Investment Valuation in India

THEORIES of MERGERS The theories of mergers can be summarized into three major explanations. The first category is synergy or efficiency, in which total value from the combination is greater than the sum of the values of the component firms operating independently. Gains to Target Positive Gains to Acquirer Positive Total value Positive Hubris (the second category) is the result of the winner’s curse, causing bidders to overpay; it postulates that value is unchanged. Of course, in a synergistic merger, it would be possible for the bidder to overpay as well. Gains to Target Positive Gains to Acquirer Negative Total value NIL The third class of mergers comprises those in which total value is decreased as a result of mistakes or managers who put their own preferences above the well-being of the firm, the agency problem. Gains to Target Positive Gains to Acquirer Negative Total value Negative So as we see, gains to targets are always positive. ...

LEVERAGED BUY-OUT Leveraged buy-out is a corporate finance method under which a company is acquired by a person or entity using the value of the company's assets to finance its acquisition; this allows for the acquirer to minimize its outlay of cash in making the purchase. A leveraged buyout may also be referred to as a hostile takeover, a highly-leveraged transaction, or a bootstrap transaction. In other words a LBO is a company acquisition method by which a business can seek to takeover another company or at least gain a controlling interest in that company. Special about leveraged buy-outs is that the corporation that is buying the other business borrows a significant amount of money to pay for (the majority of) the purchase price (usually over 70% or more of the total purchase price). Furthermore, the debt which has been incurred is secured against the assets of the business being purchased along with the acquiring company. Interest payments on the loan will be paid from the fu...