Strategic M&A Analysis: Evaluating Target Company and Recommendations

This report provides a comprehensive analysis of a potential merger and acquisition (M&A) strategy for Morrison's, focusing on the acquisition of WH Smith plc. It critically evaluates different types of mergers (horizontal, vertical, conglomerate, and concentric), ultimately recommending a horizontal acquisition to enhance market reach and economies of scale. The report justifies the selection of WH Smith plc as the target company, presenting its key financial information and profitability ratios. It delves into the target company's capital structure, calculates its weighted average cost of capital (WACC), and estimates its value using the discounted free cash flow (DCF) method. The analysis includes an assessment of WH Smith's financial trends, liquidity, and overall financial health, culminating in strategic recommendations for Morrison's senior management team based on the findings. This report is available on Desklib, where students can find a wealth of solved assignments and study resources.

Corporate Finance, Merger and Acquisition
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Critically evaluating the benefits and drawbacks of each category of merger and acquisition
.....................................................................................................................................................1
2. Justifying reasons behind selection and present the target company’s key financial
information..................................................................................................................................4
3. Presenting and discussing the target company’s capital structure and computing its WACC 8
4. Calculating the value of the target company using the discounted free cash flow method...12
5. Summarizing findings and giving recommendations to the senior management team.........14
REFERENCES..............................................................................................................................16
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INTRODUCTION
In the recent times, business units lay high level of emphasis on undertaking merger and
acquisition activities with the motive to explore business operations. Usually, business unit
employs strategy pertaining to merger and acquisition when current market lies at saturation
level. Along with this, merger & acquisition plan also enables firm to expand business in other
area and attain success with the help of loyal customer base. For this project report, Morrison’s
has been selected, a leading business units operating in retail sector. Due to the existence of high
level of competition now such business unit is planning to acquire WH Smith plc. Hence, target
company such as WH Smith plc is a leading British retailer having wide supply chain at railway
station, airport, port, hospital and motorway service station. Thus, by acquiring such proposed
company Morrison’s would become able to enhance its geographical reach and explore business
operations more effectually.
MAIN BODY
1. Critically evaluating the benefits and drawbacks of each category of merger and acquisition
Introduction
This section will provide deeper insight about different types of merger and acquisition
that can be undertaken by Morrison’s along with their pros & cons.
Main body
According to the views of Greve and Zhang (2017), acquisition is a corporate action that
is undertaken by business unit for exploring the business operations and functions. Under
acquisition, one business unit buys another unit for gaining ownership status. Further, Boschma
and Hartog (2014) stated that acquisition strategy provides high level of assistance in enhancing
the business performance. Moreover, when business operates at a large level then it enjoys high
economies of scale which in turns result into profit maximization. However, on the critical note,
Reddy (2016) presented that, in case of acquisition whether horizontal, vertical and
1

conglomerate, business unit faces issues in managing as well as coordinating several aspects
such as culture, personnel etc. Brigham and Houston (2012) investigated that acquisition
accelerates growth as it helps in diversifying risks associated with the particular sector. Along
with this, it also enables company to maintain and enhance the customer base to a great extent.
Specifically, there are mainly four types of acquisition that can be undertaken by business
unit such as follows:
Horizontal merger:
Chakrabarti, Hsieh and Chang (2017) presented that horizontal merger is when
both the companies belong from same industry such as retail, hospitality etc. Hence, horizontal
merger is the most common among firms where competition level tends to be high. The study
assessed in their study that horizontal merge strategy helps in gaining high economies of scale.
Besides this, it also facilitates Reduction in the large number of competitors which in turn places positive
impact on both profit margin and overall growth. However, Lin, Officer and Shen (2018),, argued that
it increases monopoly within the industry. Along with this, horizontal mergers also create
difficulty in the integration of culture, employee’s behavior and other aspects. Sherman (2018),
entailed that horizontal acquisition provides top management with ease, pertaining to acquiring company,
in relation to handling business more effectually.
Vertical merger:
Chakrabarti, Hsieh and Chang (2017), depicted that vertical merger is
undertaken by companies operating in the similar sector. However, such two business units, in
the same value chain of producing goods or services, differ in terms of their production stage.
Avinadav, Chernonog and Perlman (2017), found in their study that vertical merges
ensures supply chain stability to a great extent. Further, it also helps in reducing cost level as
business unit does not require paying higher to the suppliers. However, Hsu, Wright and Zhu
(2017), claimed that vertical merger type imposes high capital expenditure in front of acquiring
firm. In addition to this, vertical merger is like locking capital that can be used for other
productive or profitable business activities. Hence, such kind of mergers imposes opportunity
cost in front of the business unit. The study identified in their study that vertical mergers enables
firm to gain high economies of scale n and thereby increase the level of profit margin.
2

Conglomerate merger:
As per the views of Lin, Officer and Shen (2018),, conglomerate merger implies for the
one, when unrelated business organizations combine their operations. In other words,
conglomerate merger takes place in between companies operating in a totally different sector (5
Types of Company Mergers, 2018). Sherman (2018), reported that conglomerate merger enables
firm to gain high profit margin from the funds available by investing same in growing industries
or firms. It also offers opportunity to the firm pertaining to enhancing customer base and reduces
risk level by diversifying the business operations. On the critical note, Boyson, Gantchev
and Shivdasani (2017), mentioned that, in such kind of acquisition, lack of experience might
affect the business operations and sustainability. Further, it also includes risk in relation to shifting focus
from core business to others which in turn leads to poor performance. Problems in developing
coordination among several aspects such as culture, employees etc are also common under such type of
acquisition.
Concentric merger:
Lebedev and et.al., (2015), assessed that when one firm merges its business
operations with another where products or services offering by them differs then the same is
recognized as concentric. Hence, it can be stated that, such type of merger takes place within the
firms which are offering products or services to the same customer group. However, both the
firms differ in terms of their offerings to significant level. On the contrary to this, Sherman
(2018), criticized such acquisition strategy on the basis of lack of co-ordination and monopoly
creation. Further, another Aversa and Haefliger (2017) stated that concentric merger helps in
achieving synergy to the significant level. Such merger type also provides high level of
assistance in increasing market share and facilitates significant improvement in product
development
Conclusion
By doing analysis, it has been assessed that Morrison’s is facing stiff competition from
the major retail companies, operating in UK, such as Tesco, ASDA, Sainsbury, ALDI, LIDL etc.
All such firms are offering similar kinds of retail products or services to the customers. Further,
customers also prefer to purchase products or services from the retailer which offers the same at
discounted or lower prices. Hence, due to the saturation level of UK retail market and concern
3

about the potential growth Morrison’s wants to expand business by undertaking merger and
acquisition strategy. Referring Morrison’s concern and objectives, it can be stated that horizontal
acquisition will prove to be more beneficial. Moreover, in the UK retail sector, now due to the
existence of major players Morrison’s has to provide heavy discounts to the customers. This in
turn places direct and negative impact on the profit margin. Thus, by undertaking horizontal
acquisition Morrison’s can enhance its reach as well as customer base and thereby would become
able to make optimum use of financial resources. This aspect can clearly be supported with the
literature review section which presents that horizontal acquisition provides companies with high
economies of scale and enhances efficiency to the significant level. Moreover, cost pertaining to
purchasing existing product will be lesser. This in turn helps company in saving money and
enhances the level of profit margin.
2. Justifying reasons behind selection and present the target company’s key financial information
Introduction
This part of report depicts the reasons or aspects that are considered by Morrison’s while
making selection of Standard Life Aberdeen.
Main body
WH Smith plc is considered or selected as target company that listed on the recognized
stock exchange of London such as FTSE 250. Such business unit offers retail products and
services to the customers at affordable prices. Hence, this retail unit offers wide range of
products or services to the customers such as books, stationery, magazines, newspapers and
entertainment products. There are several motives which in turn considered by Morrison’s while
making selection of WH Smith plc for acquisition such as follows:
 High economies of scale: Usually, companies get cost benefits when they operate at
large level and specifically when both the companies relate from the similar sector. In the
context of Morrison, firm will get high synergies by bringing down fixed cost through the
removal of duplicate standards. In addition to this, when company places order for more
material then it gets and enjoys high economies of scale. Hence, such high economies of
scale positively contribute in profit margin.
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 Managerial motivations: In addition to this, it has assessed from the evaluation that
management team of Morrison’s is highly skilled and efficient. Along with this, current
performance trend of WH Smith plc exhibits that such unit is managing its income over
the expenses more effectually. Thus, management team’s capabilities pertaining to the
proposed company is also the main aspect that considered for selection.
 Third party motivations: Further, proposed acquisition strategy will also offer high level
of benefits to the shareholders. Through the means of such acquisition Morrison’s would
become able to widen its customer reach and thereby sales revenue as well as profit
margin. In addition to this, such acquisition may also result into in the enhancement of
staff capabilities and thereby overall growth as well as success. In addition to this,
concerned acquisition strategy will provide high level of assistance in reducing the level
of competition to some extent and thereby increases profit margin.
Thus, referring such aspect, it can be presented that growth potential of investment and
assets management companies are higher. From assessment, it has identified that Morrison will
get synergies in terms of market power and economies of scale by acquiring WH Smith plc. In
addition to this, Morrison’s also have ability to generate high cash flows by ensuring better
management. Hence, taking into account all such aspects WH Smith plc has been selected for the
proposed acquisition plan. Morrison will use the combination of debt and equity for making
payment pertaining to proposed acquisition.
Along with the non-financial, monetary aspects are also considered while making
selection of such business unit:
Financial trend
Particulars 2014 2015 2016 2017
Sales revenue 1161 1178 1212 1234
Net income 92 101 108 116
Operating income 117 124 131 138
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Operating margin % 10.1% 10.5% 10.8% 11.2%
Net margin % 7.9% 8.6% 8.9% 9.4%
Operating cash flow 116 145 134 148
Free cash flow 84 106 92 100
2014 2015 2016 2017
10.1% 10.5% 10.8% 11.2%
7.9% 8.6% 8.9% 9.4%
Profitability Ratios
Operating margin % Net margin %
Figure 1: Operating and Net profitability Trend
In order to assess and evaluate monetary position of target company namely WH Smith
plc financial statement analysis has been done. Tabular presentation shows that sales revenue of
WH Smith plc was increased over the time frame 1161 to 1234 GBP million. Results of ratio
analysis presents that NP margin of the company was inclined from 7.9% to 9.4% respectively at
the end of accounting year 2017. This aspect shows that company’s control on its expenses is
highly good. In addition to this, increasing sales trend exhibits that customers prefer to purchaser
products and services from such retailer. Referring the current performance level it can be
depicted that in the near future both sales revenue and profit margin of the firm will incline.
Operating profit margin of WH Smith plc also shows increasing trend from 10.1% to 11.2%
significantly. All such aspects show that management of the company pertaining to financial
resources is good.
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Liquidity ratio analysis
Particulars 2012 2013 2014 2015 2016 2017
Current assets 246 233 235 230 236 242
Current liabilities 295 288 294 279 268 272
Current ratio 0.83 0.81 0.80 0.82 0.88 0.89
2012 2013 2014 2015 2016 2017
0.830000000000
001
0.81 0.8
0.820000000000
001
0.88 0.89
Current ratio
Current ratio
7

2014 2015 2016 2017
116
145 134
148
84
106
92 100
Cash Flow Assessment
Operating cash flow Series2
Free cash flow Series4
Figure 2: Cash flow Assessment
Cash flow statement evaluation presents that in the period of 2014 and 2015, free cash
flow position of WH Smith plc was negative such as 84 & 106 GBP million. On the contrary to
this, in 2016 and 2017, free cash flow of WH Smith plc was fluctuated over the time frame and
accounted for 92 & 100 GBP million respectively. Referring such trend, it can be presented that
company is highly able to generate more cash after spending money that needed for the
maintenance or expansion of asset base. In addition to this, as compared to the preceding year
operating cash flow was good and increased in the latest years. Hence, by taking into account
overall assessment, it can be mentioned that financial position and performance of WH Smith plc
was good in the financial year 2016 and 2017.
Conclusion
In conclusion to this section, it can be concluded that there are several motives that entice
decision making aspect of Morrison’s in relation to acquiring WH Smith plc includes high
economies of scale, synergy, managerial skills etc. Further, it can be presented from financial
section that profitability and cash position of company was good at the end of 2017.
3. Presenting and discussing the target company’s capital structure and computing its WACC
Introduction
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This part of report highlights capital structure and WACC of WH Smith plc. It will help
in ascertain the level to which solvency position of the company is good.
Main Body
Capital structure presents sources that have undertaken by the scholar for financing its
overall growth and operations such as debt, equities etc. Debt includes bonds and long term
payables on which business unit is obliged to make interest payment on periodical basis or when
it becomes due. On the other side, equities contain common and preferred stock as well as
retained earnings. Further, short-term debt, an element of working capital requirement, is also
recognized as the part of capital structure. Hence, it can be stated that capital structure is the
combination of long and short term debts as well as equity and preference shares. In accordance
with the theoretical framework capital structure is considered as aggressive when it includes high
debt over equity. Companies take more resort of debt when interest rates associated with the
same are lower. Debt-equity ratio is one of the most effectual measures that can be undertaken
for analyzing and evaluating one’s capital structure.
MM model presents that perfect capital market exists when investors are rationale and
information pertaining to market is available. It assumes no transaction cost, taxes and flotation
cost. WACC presents the proportion of minimum, after tax required rate of return, that business
unit must earn for offering enough margins to the shareholders or investors in against to the risk
undertaken by them (Weighted Average Cost of Capital, 2018). Mm model also entailed that
choice pertaining to debt and equity does not have significant or material impact on the value of
firm. However, on the critical note, considering trade-off theory of capital structure Park,
Kamcev and Freeman (2017) entailed that optimal capital structure is when balance between tax
shields and cost of financial distress exists. This theory suggests that ideal solvency position is
the one that maximizes firm’s value. Thus, business unit should use the combination of debt-
equity by taking into account standards that minimizes firm’s cost of capital. Further, referring
pecking order theory Radjamin and Sudana (2017) entailed that at the time of raising funds firm
should follow hierarchical structure. On the basis of such theoretical framework firm should give
priority to the internal sources and thereafter make focus on undertaking external modes such as
debt, equities etc.
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Capital structure of WH Smith plc at the end of 2017 is as follows:
Particulars Figures (in GBP million)
Long term debt 16
Shareholders’ equity 187 (WH Smith plc, 2018)
Debt-equity ratio 0.08
The above depicted table shows that, in the year 2017, company’s business financed most
of its operations using equities rather than other sources. This aspect shows that capital structure
of WH Smith plc has not contained debt in against to the equities which is considered as
undesirable. Moreover, as per the capital structure theory or framework ideal structure is the one
that includes both debts as well as equities. In accordance with the industry’s benchmark and
ideal aspects optimal capital structure is when debt-equity ratio accounts for .5:1 respectively.
However, financial statements, for the year ended on December 2012, clearly presents that WH
Smith plc failed to maintain optimal capital structure. Further, balance sheet of such target
company presents that short term dent sources were undertaken by the business unit for meeting
monetary requirements. In the year 2015 and 2016, long term debt accounted for 16 and 13 GBP
million. On the other side, shareholders equity of WH Smith plc implies for 187 GBP million at
the end of 2017.
Outcome of debt-equity ratio such as 0.08 presents that capital structure of company is
not good. Moreover, company has fulfilled its need through equity rather than debt which in turn
imposes opportunity cost. Moreover, debt sources offer benefit to the company under tax
brackets. Further, as per the standards, firm should issue 2 equities in against to 1 debt. Hence,
by taking into account such aspect it can be presented that financial structure of the company is
not good.
By calculating the weight or proportion of debt as well as equity and multiplying the
same with related cost WACC can be determined.
WACC: WACC = R(E) × W(E) + R(D) × (1 – t) × W(D)
In this,
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 Re: Cost of equity
 We: weight of equities
 Rd: Cost of debt
 Wd: weight of debt
Equities
Particulars Figures
Share Price 1951
Shares O/S 112
Market Cap (E) 218736
Computation of cost of equity
Ke: Rf + Beta (Rm – Rf)
Particulars Figures
Rf (Risk free rate of return) 2.84% (Yield on 10 years Treasury bill, 2018)
Beta 0.69
Rm (Required market return) 10%
Risk premium (Rm – Rf) 7.16%
Cost of equity 7.78 or 8%
Cost of debt
Particulars Figures
Short term debt 22 GBP million
Long term debt 16 GBP million
Total debt (short term + long term) 38 GBP million
Assigning weights to the debt and equities
Particulars Figures (in millions) Weights
Equities 218512 218512 / 218550 = .99 or
99.98%
Debt 38 38 / 218550 = .000174
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or .02%
Total (debt + equity) 218550 100%
E/(D+E) @ Enterprise Value 99.98%
D/(D+E) @ Enterprise Value 0.02%
Interest Rate (%) 8%
Tax Rate (@) 19%
WACC = ke * weight of equity + interest
rate * weight of debt (1 – tax rate)
WACC = 7.78% * 99.98% + 8% * .02% (1
- .19)
= 8%
In this, by undertaking CAPM assumptions cost of equity has found. From assessment, it
has identified that investors expect 8% return from WH Smith plc for the risk undertaken by
investing money in its shares.
Conclusion
It can be depicted from evaluation that WACC of WH Smith plc accounts for 85%
significantly. Due to the lack of having long term debt in the capital structure, solvency position
of target company is not recognized as good.
4. Calculating the value of the target company using the discounted free cash flow method
Discounted cash flow analysis or evaluation is highly significant that provides deeper
insight about the NPV of projected cash flows available. This model is based on the principle
that value of business unit is highly affected from its ability in relation to generate cash flows.
Evaluation based on such model lays high level of emphasis on fundamental expectations of
business over public market factors or historical aspects (Hasan, Zhang, Wu and Langrish,
2016). DCF model includes rigorous evaluation and relies on several assumptions. Hence, DCF
evaluation helps in assessing the overall value of business. Key components that provide
12

assistance in assessing the value of business include free cash flow, terminal value and discount
rate (Florian, 2010). Thus, by taking into account all such aspects future values can be
determined more effectually.
Along with this, such valuation technique presents suitable solution as it influences from
accounting practices and assumptions to the lower extent. It allows or facilitates separate
valuation of different business components and synergies. However, quality of outcome
pertaining to such analysis is highly influences from the reliability or validity of assumptions
made (Dragan, Rosi and Avžner, 2017). On the critical note, it can be mentioned that usually
terminal value represents high percentage of sum of DCF valuation. Under such condition,
valuation is highly based on TV assumptions rather than operating related to the business or
asset. Hence, for getting suitable solution from DCF analysis regarding bonds, shares, property
investment and business valuation analyst needs to make suitable assumptions by taking into
account both financial and non-financial factors.
Specifically, there are mainly four steps that DCF calculation includes such as:
 Making forecast about cash flow
 Calculating or assessing weighted average cost of capital
 Identifying terminal value
 Assessing equity value
In this, EBIT multiple method has been used for determining terminal or equity value in the
following way:
Step 1: Assessment or forecasting future cash flows
Unlevered Free Cash Flow Calculation
Calendar Year Ending December 31,
CAG
R
Particulars
201
2
201
3 2014
201
5
201
6
201
7
2012-
2017
EBIT
£10
2.0
£10
7.0
£117.
0
£12
4.0
£13
1.0
£13
8.0 6.6%
Plus: Non-deductible Goodwill
Amort. - - - - - -
EBITA £10 £10 £117. £12 £13 £13 6.6%
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2.0 7.0 0 4.0 1.0 8.0
Less: Provision for Taxes
(18.
0)
(21.
0)
(20.0
)
(20.
0)
(23.
0)
(24.
0)
Unlevered Net Income
£84
.0
£86.
0 £97.0
£10
4.0
£10
8.0
£11
4.0 7.3%
Plus: D&A (excl. non-deductible
GW amortization)
£34
.0
£35.
0 £34.0
£36.
0
£38.
0
£15.
4
Less: Capital Expenditures
(37.
0)
(38.
0)
(32.0
)
(39.
0)
(42.
0)
(48.
0)
Less: Increase in Net Working
Capital
(14.
0) (6.0) (4.0) 10.0 17.0 2.0
Unlevered Free Cash Flow
£67
.0
£77.
0 £95.0
£11
1.0
£12
1.0
£10
9 9.1%
Discounted cash flow method: Valuation of WH Smith plc
Total Enterprise Value
Terminal EBITDA Multiple
7.5x 8.0x 8.5x
Discount 6.0% $1,201.1 $1,252.7 $1,304.2
Rate 7.0% 1,153.5 1,202.7 1,251.9
(WACC) 8.0% 1,108.4 1,155.3 1,202.3
Total Equity Value
Terminal EBITDA Multiple
7.5x 8.0x 8.5x
Discount 6.0% $1,198.1 $1,249.7 $1,301.2
Rate 7.0% 1,150.5 1,199.7 1,248.9
(WACC) 8.0% 1,105.4 1,152.3 1,199.3
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Implied Perpetuity Growth Rate
Terminal EBITDA Multiple
7.5x 8.0x 8.5x
Discount 6.0% (4.1%) (3.5%) (3.0%)
Rate 7.0% (3.2%) (2.6%) (2.1%)
(WACC) 8.0% (2.3%) (1.7%) (1.2%)
Total Price Per Share
Terminal EBITDA Multiple
7.5x 8.0x 8.5x
Discount
6.0
%
$10.
70 $11.16 $11.62
Rate
7.0
%
10.2
7 10.71 11.15
(WACC)
8.0
% 9.87 10.29 10.71
Long term growth in free cash flow
2018 2019 2020 2021 2022
9% 4% 3% 5% 6%
Particulars
20
18
20
19
202
0
202
1
202
2
1 2 3 4 5
PV factor @ 8%
0.9
26
0.8
57
0.7
94
0.7
35
0.6
81
15

Forecasted
Unlevered free
cash flow
11
8.8
9
12
3.6
5
127
.35
9
133
.72
7
141
.75
1
Present value of
cash flows
11
0.0
9
10
6.0
1
101
.10
98.
29
96.
47
Step 2: WACC
CAPM Assumptions
WACC 8%
RFR 0.0284
Beta 0.69
R(m) 0.1
Enterprise Value (EV)
Current Market Price 1951
Diluted Shares 112
Market Capitalizations
21851
2
Long Term Liabilities 38
Less: Cash & Cash
Equivalents 35
Enterprise Value
219,49
7
E/(D+E) @ Enterprise
Value 0.9998
D/(D+E) @ Enterprise
Value 0.0002
Interest Rate (%) 8%
Tax Rate (@) 19%
WACC Calculation
WACC 8%
16

Step 3: Terminal value
Terminal Value
Sum of PV of FCF for explicit forecast 512
WACC 8.00%
Long term growth in free cash flow 5%
Present Value of terminal value 505
Terminal Value as % of Total Value
49.7
%
Step 4: Assessment of equity and intrinsic value
EV =
FCF1
+
FCF2
+ ... +
FCFn
+
TV
(1+r)1 (1+r)2 (1+r)n (1+r)n
Where:
FCFn= Unlevered FCF occurring at the end of interval n
TV = Terminal Value
r = Weighted-average cost of capital (WACC)
PV of FCF = Full value of the company
PV of FCF
– market value of debt
17

= value of equity
𝐸𝑉 − 𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 − 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠 = 𝐸𝑞. 𝑉.
Net debt and the corporate adjustments are derived with the following definitions:
𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 = 𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 + 𝑆h𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝑙𝑒𝑎𝑠𝑒𝑠 + 𝑂
𝑡h𝑒𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 − 𝐶𝑎𝑠h 𝑎𝑛𝑑 𝑐𝑎𝑠h𝑙𝑖𝑘𝑒 𝑎𝑠𝑠𝑒𝑡s
𝐶o𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠 = 𝑀𝑖𝑛𝑜𝑟𝑖𝑡𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠 + 𝑃𝑉 𝑜𝑓 𝑝𝑒𝑛𝑠𝑖𝑜𝑛 𝑑𝑒𝑓𝑖𝑐𝑖𝑡
+ 𝑂𝑓𝑓𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑠𝑕𝑒𝑒𝑡 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛𝑠 ± 𝐴𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑑 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒s
Equity Value
Enterprise Value 1,017
- Debt 38
+ Cash 35
Net Debt 3
Equity Value 1014
Intrinsic Value
Equity Value 1,020
Diluted Shares 112
Intrinsic Value 9
For the purpose of analyzing terminal value and sum of future cash flows several
assumptions are made. Hence, by applying discounted cash flow model, it has assessed that
terminal value lies within the range of £1108.4 - 1202.3 million respectively. Hence, by keeping
in mind such value it can be presented that estimated value of assets, in the context of maturity
adjusted for interest rate & cash flows, are higher. From, financial statement analysis, it has
identified that current book value, in 2017, of WH Smith plc plc accounts for 216 GBP million
respectively. Through subtracting the value of total assets from liabilities book value of the
company has assessed. Hence, in comparison to current book value, terminal figure of WH
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Smith plc is higher. Results of DCF model shows that in the near future value of assets will
increase significantly.
Further, through using and analyzing WH Smith plc statement of financial position it has
assessed number of diluted shares account for 112 (in million). Further, it has found that
currently share price of WH Smith plc is traded at 1951 significantly. On the basis of such
figures, value of market capitalization implies for 218512 GBP million. Market capitalization
assessment helps in ascertaining the actual worth of business unit. The rationale behind this,
share prices of the companies vary on daily basis. By taking into account enterprise and intrinsic
value it can be presented that shares of the firm are undervalued. As per value investing
approaches company such deal pertaining to acquisition will prove to be profitable for both WH
Smith Plc and shareholders. Hence, this in turn has direct impact on company’s net or actual
worth. Thus, market capitalization tool assists in determining the suitable value of business unit
and thereby helps in taking decision about expansion plans pertaining to merger and acquisition
(Market Capitalization, 2018). In conclusion to the overall assessment, it can be stated that
proposed acquisition plan will prove to be more suitable for Morrison’s. Hence, for exploring
operations and enhance margin Morrison's should focus on preparing competent plan for
acquisition purpose.
5. Summarizing findings and giving recommendations to the senior management team
By summing up this report, it has been concluded that Morrison’s Plc should focus on
doing horizontal acquisition. This in turn enables such retail unit to attain high margin by
widening reach, enhancing customer base and gaining high economies of scale. It can be stated
from evaluation that, in the case of horizontal acquisition, firm will purchase, manufacture and
sells products or services at large level. This in turn offers them cost advantages and helps in
increasing the level of profit margin. Further, it has been articulated that for the purpose of
acquisition listed and leading company of retail sector such WH Smith plc has been selected. It
can be seen in the report that financial position of WH Smith plc in terms of profitability,
liquidity and cash flow was good in the concerned past 4 years. It can be seen in the report that
profitability of WH Smith plc is increasing continuously over the years. This is turn gives
indication about the aspect that customers are satisfied from the products or services offered by
WH Smith plc. Hence, it is recommended to WH Smith plc that emphasis need to be placed on
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quality maintenance and improvement. Along with this, management team of Morrison should
make focus on conducting training session for personnel. This in turn helps in enhancing the
efficiency of personnel and thereby assists in delivering suitable services to the customers. Along
with this, it has been articulated that debt-equity position of WH Smith plc was not good. Hence,
in the near future, at the timer of raising funds company should keep in mind ideal ratio such
as .5:1. This in turn helps in developing optimal capital structure and thereby enhances
improving solvency position.
Further, it can be depicted from evaluation that liquidity position of the target company
was good in the concerned years but not sound. Moreover, liquidity ratio of the company was not
in line or equal to the ideal ratio such as 2:1 respectively. Thus, by taking effectual measures
Morrison’s plc can enhance the level of liquidity position. Along with this, it has been articulated
from evaluation that WH Smith plc is able to generate high and positive cash flows that
contribute in the growth of operations. Hence, by practicing effective management strategies
Morrison’s can aid in the growth and profitability of WH Smith plc and thereby overall group.
Besides this, it can be inferred from the evaluation that terminal value is higher and implies for
£1089 GBP million. It demonstrates that in comparison to the current time period value or assets
or cash will enhance to a great extent. Hence, as per the result of DCF evaluation, Morrison’s is
advised to acquire WH Smith plc. This in turn enables such retail unit to explore business
operations in different geographical areas and attain high profit with the help of loyal as well as
large customer base. Thus, by keeping in mind all such aspects it can be presented that proposed
acquisition of WH Smith plc will aid in shareholders wealth and financial aspects positively.
Hence, concerned acquisition strategy will prove to be more beneficial or profitable for
Morrison’s plc.
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