STRATEGIC ANALYSIS OF ACQUISITION:

The decision of acquiring Saxon is good according to strategic point of view although the decision is tough because of the economic conditions of the fund’s management. The performance of a company is not very good, and it was a decline seen in the previous years although the acquisition seems a good measure on account of IBM, because of the management operation that the company would acquire after the acquisition of the enterprise. The advantage lies in similarities in both the companies, both are asset management companies operating in Canada, working as a combined unit they would achieve more economies of scale and can gain advantage from each company’s active zone. Thus customers are also attracted to the combine performance, and customer base would increase. The performance as a merge unit would affect the overall outlook of the company.

PROS AND CONS OF ACQUIRING SAXON:

There are many pros for acquiring the company if we compare them to cons.

The pros of acquiring the asset management company are:

INCREASED ECONOMY OF SCALES:

The economy of scales would increase after acquiring the company because companies get better opportunities to flourish and expand their operations and do better performance practices.

GROWTH OPPORTUNITIES:

The company would have a potential to gain growth in future if we assess the performance of the company. The historical results of the company in mutual funds shows efficient performance i.e. from 3.6 billion dollars in 1980 climbs to 696 billion dollars in 2007.

PRODUCT INNOVATION:

With the acquisition of the company, there would be product innovation. The performance of the company enhanced, and the product range also increases. The innovativeness could be achieved by the combined performance of the mutual funds with better operation management.

COMPETITIVENESS:

By acquisition, competitiveness could be attained, the combined effect of the companies would help to compete with the competitors in a better way. The share of the market also increased by the combined share base of the enterprise.

DIVERSIFIED DEPARTMENTS:

A business that would add to the advantage of the company, there is uniformity in the departments of both the companies, the asset management, mutual fund expansion could be attained.

CONS OF ACQUISITION:

With the pros, there are also some cons on the acquisition of the company i.e.

By acquiring the company, if the company opts to issue new shares to the shareholders of Saxon, it would reduce the earning per share and collectively it would bring different impact on the performance of the company.

Furthermore, the performance of the company is not up to the mark in the previous year, incorporating its assets and liabilities in a new system might affect it, in the long run, there would be a probability of not to add much in revenue as much as in cost of acquisition and asset management.

VALUATION OF THE COMPANY:

Valuation of the company can be done by applying various analysis in calculating the value of the company. All the analysis have their characteristics properties and pros and cons. All the methods are effective in their way and provide the valuation of the enterprise. The most widely used method to calculate the enterprise value is DCF analysis. By using DCF analysis, cash flows for the upcoming years are predicted and discounted to the present value of the inflows and outflows of the company.

DCF MODEL:

In the model, the main thing which is required to discount the cash flows is the weighted average cost of capital. The cost of capital can be calculated by taking the weighted average percentages of the equity and debt levels of the company.

Here the company has no long or short term debts to be used in calculating the weighted average cost of capital. So the equity cost is used to derive the cost of capital. The cost of equity is calculated by using capital asset pricing model. The formula used to derive the cost of capital is:

Cost of equity = Risk free rate + (market risk premium * beta)

The percentages and variables that are given in the approach are 3.66% is a risk free rate, 7.42% is market risk premium, and 0.62 is the beta rate.

By using the formula, the calculated cost of equity is 8.62%. It is used as the weighted average cost of equity because a company has debt services and overall capital is equity based. After calculating the cost of capital, the next step is to calculate the free cash flows of the company which can be used to calculate the enterprise value.

The formula for calculating free cash flows is:

FCF = operating cash flows – changes in working capital – Capex.

A case study requires us to draft the cash flows up to 2012. The forecasting percentages that are provided by the case study are:

Growth in revenues = 16%.

6 5 and 4 % in the years after 2009.

It is given in the case that EBT is used instead of EBIT or EBITDA, because of the ease avoiding complexities. The tax rate for the company can be used to 34.5% for the next years. It is assumed that there will be no change in working capital. The terminal growth rate of the company is taken as 4%.

The discount factor i.e. cost of capital is taken 8.26%. And the cash flows are discounted to calculate the enterprise value of the company.

The enterprise value calculated is shown in the exhibit.

VALUATION BY USING PUBLIC TRADED COMPARABLE COMPANY ANALYSIS:

The valuation of Saxon is done by using public traded comparable company analysis. In this analysis, the data of the company is compared with the data of the comparable companies i.e. the competitors. We choose those companies whose operations are same as the company under consideration. The industry characteristics are same. The data given in the case is analyzed, and only those companies which are relevant for the analysis are prioritized for the purpose.

Those companies are similar in size and the business operations,

From the analysis done it can be evaluated as:

The Saxon financials are relatively good, in spite of the decline in the share prices during the previous year.

The company’s average P/E ratio is given, and according to that, the net worth per share is $11.5.

The calculated value of P/E ratio of the company gives company’s shares net worth of $9.95.

The formula used is

Enterprise value= EBITDA*EBITDA multiple.

The net worth of the company by using this formula is calculated as:

$215 billion.

COMPARAEABLE PRECEDENTS ANALYSIS:

In this method, the analysis is done by comparing the transactions previously according to the current scenario. The estimated price of the asset under management that is equal to the average price of the asset management companies. The assumed share price for this purpose is$84. According to this analysis…………

 

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