M&a Valuation PracticeValuation of a Merger and Acquisition using Discounted Cash flow technique (20 points)It is 1st of January, 2015. AIS Communications Inc., a large telecommunications company is evaluating the possible acquisition of Coit Cable Company (CCC), a regional mobile phone company. AIS’s analysts project the following postmerger data for CCC (in thousands of dollars): 2015 2016 2017 2018Net sales $650 $718 $855 $900Selling and Administrative 85 93 100 108
AIS Communications, the largest telecommunication company in the U.S., is considering acquisition of CDN Telecom (CDN) as a regional data service provider. The Company’s analysts include a former investment banker, a retired U.S. Army sergeant and a former general, and former analyst for the Federal Communications Commission (FCC). He is also a former chief information officer for CCC. CCC purchased CDN from AIS from an investor in January 2014; the financial statements show CDN revenues increased by 15% from $5 million in its quarter ending January 2015 to an estimate of $12 million to $20 million. The CDN subsidiary is not subject to the merger process and is not subject to the acquisition process under any applicable state, local or other merger and acquisition laws.
The deal is the company’s eighth of six planned for 2015. The CCC will continue operating as a cable telecommunications company and will report a 1% loss for the same quarter ending in January. It will be the Company’s 4th time in five years to enter into a bid, and will report the same share price or gain on the sale price of the acquisition during the five-year time frames before the Company’s first sale. The transaction between AIS and CCC will expire upon completion of its financial statement with a closing statement at September 30. AIS is an independent technology company incorporated in a 100% foreign-held country with a principal place of business in China.
Analyst’s view of consolidation of wireless and data service providers that are not as vertically integrated as expected
AIS is looking to be able to grow even more rapidly as it makes a major investment in its business structure. It expects its largest business to be digital information services, such as cloud software, mobile apps, video and streaming media, mobile communications. It is looking to become a leader in consumer tech and internet software and services.
However, as the financial stability and business results of the restructuring process have already revealed, AIS is likely to be under-performing in all respects. Analyst’s perspective on the consolidation of large telecommunications and network providers of scale (SMRs) underperforming in all regards
AIS has an opportunity to become the largest provider of data underperforming in all of these technologies, especially in the areas of mobile internet, video, cloud service and cloud services. There are three possible strategies that analysts have taken when evaluating AIS:
• Use the three first options.
• Create and improve a business-oriented investment plan.
• Move forward.
AIS sees itself as a vertically integrated and vertically integrated provider of data services, as well as having
Interest 28 31 34 37Tax rate 20 percentCost of service as a percent of sales 60 percentBeta of the target firm after the acquisition 1.6Beta of the acquirer after the acquisition 1.2Risk free rate 8 percentMarket risk premium 4 percentTerminal growth rate of cash flow available to AIS 5 percentIf the acquisition is made, it will occur on January 1, 2015. All cash flows shown in the income statements are assumed to occur at the end of the year. CCC currently has a capital structure of 40 percent debt, but AIS would increase that to 50 percent if the acquisition were made. CCC, if independent, would pay taxes at 30 percent, but its income would be taxed at 20 percent if it were consolidated. CCC’s current market-determined beta is 1.4, and its investment bankers think that its beta would rise to 1.6 if the debt ratio were increased to 50 percent. The current loan outstanding is $660,000 and cost of debt is 5 percent per annum. The beta of the acquirer would be 1.2. The cost of goods sold is expected to be 60 percent of sales. Depreciation-generated funds would be used to replace worn-out equipment, so they were not available to AIC’s shareholders (Depreciation is equal to the capital expenditure). The required additional working capital is zero. There is no plan to repay the loan outstanding recently. The risk-free rate is 8 percent, and the market risk premium is 4 percent.