Hybrid paying method taxation and raising cash , Corporate Finance


There are various ways of making a payment for M&A. Cash, stock-swap and combination of both. The hybrid paying method is commonly used method for most of organisations. Because people believe combination of cash and stocks structure would maximise the money function, whilst minimise the costs. However many factors can influence the method choosing.
Taxation is the main reason of altering different method. If acquirer willing to pay full cash payment, obviously it will be very costly. This amount will be taxed by certain rate, after successful acquisition, thus a higher premium is necessary to compensate for the tax they paid in order to secure the deal. But this lead to another issue how would you able to fiancé those cash from? Using the cash reserves, this is free cash flow for day-to-day base operating, it could be used, but it can course serious cash flow problems.

Raising cash from issuing new shares, most organisations would do such equity issuing, this is a quicker way to finance large amount of capital. But simply issuing more shares, would lead to drop in share price, this will not satisfy shareholders. There is a case when acquirer's share is overpriced; financing from issuing new equity will be preferable. Because acquirer can pay less as true value is lower than the market value. However, cash is much attractive than other paying method.

Raising cash from issuing new debt, current debt level is deciding whether or not issue new debts, because if organisation is highly geared or leveraged, issuing more debt can only make the firm weaker. However, firm have to make sure they are able to make fixed payment, otherwise, they will suffer from cash flow difficulties, the default risk is increasing high, and also it is very bad for brand image.

Cash flow is crucial to all the investments, is related to the future growth of a organisation, if acquirer believes itself has positive growth prospect, cash is important.
Referring our case, the firm is considered by board of directors to be financially sound with plenty of cash reserves and good mix of debt/equity in capital structure. Main shareholders believe the market value of firm is declining, they are losing money, due to these reasons we should consider to merger Sainsbury by paying mainly cash, and considerable stock swaps mix to Sainsbury in order to minimise the costs. Because cash M&A is a strong positive signal to show firm's capability and strong trend of future growth, it will greatly increase the confidence of potential investors, the market value will increase.
There is a potential risk we need to draw attention. The assumption we believe that our value is overprice/underpriced by the market, but it is not always the case eBay bought Skype in 2005 with 2.6bn dollars. But in the end of 2009, eBay decided to sell it with 2.75bn dollars, the acquisition was not successful.


"According to evidence over last 30 years, most acquisitions failed to create their expected value"-D.Mueller, "Mergers: Theory and Evidence
In many cases M&A not only failed to create value but also destroy value. For example, On September 25, 1989, Japanese electronics major Sony acquired the US-based Columbia Pictures Entertainment (Columbia), which also included TriStar Pictures, paying $4.8 billion ($3.2bn in cash and assuming an additional debt of $1.6bn) for it. Industry analysts felt that the acquisition cost of $27 per share paid by Sony was very high compared to Columbia's share price of $12 at the beginning of 1989. Moreover, Sony paid 22 times more than the company's annual cash flows at the time of acquisition.
For the financial year ending March 31, 1995, Sony reported a net loss of ¥293.36bn compared to a net profit of ¥15.30bn in the fiscal 1994. The write-off and loss came as a shock to Sony's shareholders, and industry analysts anticipated Sony's exit from movie business as it failed to leverage the expected synergies from the acquisition.

However, according to "Global M&A: Outlook for Retail" by KPMG, it shows that after the financial crisis in 2008, the world retail market is recovering slowly, the sales growth 15.8% at 2009, 2010 could be higher. For our calculated growth rate of 5.59%, it has great potential of future increasing in sales.

For our firm, UK is sensible target market to go into. Successful entering new market, could definite increase our competitiveness, relatively stable economy and low level of inflation rate, would secure our investment to be valuable.
The growing online shopping trend

Research shows that online shopper spending increase from to £17.3bn (6% increase) in 2008 and up to £29bn (9% increase) in 2011. Unlike US, UK shoppers are in the transition from traditional behaviour to online shopping, we believe this will help Sainsbury gain extra profit.

FT indicated that the failure of acquisition of Sainsbury in recent years mainly due to the inconsistent views of Sainsbury's employer pension scheme. For this particular case, if we agree with pension scheme, it would be beneficial not only help to secure the deal, but also has positive impact on our public image, shows the commitment of social responsibility.

In conclusion, there two things need to draw attention on. Firstly, be careful with M&A premium, Sainsbury is a well-established mature organisation, it will not be growing dramatically. Therefore the premium should not exceed more 50% of its current market value, in case paying too much premium. Secondly, different culture background might lead agency conflicts; communication difficulties with existing management team, these all could cause increase in cost and reduction in efficiency.

Posted Date: 2/19/2013 6:57:01 AM | Location : United States

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