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发表于 2012-3-30 14:22
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Gazelle Bancorp was formed 11 years ago to address what its founders deemed unmet consumer needs. Apparently, they were correct in their assessment, and Gazelle has grown rapidly as a niche player. This has attracted the attention of the other banks in its market, and rumors are swirling that two of its competitors are contemplating takeover bids for Gazelle. The firm’s management has approached Omega Financial for advice on strategies it can employ should the firm become a takeover target.Ionnias Padras, CFA, has been assigned as the lead advisor to Gazelle’s management. In advance of their initial meeting, he has prepared a list of questions and discussion points. With this information he hopes to built a coherent strategy either to fend off the potential suitors or to realize maximum value for Gazelle’s shareholders, should a takeover be consummated.
During the course of his meeting with management, Padras asks the bank managers a series of questions, and the answers he received are provided below each question.
Q1: What is your growth rate, and how does it compare to your potential acquirers?
A1: Our profits have been growing at a rate of approximately 10% per year, while our potential acquirers’ profits have been growing in line with the overall economy, which is about 3 to 4% per year.
Q2: Do you have any takeover defenses in place, and, if so, what are they?
A2: We have established a set of compensation arrangements to enhance management’s security. If a merger were to occur, our top 7 management personnel would each be paid 4 years salary. This is contingent upon the managers agreeing to remain in their jobs until the merger is completed.
Q3: How many banks are operating in the market, and what are their market shares?
A3: There are 11 other comparable financial institutions in our market. 8 of these institutions have a market share of 6% each, 3 of them have a market share of 15% each, and we have a share of 7%. Potential acquirer 1 has a share of 15%, while potential acquirer 2 has a share of 6%.
Q4: Do you consider any of your current competitors similar to Gazelle? Were there other banks previously present in the market that have been taken over recently?
A4: None of the current competitors have business models or growth rates that are comparable to Gazelle. There are three previously independent institutions that have business models and growth rates similar to ours, and are our direct competitors. These banks were taken over by other banks within the past 3 years.
Q5: What is Gazelle’s current market price and how many shares are outstanding? If your firm were to merge with either of its potential suitors, what is your estimate of the synergies available? Is there any chance that your board would agree to a takeover if the price were right?
A5: Our current share price is $43, and there are 50 million shares outstanding. We estimate that the present value of potential cost reductions and revenue enhancements for an acquirer would be approximately $500m. The board can probably be convinced to accept an offer it believes to be adequate.
Q6: Describe the structure of your banking operations. Is there any other course of action that you would consider that might make the bank less attractive as a takeover target?
A6: Gazelle is a combination of a traditional, full service bank, and a 24/7 provider of personal financial services. For example, we have been able to obtain exclusive agreements with the 2 largest grocery chains in our market to open branch offices in their stores. We have similar agreements with other 24/7 retail establishments, and consumers have found the ability to bank at any time of the day extremely attractive. We believe that this is the part of Gazelle that our prospective suitors are seeking.
Based upon the information provided to Padras, does it appear that the potential suitors are seeking to bootstrap their earnings? What stage of the industry lifecycle is Gazelle most likely in? | Bootstrap Earnings | Industry Life Cycle |
In order for bootstrapping to occur, a high price-to-earnings (P/E) firm needs to acquire a low P/E firm. In this case, based upon the relative growth rates, the opposite is likely to be true. Gazelle is most likely in the mature growth stage. In this stage, competition is present, but there is still opportunity for above average growth. During the rapid growth stage, competition is more limited than appears to be the case for Gazelle. (Study Session 9, LOS 32.d)
What type of take-over defense does Gazelle have in place, and is this likely to be sufficient to fend off a potential suitor?
| Take-Over Defense | Defense Sufficient? |
The company has a golden parachute package in place. If the compensation for the top 7 managers averaged $500,000, the total cost of the golden parachute is $14m. This is probably not sufficient to deter a bidder. Conversely, to the extent that it helps keep management in place during the acquisition, it may make Gazelle more attractive as an acquisition candidate. (Study Session 9, LOS 32.f)
If both of the prospective acquirers were to make bids, what are the probable antitrust ramifications for potential acquirer 1 and potential acquirer 2, respectively? A)
| No chance of antitrust action because change in HHI is less than 100; no chance of antitrust action because change in HHI is less than 50. |
| B)
| Good chance of antitrust action because change in HHI is greater than 100; small chance of antitrust action because change in HHI is less than 100. |
| C)
| Antitrust action virtually certain because change in HHI is greater than 100; small chance of antitrust action because change in HHI is less than 50. |
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Based upon the market share data provided, the initial HHI value is:
If acquirer 1 were successful, the new HHI = 1222 (an increase of 210). This indicates a good chance of an antitrust challenge.
If acquirer 2 were successful, the new HHI = 1096 (an increase of 84). This indicates a small chance of an antitrust challenge. (Study Session 9, LOS 32.g)
Based upon the information provided, what type of valuation methodology is most likely to be used by the potential acquirers? A)
| Comparable transaction. |
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Since there are no comparable direct competitors in the market, comparable firm analysis is unlikely. Discounted cash flow analysis is a viable possibility. However, given that there have been 3 comparable transactions over the past 3 years, this argues strongly in favor of a comparable transaction valuation methodology. (Study Session 9, LOS 32.h)
What is the probable price range for an offer for Gazelle? If one of the acquirers makes an offer of $55, should the board accept it?
The probable price range is the current market price to the current price + the value of the synergies. That is, $43 to $43 + 500m / 50m = $53. If they receive an offer greater than $53, the board should accept. (Study Session 9, LOS 32.k)
If Gazelle were to separate itself into two parts, the traditional bank and the 24/7 bank, and to sell off the 24/7 bank in a public offering, what would the action be called from the standpoint of the sale and from the standpoint of a takeover defense?
A)
| | Equity carve-out | Crown jewel defense |
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| B)
| | Equity carve-out | Leveraged recapitalization defense |
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| C)
| | Split-off | Crown jewel defense |
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A public offering of a subsidiary as a stand-alone enterprise is called an equity carve-out. Using this technique to fend off a merger is known as a crown jewel defense. (Study Session 9, LOS 32.n) |
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