Tiếng anh chuyên ngành kế toán part 60

578
Making Key Strategic Decisions
Tax Savings Corporations in the U.S. pay billions each year in corporate in-
come taxes. M&A activity may create tax savings that would not be possible ab-
sent the transaction. While acquisitions made solely to reduce taxes would be
disallowed, substantial value may result from tax savings in deals initiated for
valid business purposes. We consider the following three ways that tax incen-
tives may motivate acquisition activity:
1. Unused operating losses.
2. Excess debt capacity.
3. Disposition of excess cash.
Operating losses can reduce taxes paid, provided that the firm has operating
profits in the same period to offset. If this is not the case, the operating losses
can be used to claim refunds for taxes paid in the three previous years or car-
ried forward for 15 years. In all cases, the tax savings are worth less than if
they were earned today due to the time value of money.
Example 4 Consider two firms, A and B, and two possible states of the econ-
omy, boom and bust with the following outcomes:
Firm A Firm B
Boom Bust Boom Bust
Taxable income $1,000 $(500) $(500) $1,000
Taxes (at 40%) (400) 0 0 (400)
Net income $ 600 $(500) $(500) $ 600
Notice that for each possible outcome, the firms together pay $400 of
taxes. In this case, operating losses do not reduce taxes for the individual firms.
Now consider the impact of an acquisition of firm B by firm A.
Firm A/B
Boom Bust
Taxable income $500 $500
Taxes (at 40%) (200) (200)
Net income $300 $300

The taxes paid have fallen by 50% to $200 under either scenario. This is
incremental cash flow that must be considered when assessing the acquisition’s
impact on value creation. This calculation must be done with two caveats.
Firstly, only cash flows over and above what the independent firms would ulti-
mately save in taxes should be included and secondly, the tax savings cannot be
the main purpose of the acquisition.
Interest payments on corporate debt are tax deductible and can generate
significant tax savings. Basic capital structure theory predicts that firms will
issue debt until its additional tax benefits are offset by the increased likelihood
Profitable Growth by Acquisition
579
of financial distress. Because most acquisitions provide some degree of diversi-
fication, that is, they reduce the variability of profits for the merged firms,
they can also reduce the probability of financial distress. This diversification
effect is illustrated in the previous example, where the postmerger net income
is constant. The result is a higher debt-to-equity ratio, more interest payments,
lower taxes, and value creation.
Many firms are in the enviable position of generating substantial operat-
ing cash flows and over time, large cash surpluses. At the end of 1999, for ex-
ample, Microsoft and Intel held a combined $29 billion in cash and short-term
investments. Firms can distribute these funds to shareholders via a dividend or
through a stock repurchase. However, both of these options have tax conse-
quences. Dividends create substantial tax liabilities for many shareholders and
a stock repurchase, while generating lower taxes due to capital gains provisions
cannot be executed solely to avoid tax payments. A third option is to use the ex-
cess cash to acquire another company. This strategy would solve the surplus
funds “problem” and carry tax benefits as no tax is paid on dividends paid from
the acquired to the acquiring firms. Again, the acquisition must have a busi-
ness rationale beyond just saving taxes.
The following example summarizes the sources of value discussed in

this section and illustrates how we might assess value creation in a potential
acquisition.
Example 5 MC Enterprises Inc. manufactures and markets value-priced digi-
tal speakers and headphones. The firm has excellent engineering and design
staffs and has won numerous awards from High Fidelity magazine for its most
recent wireless bookshelf speakers. MC wants to enter the market for personal
computer (PC) speakers, but does not want to develop its own line of new prod-
ucts from scratch. MC has three million outstanding shares trading at $30/share.
Digerati Inc. is a small manufacturer of high-end speakers for PCs, best
known for the technical sophistication of its products. However, the firm has
not been well managed financially and has had recent production problems,
leading to a string of quarterly losses. The stock recently hit a three-year low of
$6.25 per share with two million outstanding shares.
MC’s executives feel that Digerati is an attractive acquisition candidate
that would provide them with quick access to the PC market. They believe an
acquisition would generate incremental after-tax cash flow from three sources.
1. Revenue enhancement: MC believes that Digerati’s technical expertise
will allow it to expand their current product line to include high-end
speakers for home theater equipment. They estimate these products
could generate incremental annual cash flow of $1.25 million. Because
this is a risky undertaking, the appropriate discount rate is 20%.
2. Operating efficiencies: MC is currently operating at full capacity with
significant overtime. Digerati has unused production capacity and could
easily adapt their equipment to produce MC’s products. The estimated
580
Making Key Strategic Decisions
annual cash flow savings would be $1.5 million. MC’s financial analysts
are reasonably certain these results can be achieved and suggest a 15%
discount rate.
3. Tax savings: MC can use Digerati’s recent operating losses to reduce its

tax liability. Their tax accountant estimates $750,000 per year in cash sav-
ings for each of the next four years. Because these values are easy to esti-
mate and relatively safe cash flows, they are discounted at 10%. The
values of MC and Digerati premerger are computed as follows:
Number of
Company Shares Price/Share Market Value
MC Enterprises 3,000,000 $30.00 $90 million
Digerati Inc. 2,000,000 6.25 12.5 million
Assume that MC pays a 50% premium to acquire Digerati and that the
costs of the acquisition total $3 million. What is the expected impact of the
transaction on MC’s share price?
Solution: We first compute the total value created by each of the incremental
cash flows:
Annual Cash Discount
Source Flow Rate Value
Revenue enhancement $1.25 million 20% $ 6.25 million
Operating efficiencies 1.5 million 15 10.0 million
Tax savings $750,000 10 2.38 million
Total Value = $18.63 million
The total value created by the acquisition is $18.63 million. A 50% pre-
mium would give $6.25 million of this incremental value to Digerati’s share-
holders. After $3 million of acquisition costs, $9.38 million remains for MC’s
three million shareholders. Thus, each share should increase by $3.13 ($9.38
million divided by the 3 million shares outstanding) to $33.13.
Note that the solution to Example 5 assumes the market knows about and
accepts the value creation estimates described. Investors will often discount
management’s estimates of value creation, believing them to be overly opti-
mistic or doubting the timetable for their realization. In practice, estimating
the synergistic cash flows and the appropriate discount rates is the analyst’s
most difficult task.

Summary The sole motivation for initiating a merger or acquisition should
be increased wealth for the acquirer’s shareholders. We know from the em-
pirical evidence presented in section III that many transactions fail to meet
this simple requirement. The main point of this section is that value can only
come from one source—incremental future cash flows or reduced risk. If we
can estimate these parameters in the future, we can measure the acquisition’s
Profitable Growth by Acquisition
581
synergy, or potential for value creation. For the deal to benefit the acquirer’s
shareholders, management must do two things. The first is to pay a premium
that is less than the potential synergy. Many acquisitions that make strategic
sense and generate positive synergies fail financially simply because the bid-
der overpays for the target. The second task for the acquirer’s management is
to implement the steps needed after the transaction is completed to realize
the deal’s potential for value creation. This is a major challenge and is
discussed further in section VII. In the next section we briefly present some
of the key issues managers should consider when initiating and structuring
acquisitions.
SOME PRACTICAL CONSIDERATIONS
In this section, we briefly discuss the following issues you may encounter in de-
veloping and executing a successful M&A strategy:
• Identifying candidates.
• Cash versus stock deals.
• Pooling versus purchase accounting.
• Tax considerations.
• Antitrust concerns.
• Cross-border deals.
This is not meant to be a comprehensive presentation of these topics. Rather,
the important aspects of each are described with the focus on how they can in-
fluence cash flows and synergy. The goal is to make sure that you are at least

aware of how each item might affect your strategy and the potential for value
creation.
Identif ying and Screening Candidates
Bidders must first identify an industry or market segment they will target. This
process should be part of a larger strategic plan for the company. The next step
is to develop a screening process to rank the potential acquisitions in the indus-
try and to eliminate those that do not meet the requirements. This first screen
is typically done based on size, geographic area, and product mix. Each of the
target’s product lines should be assessed to see how they relate to (a) the bid-
der’s existing target market, (b) markets that might be of interest to the bid-
der, and (c) markets that are of no interest to the bidder. Keep in mind that
undesirable product lines may be sold.
It is also important to evaluate the current ownership and corporate gov-
ernance structure of the target. If public, how dispersed is share ownership
and who are the majority stockholders? What types of takeover defenses are in
582
Making Key Strategic Decisions
place and have there been previous acquisition attempts? If so, how have they
fared? For a private company, there should be some attempt to discern how
likely the owners are to sell. Information about the recent performance of the
firm or the financial health of the owners may provide some insight.
The original list of potential acquisitions can be shortened considerably
by using these criteria. The companies on this shortened list should be first an-
alyzed assuming they would remain as a stand-alone business after the acquisi-
tion. This analysis should go beyond just financial performance and might
include the following criteria:
14
Other popular tools for this analysis include SWOT (strengths, weak-
nesses, opportunities, and threats) analysis, the Porter’s Five Forces model,
and gap analysis. Once this process is completed, the potential synergies of

the deal should be assessed using the approach presented in the previous sec-
tion. The result will be a list of potential acquisitions ranked by both their po-
tential as stand-alone companies and the synergies that would result from a
combination.
Cash versus Stock Deals
The choice of using cash or shares of stock to finance an acquisition is an im-
portant one. In making it, the following factors should be considered:
1.
Risk-sharing: In a cash deal, the target firm shareholders take the money
and have no continued interest in the firm. If the acquirer is able to create
significant value after the merger, these gains will go only to its sharehold-
ers. In a stock deal, the target shareholders retain ownership in the new
firm and therefore share in the risk of the transaction. Stock deals with
Microsoft or Cisco in the 1990s made many target-firm shareholders
wealthy as the share prices of these two firms soared. Chrysler Corpora
tion
Future Performance Forecast
Growth prospects
Future margin
Future cash flows
Potential risk areas
Key Strengths/Weaknesses
Products and brands
Technology
Assets
Management
Distribution
Industry Position
Cost structure versus competition
Position in supply chain

Financial Performance
Profit growth
Profit margins
Cash flow
Leverage
Asset turnover
Return on equity
Business Performance
Market share
Product development
Geographic coverage
Research and assets
Employees