According to Statista, the average deal or price paid for a merger in the communications sector was 151 million US dollars (Rudden, 2021). However, T-Mobile paid 26 billion dollars in the merger acquisition with Sprint. T-Mobile has increased their services and their prices as well as a result. The negotiation was between Softbank and T-Mobile because they owned 85% of Sprint. The deal was that Softbank would give T-Mobile 11 shares of Sprint for 1 of T-Mobile. The German company Deutsche Telekom would also receive stakes since it owns about 60% of T-Mobile. In a merger, every party must agree on a price. According to the textbook,
For a merger to proceed, both the target and the acquiring board of directors must approve the merger and put the question to a vote of the target’s shareholders (and, in some cases, the shareholders of the acquiring firm as well). In a friendly takeover, the target board of directors supports the merger and negotiates with the potential acquirers. If the target board opposes the merger, the acquirer must go around the target board and appeal directly to the target shareholders, asking them to elect a new board to support the merger (Berk & Demarzo, 2014).
Explain the process you would use to calculate the merger premium for your target company. Provide a rationale for why the merger premium should be computed using the share price 30 days before the initial announcement of the acquisition.
The process for calculating the premium would be by taking the original paid the price per share and subtracting it by the current stock price; The difference of the price would then be divided by the target company’s stock which would give us the percentage. Yahoo mentioned the following,
Let’s do the math. At 0.10256 T-Mobile shares for each Sprint share, the total amount of Sprint’s shares outstanding will translate to 421.66 million T-Mobile shares. T-Mobile has 856.93 million shares outstanding, so that the deal will give Sprint control of approximately a third of the combined company. For $96.05 per share, each Sprint share is worth $9.85 (Yahoo, 2020).
Essentially, Sprint investors had a significant opportunity to make money.
Explain how the discounted cash flow (DCF) analysis and the net present value (NPV) calculation will be helpful for the acquisition of your target company.
Banks like to use the DCF as a routine to value a business. A journal article mentioned, “companies are usefully viewed as generating streams of future cash flows to be benchmarked against investor return requirements” (Brotherson et al., 2014).
The DCF is also used to measure capital cost from the target company and some data from the financial markets. The DCF is also used to forecast buying shares when acquiring a company and for company budgeting. The model is used to capture analytic information. The NPV can be calculated by figuring out the expected cash flows of the acquiring company and figuring out the outcome of cost from both companies and knowing the amount that will be paid for the acquiring company (Brotherson et al., 2014).
Evaluate the executive summary. Analyze the way the DCF analysis assists in the determination of the value of the target company, and explain how using this method will allow your peer to negotiate a reasonable price for the acquisition. Explain how the NPV calculation, as part of the DCF, will allow your classmate to analyze strategic alternatives for the identified mergers and acquisitions activity. 200 words