Case Study 1.1. Google Acquires Motorola Mobility
1.Many acquisitions are intended to create measureable synergy between the acquirer and target firms. In what sense is Motorola Mobility’s role in this transaction unclear? Identify sources of synergy between Google and Motorola Mobility. What factors are likely to make the realization of this synergy difficult? Be specific.
2.Using the motives for mergers and acquisitions described in Chapter 1, which do you thing apply to Google’s acquisition of Motorola Mobility? Be specific.
3.Speculate as to why the share price of Motorola Mobility did not increase by the full extent of the premium and why Google’s share price fell on the day of the announcement. Be specific.
4.Speculate as to why the shares of other handset manufacturers jumped on the announcement that Google was buying Motorola Mobility. Be specific.
5.How might the growing tendency for technology companies to buy other firms’ patents affect innovation? Be specific.
Case Study 5-1 Exxon Mobil’s Unrelenting Pursuit of Natural Gas
1.What was the total purchase price or enterprise value of the transaction?
2.Why did Exxon Mobil’s shares decline and XTO Energy’s shares rise substantially immediately following the announcement of the takeover?
3.What do you think Exxon Mobil believes are its core skills? Based on your answer to this question, would you characterize this transaction as a related or unrelated acquisition? Explain your answer.
4.Identify what you believe the key environmental trends that encouraged Exxon Mobil to acquire XTO Energy.
5.How would you describe Exxon Mobil’s long-term objectives, business strategy, and implementation strategy? What alternative implementation strategies could Exxon have pursued? Why do you believe it chose an acquisition strategy? What are the key risks involved in ExxonMobil’s takeover of XTO Energy?
7.18Kingsman Incorporated had operating income before interest and taxes in 2011 of $220 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $10 million that same year. Capital spending totaled $20 million during 2011. At the end of 2010 and 2011, working capital totaled $70 and $80 million, respectively. The firm’s combined marginal state, local, and federal tax rate was 40% and its debt outstanding had a market value of $1.2 billion. The 10-year Treasury bond rate is 5% and the borrowing rate for companies exhibiting levels of creditworthiness similar to Kingsman is 7%. The historical risk premium for stocks over the risk free rate of return is 5.5%. No Growth’s beta was estimated to be 1.0. The firm had 2,500,000 common shares outstanding at the end of 2011. Kingsman target debt to total capital ratio is 30%.
a.Estimate free cash flow to the firm in 2011.
b.Estimate the firm’s cost of capital.
c.Estimate the value of the firm assuming the comparative market multiple of EBITDA is 6x
d.Estimate the value of the equity of the firm at the end of 2011.
e.Estimate the value per share at the end of 2011.
FINANCIAL MODELING EXERCISE
Prepare a financial five year income statement projection in Excel with the following assumptions:
Unit Sales – 4,000,000
Unit Price – $25
COGS – 50%
Sales & Marketing Expense – 15% of revenues
General & Administrative Expense – $2,000,000
Tax Rate 40%
Annual Depreciation – $100,000 (included in G&A Expense)
Year Two through Year Five
Unit Sales Increase – 10% per year
Price Increases – 2% per year
G&A increases – 4% per year
c.Net Profit Margin
2.If Company is valued at 6x EBITDA, what is the estimated current value after Year 1? Year 5?
3.Describe the operating leverage this company possesses?