.53
$
107,907,20
7.74
(+) Salvage Value $
9,500,000.
00
Cash Inflows $
32,237,28
0.00
$
62,756,04
4.34
$
74,886,358.
28
$
89,733,862
.53
$
117,407,20
7.74
*Present value factor
@12%
$
0.89
$
0.80
$
0.71
$
0.64
$
0.57
Present Value $
28,783,28
5.71
$
50,028,73
4.33
$
53,302,630.
65
$
57,027,491
.88
$
66,620,002
.72
Total Present
values(A)
$
255,762,14
5.30
(-)Cash Outflows
Additional expenses $
1,175,000.
00
Total cash
consideration to
company
$
19,981,000
.00
Other expenses $
11

45,200,000
.00
Total(B)
$
66,356,000
.00
Net Present Value(A-
B)
$
189,406,14
5.30
Post-Merger stock Price
Valuation in Efficient Markets - No Bootstrapping (in $million)
JB HI FI
before merger
CVP Technologies
before Takeover
JB HI Fi Company after
the merger (AB)
1. Earnings per
share 2 1 3.33
2. Price per share 60 10 60
3. Price-earnings
ratio 30 10 18
4. Number of shares 20 mil. 60 mil. 30 mil.
5. Total earnings $40 mil. $60 mil. $100 mil.
6. Total market
value $1,200 mil. $600 mil. $1,800 mil.
7. Earnings per
dollar invested in
the stock (line 1 ¸
line 2) 0.033 0.1 0.056
12

The estimated share price value of company could be AUD $ 446 million (Morningstar,
2017).
MPS 25
EPS 0.056
Post Takeover share
price 446.4285714
Task-3
(a) Company raise the capital using internal funds, debt, equity,
hybrid securities or a combination of the above
There are several ways to finance the takeover strategic alliance by the company. It is
analyzed that company could follow the following options
Bank Loans- It is the process to take loan and borrow money form the banks and financial
institutions. It is analyzed that company could create charge on the assets with the bank to
finance its takeover deal.
Issue of debts- JB Hi-Fi Company should issue debts in market to raise funds for its capital
financing. It will allow company to keep the raised funds for the longer certain time period.
Retained earnings- It is the amount of capital which has in its business. It could be used by
company to pay off the take-over.
JB Hi- Fi Company could accept mix method of financing to finance its takeover deals. It
could use retained earnings and equity capital in its business to finance its takeover deal.
However, deb cost of capital in Australia would be around 7% and retained earning cost of
capital would be 3%. The retained earning cost of capital is assumed to be the share issue cost
which company needs to bear in its business.
The main reason of accepting these two different options is based on the cost of capital. If
company has low amount of cost capital in its business then it could easily create higher
amount of return on capital and increased synergy in its business.
13

The debt capital has several merits and demerits associated with it. It is analyzed that
company would have higher financial leverage if the funding is done by issue of more debt
capital. Nonetheless, increased debt funding will eventually lower down the cost of capital of
organization. On the other hand, JB HI-FI company has AUD $ 113 million retained earning
its business which it could use to finance its takeover.
Company should raise the capital by following the mix funding in which debt capital will be
issues to debt holders for some consideration and some part of the capital will be financed by
the retained earnings.
(B) If the capital required is raised via a share issue, should the company
engage in a right issue or private placement?
If JB HI- Fi Company finances its takeover options by following the equity funding then it
will has to face high cost of capital in its business. However, if it has become mandatory for
the company to issues shares in market then it should go for the public funding at premium
price. The premium associated with the shares will cover the cost of capital to raise the funds
in market.
Methods to raise funds Pros Cons
Private funding It is associated with the less
costing and company do not
have to incur more expenses
for advertisement and legal
compliance.
The investment capital will
be made by the selected
members
It will require promoters to
make their own capital
investment in organization.
It will increase the overall
cost of capital of
organization.
Right issue or public funding High advertisement cost and
legal compliance.
Loss of business and shared
ownership.
14

Increased business costing.
It is the one of the best
source of creation of the
synergy in the business
outcomes and establishes the
profitable business in long
run.
Eventually, it will increase
cost of capital and financial
sustainable risk in the
business.
© Share issue affects the wealth of the existing shareholders
In case when the shares are issued through the private funding, it will not be issued on the pro
rate basis. It will eliminate the pair passu right of the shareholders. In addition to this,
increased numbers of shares will lower down the return on earing available to equity
shareholders.
In case of public funding, company might face issue of the insider trading case due to the heat
of the moment or case event. It is analyzed that if shares are issued through the public
funding then it might result to undue losses to the existing shareholders or some of the
shareholders who wants to keep their capital invested in JB Hi-Fi Company may face
destruction in loss due to the sudden hike in share price (Palepu, Healy, and Peek, 2013).
Task-4
(A) Risk involved in takeover deal
The takeover deal is accompanied risks which might face by JB Hi-Fi Company after
takeover. There are chances that company might not have the expected synergy in its
business and failed to achieve the certain results out of its own business. Company might risk
such as inefficient business functioning, cultural issue, team building problems and lack of
transparency and non-effective legal compliance program. In addition to this, due to the
15

external and internal factors, company might face decrease in its net present value (Robb, &
Robinson, 2014).
In case, when company has to face negative business outcomes and increased business risk
due to the external business factors, then it will have to face low amount of synergy will also
lower down the NPV.
Sensitivity analysis
In case when the sensitivity analysis is done then due to the external factors, company might
face issues related to low amount of net present value and less synergy.
Year
Particular 1 2 3 4 5
Sales (in units)
$
92,000.00
$
105,800.0
0
$
126,960.0
0
$
152,352.00
$
182,822.40
Price
$
687.00
$
700.74
$
714.75
$
729.05
$
743.63
Total sales
$
63,204,00
0.00
$
74,138,29
2.00
$
90,745,26
9.41
$
111,072,20
9.76
$
135,952,38
4.74
(-) Variable Costs
$
28,980,00
0.00
$
58,190,00
0.00
$
74,271,60
0.00
$
119,596,32
0.00
$
162,346,29
1.20
Contribution
$
34,224,00
0.00
$
15,948,29
2.00
$
16,473,66
9.41
-$
8,524,110.2
4
-$
26,393,906.
46
(-) Fixed Cost
$
6,500,000.
00
$
6,500,000.
00
$
6,500,000.
00
$
6,500,000.0
0
$
6,500,000.0
0
Net Profit
$
27,724,00
0.00
$
9,448,292.
00
$
9,973,669.
41
-$
15,024,110.
24
-$
32,893,906.
46
(-)Depreciation
$
43,842,85
7.14
$
43,842,85
7.14
$
43,842,85
7.14
$
43,842,857.
14
$
43,842,857.
14
Net Profit before Tax
-$
16,118,85
7.14
-$
34,394,56
5.14
-$
33,869,18
7.73
-$
58,866,967.
39
-$
76,736,763.
60
(-) Tax @28%
-$
4,513,280.
00
-$
10,318,36
9.54
-$
10,160,75
6.32
-$
17,660,090.
22
-$
23,021,029.
08
16

Net Profit after tax
-$
11,605,57
7.14
-$
24,076,19
5.60
-$
23,708,43
1.41
-$
41,206,877.
17
-$
53,715,734.
52
(+) Depreciation
$
43,842,85
7.14
$
43,842,85
7.14
$
43,842,85
7.14
$
43,842,857.
14
$
43,842,857.
14
Cash Inflows
$
32,237,28
0.00
$
19,766,66
1.54
$
20,134,42
5.73
$
2,635,979.9
7
-$
9,872,877.3
8
(+) Salvage Value
$
9,500,000.0
0
Cash Inflows
$
32,237,28
0.00
$
19,766,66
1.54
$
20,134,42
5.73
$
2,635,979.9
7
-$
372,877.38
*Present value factor
@12%
$
0.89
$
0.80
$
0.71
$
0.64
$
0.57
Present Value
$
28,783,28
5.71
$
15,757,86
1.56
$
14,331,28
6.53
$
1,675,212.9
3
-$
211,580.64
Total Present
values(A)
$
60,336,066.
10
(-)Cash Outflows
Additional expenses
$
1,175,000.0
0
Total cash
consideration to
company
$
650,000.00
Other expenses
$
19,981,000.
00
Total(B)
$
21,806,000.
00
Net Present Value(A-
B)
$
38,530,066.
10
(Yahoo finance, 2017).
Wealth maximization of the shareholder
The shareholders could be benefited by this takeover deal as it will not only increase he
overall turnover of the company but eventually also impact the return on capital employed of
company in long run (Yahoo finance, 2017).
17

It is analyzed that shareholders will have high wealth maximization if company undertake
this takeover.
Conclusion
The ratio analysis, du Pont analysis, top down analysis and different decision tools are
the some of the methods which could be used by investors to make the investment decisions.
After analysing all the details and information given on the takeover and increased business
benefits of synergy, it is inferred that company will have higher benefits from its investment.
Nonetheless, sensitivity analysis has also focused on all the external factors which might
negatively impact the business functioning of organization. Now in the end, it could be
inferred that company should focus on aligning two businesses by changing policies and
business functions.
18

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