Merger and Takeover Analysis: Adison Business Sales Limited

This project analyzes the concept of mergers and takeovers, defining the roles of the buyer, seller, and intermediary (Adison Business Sales Limited). It explores horizontal takeovers, their benefits, and the importance of shareholder wealth maximization. The project delves into financial intermediation, valuation methods (stock valuation, capitalized earning value, and price/earnings ratio), and the impact of mergers on capital markets. It emphasizes the significance of calculating the correct merger value and the role of intermediaries in providing information, launching bidding processes, and advising on bid values. The project also discusses the capital asset pricing model, synergies, and commission structures, offering a comprehensive understanding of the merger and acquisition process from an intermediary's perspective. The project also includes the valuation methods for determining the correct value of the company for the merger.

Merger and Takeover
Adison Business Sales Limited (Intermediary)
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Concept and Implications of market efficiency
Merger and takeover can be defined as the term in which one company buys the other company
for some valid consideration. For the merger or takeover process, there is need of at least three
parties to be present here- the seller company, the buyer company and the intermediary. The
buyer company is one which wants to buy the other company at minimum possible price. The
seller may want to sell at maximum price. The third party, called intermediary, wants to take the
maximum commission from both the seller and buyer.
Role of my company
In this game, I am playing the role of an intermediary. The benefit of being an intermediary is
that there will be no loss on selling or buying process of the companies. The work of an
intermediary is just to attract both the buyer and seller for the business. The commission received
will be a fixed percentage on the selling price. The name of company I formed for the selling and
buying companies is Adisons business sales limited. The role I m playing through intermediary
is of broker business.
There are various types of takeover that can be divided into three parts, horizontal takeover,
conglomerate takeover and vertical takeover. The company we are selling is the type of
horizontal takeover. In the horizontal takeover, the two companies operate in the same industry
and at similar stage of production. The benefit for the merger of two companies is that it
becomes beneficial for the shareholders to take better returns on their investments. The
justification for the takeover or merger is that shareholders wealth will increase.
The benefit for the horizontal acquisition is that it increases the market share. It helps to increase
the monopoly profits of the company. The financial benefits for the justifications are that it
becomes financially benefited for the investors. If the company is tax exhausted, then it becomes
beneficial for that company to accept the merger option. Merger affects the capital market in the
way that it becomes a decision point for the shareholders to invest in new merger company or
take their values back and invest in another company. The main aim for companies going for
merger and acquisition is to make a growth of the companies by investing in a single company.
The shareholders of both the companies can enjoy the benefit of merger by taking the better
return on investment. It is important to calculate the correct value of merger for calculating the
correct profit.

Merger requires taking all the assets and liabilities of the company. The liabilities of the merging
company are also the liabilities of the other company. The value at which the company is
merging is the market value of the business (Jim Milliot, 2014). The merger and acquisition
happens in real life in a little complicated process. Financial intermediation also helps the buyers
by financial help. They charge their financing charges by providing the funds to the buyers.
The companies also go for the merger process when a similar company is not going so good but
its existence affected the company’s growth. In this situation, the companies may deal with each
other and merge the companies to gain the profit in the industry (Andrew J, Sherman, 2011). The
company going through the minimum profit will be taken by the company achieving the high
profit.
In the process of merging, there are various things that companies have to identify. There is need
to identify the target company, identify the information about the targeted companies is also
important. By using this information, the companies are able to understand the maximum
purchase price in the market. It is difficult for the organizations to find so much information.
Intermediaries help to find this information for the buying company. The buying or selling
company does not need to go themselves to find out the company that will be beneficial for them
(Stanley Foster Read, 2007). The intermediaries can find the information on the behalf of the
companies. They decide the best way on which the companies can accept the target company.
The intermediaries launch the bidding process for the company. The bid will be continued till the
selling company gets satisfied.
Role of Financial Intermediation
Financial institutions also play role in the merger and acquisition process. My company is also a
financial intermediary. We help the sellers and buyer in many aspects like advising on bid value
and organizing the defence tactics. We charge the advertising fee for the selling and buying from
the companies. There are too many valuation methods which we can use to merge the company.
These methods include stock valuation method, asset based valuation method and income based
valuation method (Jeffery A Krug, 2008). These methods can further be divided into more types.
Stock market value method is defined as the number of issued shares to be divided by their
market price. It reflects the minimum purchase price of a company. It is the useful method for
the buying company.
Business Valuation

As per the stock valuation method, the market value for the company can be calculated as
follows:
= Number of market share * market value of shares
= 10m* 15.5 = 155£
The market value calculated is £155m.
The other method for calculating the market value of the company is capitalized earning value.
This method requires finding the required earning yield of the company. This capitalization
method used to reflect the factors such as size of the company and the industry in which the
company operates.
Required Earning Yield = EPS/share price or reciprocal of price earnings ratio
= (1/13.47)*100= 7.4%
Capitalized earning value = Annual earning/required earning yields
= 11.5/7.4% = 155
On calculating the value using the above factors, the value that will be useful for the merger is
after the additional cash flow and synergy treatment.
The value that we calculated is without using the discount factors in the calculation. There is also
the point where strategic buyers can get the benefit of annual synergy of £1. On the sale of
duplicate asset, there would be profit of generating £ 5m. If we use this in the market value will
come at the 155+5-1= 159£. The value is less than the buyers are expecting to buy the company.
The value is not appropriate as per the seller point of view. There should be a value that will be
greater than this value .Buyers are agree to buy at 180£ and sellers are agree at 210£, we must
find the value that will be appropriate for all. The value must be calculated as per the method that
is best using method.
The company receives offers from 5 sellers and 7 buyers in the industry. The buyers want to buy
any company at minimum price. After looking at the buyer’s views, I have advertised for sale a
business for 180 million. But the seller’s value is 210 million. So it is advisable to calculate a
value that would be beneficial to all the buyers and sellers. The main aim is to provide the best

intermediate facilities and charging the companies for the best commission price. The bid we
have decided to make is going to be a large one.
Price/earnings ratio Valuation
This method clears about the valuation of company’s data using Target Company’s distributable
earning. It is the most common method for calculating the measure for the value of the stock.
This is the combined calculation of two factors of market value per share and earnings per share.
Price earnings ratio depends upon the economic and financing condition of the market. It shows
the direct relationship of the market price of the shares of the company. This ratio is the best
method for the investment valuation. Shareholders after reviewing the new company’s price
earnings ratio (Patrick, 2011).
The best method of calculating the value of merging value is stock valuation method. It increases
the efficiency of the value based on stock. The buyer company will be interested in the stock
value of the other company. The reason for calculating the value as per the stock valuation
method is that it can clarify the value of shares. This method clears about the value of the
number of share with the number of share. It explains the value of shares available in the new
merged company (Timothy J. Galpin, 2007).
As being in the position of an intermediary, the motive for the calculation of all the factors is that
it contributed to the value of the selling and buying process. The intermediary must calculated
the value for the benefit for both of the companies that are buying and selling. Sellers may
calculate only the values that are valuable from the point of view of the seller. They may want to
take the value that will be highly possible (Kavita Shetty, 2011). The intermediary is the party
which helps to take the effective and sufficient value from the buyer. The values calculated
should be as per the proper formula and procedure. the intermediaries advised the company
about the time for selling the company when there is enough demand for the companies in the
industry (Edwin L, 2007).

Evaluation
In the evaluation of the report we may discuss the models such as capital asset pricing model.
Capital asset pricing model describes the understanding of risks on an investment made by the
investors. It uses the risk free rate and return on the market value. Return on market can be
described as the value calculated by analyzing the value of risk the company have. Some
companies have less risk and some charges high risk. The concept applied to the risk includes
securities (Carry Cooper, 2016). In the capital asset pricing model, beta is the factor which
evaluates the risk of the investment. The more the beta is, the less risk there would be in the
industry. Risk free rate refers to the rate which includes the rate that is assumed to have no risk.
This method clears about the price that an organization should take for the merger process.
Because I am on the intermediary process, I will take the value that would be beneficial for the
buyer as well as seller. In my company, the main motive is to attract the buyers and sellers
towards the company. Best values can attract both the buyers as well as the sellers (Stephen,
2012).
The materialization of synergies is the great concept in finding the value of the merger. These are
helpful for taking the decision for buying any company. Synergies can be determined as the
process of growth opportunities, cost saving and other financial benefits. The estimation of
synergies is the point of success in the organization (Ray K G, 2010). The negative value of
synergies refers to the point that the companies should not be merged. The gain in the value of
combined entity can be present value of the synergy cash flows. Synergies are the material factor
in the process of merger (William J. Gole, 2008). There can be two types of strategies in the cash
flow. These can be described as revenue synergy and cost synergy. Revenue synergies tend to be
more attractive and speculative than the cost synergies.
The above methods of valuation of the merger value for the companies are calculated to the best
of it can. The values of the above mentioned methods are the basis for the payment of the
intermediary commission (James Scott, 2015). The commission received is 5% of the value on
which the company is selling. When the company is sold, the first point to be considered for the
payment is the commission of shareholder’s value.
The work of my company is to find a better buyer for the selling company. We will find the
buyer at the value calculated as the above procedure. After finding the value of the company we
are selling, the advertisement we make to the buyers will attract them toward the company.
There are buyers who want to buy the company at maximum value of 180m. We can negotiate to

them by attracting them towards the company they are buying. In this way, the companies may
buy or sell the company at the adequate price.
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