1. Assume that Abbey had decided to divest its ANTS and ANL divisions prior to any purchase discussions with Santander in early 2004. What is the likely range of values for those divisions based on the information available in the two cases? As the case does not include all the information to calculate this valuation, show what additional information you would need to have, make a reasonable assumption about any information not provided by the case, and provide the basis for your valuation. Consider the seller's and buyer's perspectives and assume a friendly (not hostile) transaction process.
Answer:
Accordingly, valuation is an appraisal of what specific thing is worth. This is not the same as the context of price. Valuation is something which will actually paid for in an industrial transaction like merging and acquisition. If Abbey would decide to divest its ANTS and ANL divisions to any agreement with Santander in early 2004 the likely range of values that can be considered is the values of growth of the two divisions prior to the years when ANTS and ANL divisions are facing financial trouble. Base on the case, the financial situation of ANTS and ANL are given and this information is useful to calculate valuation. However, there are some other information which is considerable in calculating valuation of ANTS and ANL.
The following are the assumed valuation that should be considered in computation:
· The statement of the financial assets of ANTS and ANL can be noted as a good valuation in considering the purchase of these two activities by Santander.
As a base for calculating valuation, the management or accountant of Santander and Abbey may look at the Net Tangible assets of the companies. Net Tangible assets is the summation of assets that can be seen in the balance sheet minus the intangible items and total liabilities. The calculated valuation for this is the physical assets managed by the both Santander and Abbey. However, this information may be affected by the accounting treatments of assets which include depreciation policies and others.
· The current situation of Santander in the UK market, at is has been recognised to be one of the most competitive financial industry within UK.
In order to calculate the valuation of the decision of selling ANTS and ANL activities of Abbey to Santander includes all assets which will come under the management of Abbey within the current financial year. This is also needed in order to calculate valuation for the perceived acquisition.
· The major information that can also be given emphasis as part of acquisition valuation also includes value of the enterprise.
Such valuation may be based on a primary allocation of assets that should be published by Abbey in accordance to the purchase of Santander with ANTS and ANL which can be attributed with the intangibles. Santander may examine the value of ANTS and ANL using the stand-alone basis of the cash flows of these activities.
The use of this information can be essential for several attributes. First, such information can provide a good view of what ANTS and ANL is capable of achieving when these two activities stand on its own. Such information may help create a floor with respect to value for transaction purposes. Secondly, the information that can be derived on a stand-alone basis of valuation can be compared to the targeted market value. Such information can be usable in valuating whether the target is over or under valued within the market environment. The information may allow the management of Abbey to calibrate model assumptions to Santander. By assessing the key assumptions related to this essential information, Santander’s management can gain confidence that the calculated valuation will give a reasonable guide in analysing the acquisition situation. The calculation of valuation must include company value to determine how saleable or marketable ANTS and ANL is even after the financial problems and issues encountered.
· Presents value of cash flow of ANTS and ANL activities, as well as the present value of cash flow for Santander can also be used to calculate valuation of the subject of acquisition.
For this transaction, Santander and Abbey (for ANTS and ANL) can use discounted cash flow (DCF) method. This approach can be used to determine the value of ANTS and ANL activities by computing the present value of cash flows over the life of Abbey. In this regard, other information includes the forecasted life-span of Abbey and the terminal value of Abbey.
In the first context, clear forecast of free cash flow should be established which composed of the economic costs and benefits of the said acquisition and transaction. Preferably, this forecasted time must be equated with the interval over which the company (like Abbey) enjoys a competitive position in the marketplace i.e., the condition where the expected profit exceeds required profits. For the transaction of Santander and Abbey, a forecast period of 5-10 years may be used. On the other hand, the value of Abbey or Santander derived from free cash follows which happens after the forecasted time is considered is captured by a terminal value. This information is derived in the last year of the forecasted time and capitalizes the present value of all upcoming cash flows which happens beyond the forecasted time. Such information is needed in order to calculate valuation and to determine whether both companies will be benefited from the acquisition of Santander with ANTS and ANL activities of Abbey.
Sample DCF Computation for Santander Acquisition with Abbey
DCF will be computed using the following formula:
Future Years
1
2
3
Forecast Net Income
100,000
120,000
144,000
Cash Flow Adjustment (B23)
75%
75%
75%
Forecast Cash Flow
75,000
90,000
108,000
Present Value Factor (Mid-year Assumption)
0.9017
0.7331
0.5960
Present Value of Cash Flow (Row 8 * Row 9)
67,625
65,976
64,367
Total Cash Flow: Years 1-3
197,968
Forecast Cash Flow Year 4 (D8 * (1 +B25)
113,400
Gordon Multiple
6.1614
Present Value of Cash Flow Year 4-Infinity
375,472
100% Marketable Minority (Total PV of CF) (B11+B14)
573,440
Discount for Lack of Marketability-%
16%
Discount for Lack of Marketability-$
89,457
100% Illiquid Minority Interest
483,983
Control Premium-% (See Table of Control Adjustments)
25%
Control Premium-$
120,996
100% Illiquid Control Interest
604,979
Assumptions
Payout Ratio
75.0%
Discount Rate
23%
Long-Term Cash Flow Growth Rate
5.0%
Table of Control Adjustments to Marketable Minority Values
Controlling Interests
25.0%
Private Minority Interest
-20.0%
21%
-2.0%
0.0%
75,000
23%
25%
100,000
22%
24%
300,000
21%
23%
900,000
20%
22%
3,000,000
19%
21%
10,000,000
18%
20%
30,000,000
17%
19%
85,000,000
16%
18%
258,000,000
15%
17%
Discount Rate Calculation
FMV-100% Marketable Minority Interest (=B15)
573,440
Ln FMV
13.25940841
Multiply By X-Coefficient
-0.008788
Subtotal
-0.116523681
Regression Constant
0.3452
Unadjusted Discount Rate
22.9%
Adjustment for Fama French Research
-2.0%
Discount Rate
20.9%
Discount Rate-Rounded
21%
All in all, with the valuations or assumptions given above, the situation of Abbey and Santander will dictate which of the information is really essential to calculate valuation of ANTS and ANL activities. The information should be relevant to the financial condition and current market situation of ANTS and ANL activities to make sure that Santander will not encounter drawbacks because of its purchased of Abbey’s ANTS and ANL. Acquisition transactions don’t usually go through smoothly. A lot of information should be needed in order to make sure that the acquisition process will benefit both companies. The calculation of valuation is helpful in determining whether acquisition transaction will benefit both the company or not.
2. As a senior manager in one of Abbey's back-office groups, how would you prepare your division for the post-merger integration?
Answer:
Merger has been recognised to be one of the strategic ways in business operation growth and expansion. In line with the strategy of Abbey it can be said that the used of merging may be able to provide the company a more comprehensive, efficient and effective ways to have a sustainable company growth. Mergers allow the company to grow both internally and externally because through mergers the family of the company has increased, not only in its local operation but also in global environment.
According to (2002) merger and acquisition will immediately impact the company with changes in ownership, in ideology, and eventually in practice. In order to have a more successful expansion, the company should provide some post-merger integration strategy. As a manager, it is my responsibility to ensure that both companies (Abbey and Santander) will be benefited from the transaction or agreement. In this regard, I will prepare my division for the post-merger integration by conducting a training and seminar program which will allow the staff to understand why the merging has been done. The Post-merger Integration approach will be considered so as to make sure that the organisational goal will be achieved. As a manager, I will design a post merger Integration management plan. In this plan, the use of an effective communication will be considered.
Figure 1
Post-Merger Integration Management Plan
The first part of this plan is the merger design, in this regard, being the manager of Abbey, I will focus on the structure of the transaction, its strategic vision the business model used by Santander. As a manager, I will create a merger principle and integration context including the organisational design of the new merged company to make sure that the staff will be knowledgeable about the new company. In order to prepare the division with the merger, a meeting will be conducted with the agenda of disseminating the information about the purpose and objective of the merger. In order to disseminate the information properly, an effective organisational communication will be used. In organizations, it is well-known that communication certainly affects business functions and operations. The ability to communicate of the persons involved in a particular business transaction will, by at large, determine the outcomes or results. Effective communications is a ‘life-skill’ upon which sound relationships are established.
Communication serves a number of functions for preparing a specific division for the post-merger integration (, 2001). Consequently, communication serves as the pathway through which post-merger integration are discussed. (1994) suggested that communication serves four primary operations within a specific groups. These include control or management, motivation, emotional aspects, and information dissemination. For example, I will use an effective communication approach to tell the employees about the merging activities. On the other hand, communication is linked to motivation by clarifying to staffs what is to be accomplished, how well they do their tasks, and what should be done to prepare themselves on a possible impact of the post-merger integration. Lastly, the final function of communication is related to its role in facilitating decision making. It provides the information that individuals and groups need to make decision by transmitting the data to identify and evaluate alternative choices.
In order to prepare the staff or employees regarding the merging activities, both internal and external communication must be included. Being the manager, I should be able to disseminate this information effectively internally and externally. In this manner, I can disseminate these merging in the following approach. First, I should be able to make the employees and staff aware of the said merging activities. Herein the I can conduct a meeting to tell their plan to the employees. In addition, I should also provide the employees and key stakeholders about the purpose and objective of the said merger activities to avoid conflicts and problems. I can also make a memorandum which indicates the reasons why the company must merge with other company system. This integration management process is important so that every member of the organisation will be aware of the said merging activities
As mentioned, merging process is complex and that the assurance of having a successful outcome is to have an effective communication within the division. Hence, I must insure that there are open channels for staffs of the division s to communicate new solutions, problems, input and feedback relevant with the process of merging ( & 1994). Furthermore, it is important that preparation for these activity through meeting and the information dissemination provided is clear and consistent within the departments of the organisation.
By and large, it can be said that in order to prepare the division of a company to a post-merger integration, effective communication is needed. It has been stressed out that to have a successful merging, the management that implements the changes must be committed to the importance of communication, and that they match actions and words. There should also be commitment to two-way communication process, more emphasis on face-to-face communication, shared responsibility for employee communication, immediate discussion when organizational controversies and problems arise, accurate transmission of information, and moreover, every member of the organization should treat communication as an ongoing process. In the problems in terms of cultural differences, the management that initiate the process must insure that there provide the employees the chance to express their feelings and assessments. This process will make sure that the division will be prepared in any challenges that will bring about by the merging activities.
Reference
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