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1a. True/ False - On average, acquisitions destroy shareholder value

Identify a corporate acquisition (within the last 10 years) which added value to the acquiring company and discuss a minimum of three (3) key factors which enabled their success?

Mergers and acquisitions are the fastest growth options that companies can use to upscale their operations, enter new markets, and broaden their product portfolio in an effort to counter stiff competition from established players in the industry (Mourdoukoutas, 2017). However, most of the cases involving high profile acquisitions have benefited the acquiring company but destroyed shareholder's value in the target company for various reasons. Some of the reasons cited for loss of shareholders' value in the most recent acquisitions include overvaluation resulting from fraudulent accounting practices which destroys company's reputation, conflict of interest from managers and other interested parties, and high tax liabilities resulting from acquisitions borne by the acquiring company which is often transferred to shareholders. According to National Bureau of Economic Research (2019) indicate the acquisition of large firms has led to the loss of $226 billion of shareholder's wealth in the last 10 years.

Normally, the acquiring company aims at benefiting from acquisitions at the expense of shareholders' value. In a recent acquisition involving Uber and its Middle East rival Careem, Uber stood to benefit in various ways. First, Careem operates in 14 middle east countries allowing Uber, therefore, to expand its dominance in the middle east, especially after having retreated from Russia, China, and Southeast Asia. Secondly, the acquisition gave Uber the synergy to expand in the middle east since Careem was already an established brand in 14 countries in the middle east (Evans, 2019). Lastly, Careem gave Uber the cultural diversity that it was lacking to succeed in the middle east countries since Uber being an American company, it did not have a culturally diverse workforce that would help it to penetrate a highly conservative society in the middle east. The Uber-Careem acquisition, therefore, helped Uber to succeed in the middle east market.

One more acquisition in recent years which has created great value for the acquiring company is social media giant, Facebook's acquisition of Instagram. Facebook acquired Instagram, a photo-sharing app back in 2012 for only $1 billion, when it had only a few million users. In seven years, Instagram's monthly active users grew to over 1 billion and is now a major driver of Facebook's growth. Facebook made $17.6 billion in revenue during the third quarter of 2019.

Here are three factors contributing to Instagram's success:

1) Instagram attracts the younger audience, like millennials and Gen Zers. Instagram cloned Snapchat's features like "Stories" and face filters, which were very popular among younger people

2) Instagram's engagement rate is much higher than most other platforms like Facebook. Hence, Instagram can command a higher ad rate.

3) On Instagram, Users have been generating content which are followed intently by users. Advertisers have leveraged this popularity.

1b. True/ False - A discounted cash flow valuation of a target company discounts the target's estimated free cash flows at the acquirer's cost of capital

The discounted cash flow valuation of the target company basically discounts the approximated free cash flows of a target company at the cost of capital of the target company. The basic principle here is that the discount rate needs to reflect the risk associated with the cash flows discounted so that true value of the target company can be obtained. Therefore, in order to determine the value of the target company, the free cash flows of the target company get discounted using the cost of capital/rate of return of the target firm and not the cost of capital or rate of return of the acquirer.

1c. True/ False - An acquirer should be willing to pay a higher control premium for a well managed company than a poorly managed one

Why is control considered so valuable? Identify a company which paid-up for a controlling interest and assess why it was done?

False - This is because the acquirer would require huge amount of operations to turn the operations of a target company in good position. Hence the acquirer would always pay a premium for a poorly managed company then for a well managed company. Similarly premium would also be paid by the acquirer if it feels that making premium can replace the company management in order to increase the value of the company.

Control is considered to be valuable for the following reasons:

Control can give ownership over operational & strategic decision making in the organization.

Control can help the particular individual to achieve top position in the organization i.e. he would become the chairman of the company.

Having a control can also help in striking major deals for the organization that can help the company to reach top position in the market.

It also provides a foundation for the future course of action of the company.

Control helps in correcting errors & take corrective measures to ensure that the errors dont repeat again.

Example of controlling interest:

Facebook acquired controlling interest over social media giant by purchasing 18% of the company's class B shares. This is because of the reason that company's class B shares carry 10 votes per share whereas the class A shares of the company carry only a single vote.

Also control is necessary because when someone has controlling interest in a company, he/she can dictate the rules and how the company is run. A big conglomerate buying a controlling interest in another company can set policies that bring out synergies in the parent company overall. Without a controlling interest it would not have been possible.

For Example Bharti Airtel of India bought controlling stake in Zain telecom operations in Africa so that it can bring out synergies in telecom in developing countries as Bharti had a good experience running a business in a low income group countries

1d. True/ False - The liquidation value of a company's shares always places a floor under its stock price

The given statement is not correct as the decision of liquidation is in the hands of controlling shareholders. However, if the management is widely disbursed, incumbent management is responsible for taking the decision regarding liquidation. Stock price has no role in placing the value of liquidation in the company's shares. Moreover, when the company is liquidated, the controlling shareholders has the right to assets and other income of the company. Also, they have the right to liquidate the company whenever the event comes. A company's share price during liquidation majorly depends on the management and worth of the assets as on the liquidation date. The management is certainly under no obligation to liquidate and may continue operations if it believes that the firm has worth than what has been perceived. Also, the management predicts that the future prospects are optimistic then it may decide to continue the operations with out having regard to those who may believe otherwise.

Liquidation - Liquidation is a process in which the properties and assets of a companies is distributed to claimants when the organization is brought to an end. Liquidation is proceeded when a company becomes bankrupt or insolvent. Insolvency is an event when a company has not enough funds for making the necessary payments related to the business.When a liquidation process starts, creditors are the first to receive funds from the liquidation process.

1e. True/ False - An unusually low stock price in management's eyes encourages management to take the company private in a management buyout

Identify an instance where management took a company private based on a low stock price valuation? Did the company remain private, and if so, why did it remain in private hands?

True: Management buyout involves managers or managing partners taking a controlling shares in a company for various reasons one of them being to improve the performance of the company's undervalued stock.

Management buyout involves managers or managing partners taking a controlling shares in a company for various reasons. In the event of a company's stock under performing or undervalued in the stock market, the management might opt to buyout the company taking it private or having a controlling stake in the company in an effort to improve the value of its stock. A recent example of a management buyout in the United States involved AT&T Elliot Management bought a $3.2 billion stake in the company after the company's stock was performing poorly in the market. The buyout was aimed at improving the company's stock prices by at least $60 which the management believed would catapult the company's stock value by at least 9% (Franck, 2019). Prior to the buyout, the company's stock was valued at an average of $36.25 per share which the management considered to be too low prompting the buyout to improve its market value (Franck, 2019). Despite the company not remaining private, the acquiring management has a controlling shares in the company helping them to make critical decision relating to the management and operations of the company. Elliot's management, for instance, announced to facilitate the exit of the current CEO Randall Stephenson to improve investors' confidence in the company's stock.

Also example is Dell, which was taken private in 2013. At this time, the stock of the company had fallen over 30% in the previous 5 years. The company remained private because there was no incentive for the management to go public again. It could raise additional funds through private placement of shares without having to go through the cumbersome process of a public issue.