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3.1 (10) Propose and apply a time value and risk assessment discounting method of valuation, critically discuss how you would advise Beecham and SmithKline Beckam to value an investment, prior to acquiring an orgrisation? If Beecham has paid a dividend of R0.15 per share and the dividend is expected to grow at 9% annually and the current the share price is R1.50: What is Boecham's cost of equity based on the dividend growth model? 3.2 (10) How Beecham approached its merger with SmithKline Beckman The merger of Beecham, the UK pharmaceutical and consumer products company, with the US pharmaceutical company SmithKline Beckman (SKB) was formally approved by the shareholders of the two companies in June 1989. A new company SmithKline Beecham (SB) was created. But the idea that Beacham needed to merge with a US partner had been sown in late 1986 when Robert Bauman, an American, was appointed CEO of Beecham. He hired the strategy consulting firm Booz Alen to study the future growth options for Beecham and the concept of an integrated healthcare company, selling both prescription and over the counter (OTC) drugs and healthcare products emerged. With the appointment of new board of directors, Bauman started to explore how this strategy could be put into effect. In December 1967. Beacham directors agreed to pursue potential partners in the US the largest pharmaceutical and healthcare products market in the world. Without entering the US market Beecham, which had more than two-thirds of its sales in Europe, would not be able to compete effectively with other pharma companies, especially the American ones. In the late 1980s. because of enormous competitive pressures as well as pressures from increased buyer power, regulatory relaxation in favour of generic producers, etc. The pharma companies were underperforming the stock market and they had to find new ways of enhancing their competitive advantage and their bargaining power against buyers, etc. Beecham had to increase its research and marketing capabilities substantially especially in the US. An important objective was to enhance these resources by pooling those of Beecham and those of an American firm. In 1988. Beecham executives including Bob Bauman made visits to potential US pharmaceutical candidate companies. Beecham also considered alternatives to mergers. Among the options considered were the following: . Forming a strategic alliance for co-marketing specific products in the US, adding significantly to its sales strength. Beecham could contract with research laboratories to co-develop its new compounds, thereby speeding up the drug discovery process. Buy several small companies. By acquiring several small companies and folding them into Beecham's existing US operations, it can build critical mass. Beecham, given its financial constraints, could make only small acquisitions. Building critical mass would take a long time, losing valuable time to its rivals in a fast-consolidating industry. Make a large acquisition. While overcoming the small acquisitions problems, this option would run up against a weak Beecham balance sheet. Beecham did not want to pursue an acquisition that could turn hostile and increase the acquisition cost . Be acquired or spin-off the two businesses. The threat of a competitor making a take-over bid before Beecham management had a chance to pursue any of these options still loomed. Moreover, the potential acquirer must be someone to Beecham's liking 3.1 (10) Propose and apply a time value and risk assessment discounting method of valuation, critically discuss how you would advise Beecham and SmithKline Beckam to value an investment, prior to acquiring an orgrisation? If Beecham has paid a dividend of R0.15 per share and the dividend is expected to grow at 9% annually and the current the share price is R1.50: What is Boecham's cost of equity based on the dividend growth model? 3.2 (10) How Beecham approached its merger with SmithKline Beckman The merger of Beecham, the UK pharmaceutical and consumer products company, with the US pharmaceutical company SmithKline Beckman (SKB) was formally approved by the shareholders of the two companies in June 1989. A new company SmithKline Beecham (SB) was created. But the idea that Beacham needed to merge with a US partner had been sown in late 1986 when Robert Bauman, an American, was appointed CEO of Beecham. He hired the strategy consulting firm Booz Alen to study the future growth options for Beecham and the concept of an integrated healthcare company, selling both prescription and over the counter (OTC) drugs and healthcare products emerged. With the appointment of new board of directors, Bauman started to explore how this strategy could be put into effect. In December 1967. Beacham directors agreed to pursue potential partners in the US the largest pharmaceutical and healthcare products market in the world. Without entering the US market Beecham, which had more than two-thirds of its sales in Europe, would not be able to compete effectively with other pharma companies, especially the American ones. In the late 1980s. because of enormous competitive pressures as well as pressures from increased buyer power, regulatory relaxation in favour of generic producers, etc. The pharma companies were underperforming the stock market and they had to find new ways of enhancing their competitive advantage and their bargaining power against buyers, etc. Beecham had to increase its research and marketing capabilities substantially especially in the US. An important objective was to enhance these resources by pooling those of Beecham and those of an American firm. In 1988. Beecham executives including Bob Bauman made visits to potential US pharmaceutical candidate companies. Beecham also considered alternatives to mergers. Among the options considered were the following: . Forming a strategic alliance for co-marketing specific products in the US, adding significantly to its sales strength. Beecham could contract with research laboratories to co-develop its new compounds, thereby speeding up the drug discovery process. Buy several small companies. By acquiring several small companies and folding them into Beecham's existing US operations, it can build critical mass. Beecham, given its financial constraints, could make only small acquisitions. Building critical mass would take a long time, losing valuable time to its rivals in a fast-consolidating industry. Make a large acquisition. While overcoming the small acquisitions problems, this option would run up against a weak Beecham balance sheet. Beecham did not want to pursue an acquisition that could turn hostile and increase the acquisition cost . Be acquired or spin-off the two businesses. The threat of a competitor making a take-over bid before Beecham management had a chance to pursue any of these options still loomed. Moreover, the potential acquirer must be someone to Beecham's liking