Project requirements
Pick a target company that you as a company like to merge with. (Mostly the analysis on Target Company ) for example you are bank of America and you want to buy (bank of Florida which this will be your target).
Locate a publicly traded company in an industry that interests you. Find a publicly traded competitor which is suitable for a merger or acquisition with this firm.
Write a (10-15) pages double spaced paper (not including exhibits) on why the company should be acquired and what purchase price should be paid. Your analysis should include the real reasons behind the merger and not the standard answers. Major topics should include: A brief background of the industry which the company operates, a background on the company and the management team, the acquisition purchase price (you may want to include a base purchase price and the maximum purchase price your firm would be willing to pay), what makes this merger a good fit, a brief strategy on how the company will operate after the merger, and how the deal would be financed. ( the analysis should be for the target company).
You have an enormous amount of material to use for this project. Annual Reports and 10Ks can be obtained by contacting the companys Investor Services Department.
Prepare your presentation as though it was before the Board of Directors of the company. The class will be asking specific questions about your analysis, so be prepared.
Try to stay away from Airlines Companies and banks, since its a bit hard to analyze.
Describe how the target company fits does and operates within the industry. (Important point)
Explain and show how you came up with the bid price and why.
Calculate NPV (Make sure it is right and it is not a negative number, if so maybe you will have a problem with your working capital which is calculated by account payable, account receivable, inventory ) ( make sure when you calculate your WC its incremental not total) show what this number means and what it will do, also IRR,,, and other important calculations.
Make sure your calculation (your model and financial statements and right and cash flow forecasting), and focus on your calculation when you do Accretive Dilutive.
Valuations and recommendation, and show why you should confines people to invest in your idea of merge.
Dont forget to focus on equity of dept.
Background of Facebook
Facebook is social networking service launched in February 2004, owned and operated by Facebook Inc. It was founded by Mark Zuckerberg with his college roommates and fellow Harvard University students Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes. The website’s membership was initially limited by the founders to Harvard students, but was expanded to other colleges in the Boston area, the Ivy League, and gradually most universities in Canada and the United States, corporations, and by September 2006, to everyone of age 13 and older with a valid email address.
2007
Facebook had 100,000 business pages, allowing companies to attract potential customers and tell about themselves. These started as group pages, but a new concept called company pages was planned.
2008
Facebook announced that it would set up its international headquarters in Dublin, Ireland.
2010
Facebook began to invite users to become beta testers after passing a question-and-answer-based selection process, and a set of Facebook Engineering Puzzles where users would solve computational problems which gave them an opportunity to be hired by Facebook.
2011
Facebook had become the largest online photo host, being cited by Facebook application and online photo aggregator Pixable as expecting to have 100 billion photos by summer 2011.
2012
Yaboo! filed suit in a U.S. federal court against Facebook weeks before the scheduled Facebook initial public offering.
Background Of Sina Weibo
Sina Weibo is a Chinese microblogging(weibo) website. Akin to a hybrid of Twitter and Facebook, it is one of the most popular sites in China and in use by well over 30% of Internet users. It was launched by SINA Corporation on 14 August 2009, and has 503 million registered users as of Dec 2012. About 100 million messages are posted each day on Sina Weibo.
After the July 2009 Ürümqi riots, China shut down most of the domestic microblogging services including the first weibo service Fanfou. Many popular non China-based microblogging services like Twitter, Facebook and Plurk have been blocked from viewing since then. It was considered to be an opportunity to Sina’s CEO Charles Chao.
Features
Sina Weibo implements many features from Twitter. Users may post with a 140-character limit, mention or talk to other people using “@UserName” format, add hashtags with “#HashName#” format, follow other people to make his/her posts appear in users’ own timeline, re-post with “//@UserName” similar to Twitter’s retweet function “RT @UserName”, put a post into the favorite list, verify the account if the user is a celebrity. URLs are automatically shortened using the domain name t.cn like Twitter’s t.co. Official and third-party applications make users able to access Sina Weibo from other websites or platforms.
Additionally, users are allowed to insert graphical emoticons or attach own image, music, video files in every post. Comments to a post can be shown as a list right below the post, the commenter can also choose whether to re-post the comment, quoting the whole original post, to commenter’s own page.
Unregistered users can only browse a few posts by verified accounts. Neither unverified account pages nor comments to the posts by verified accounts are accessible to unregistered users.
Clients
Sina produced mobile applications for various platforms to access Sina Weibo; the platforms include Android, Blackberry OS, iOS, Symbian S60, Windows Mobile and Windows Phone.
Sina also released a desktop client for Microsoft Windows under the product name of Weibo Desktop.
International versions
Sina Weibo is available in both simplified and traditional Chinese characters. The site also has versions catering to users from Hong Kong and Taiwan. Weibo is now developing its international version in English and other languages. On January 9, Sina Weibo created a partial English Version, most likely being a test run, but was soon taken down in a week.
For the Chinese version, you must be a Chinese citizen to use it. You will be asked to verify your identity either through a valid Chinese cellphone number or a valid Chinese citizen identification number.
Sina Weibo’s official iPhone and iPad application have English language options.
The reason for acquisition
Why would we chose Facebook to be the company to merge with Sina Vibo, because according to recent market share research, you will be realizing the Facebooks market share is heavily decreasing in recent month. The Facebooks strategy is to purchase bunch of their stocks when Sinas stock price hit our ideal price. But everybody will be arising the questions that how to evaluate the company intrinsic value. We will hire an accountant to calculate their total assets and total liabilities see whether it is fit the current market price and then to decide if it is worth buying Sina Vibo over the public traded market.
What kind of advantages will be beneficial to Facebook to do the acquisition for Sinas Vibo.
1. The Facebook can absorb their member to increase the market share over the social networking website.
2. Facebook can take some unique patent over the creating the social networking website.
3. Once Facebook merge the Sina Vibo, it can get the access to Chinese market which is the biggest social networking market over the world meaning that it can heavily increase the EPS about 3 dollars per year in which our expertise estimate.
The main management team of Facebook
Mark Zuckerberg(Founder, Chairman and Chief Executive Officer)
Mark is the Founder, Chairman and CEO of Facebook, which he founded in 2004. Mark is responsible for setting the overall direction and product strategy for the company. He leads the design of Facebook’s service and development of its core technology and infrastructure. Mark studied computer science at Harvard University before moving the company to Palo Alto, California. (Already mentioned in the beginning)
Sheryl Sandberg(Chief Operating Officer)
Sheryl Sandberg is Chief Operating Officer at Facebook. She oversees the firm’s business operations including sales, marketing, business development, legal, human resources, public policy and communications. Prior to Facebook, Sandberg was vice president of Global Online Sales and Operations at Google, where she built and managed the online sales channels for advertising and publishing and operations for consumer products worldwide. She previously served as Chief of Staff for the United States Treasury Department under President Bill Clinton and began her career as an economist with the World Bank. She received B.A. and M.B.A degrees from Harvard University.
Sandberg also serves on the boards of Facebook, ONE, The Walt Disney Company, Women for Women International, the Center for Global Development and V-Day.
David Ebersman(Chief Financial Officer)
David is Chief Financial Officer of Facebook, where he leads the finance, facilities and information technology teams. Prior to joining Facebook in September 2009, David worked at Genentech Inc., a leading biotechnology company, most recently as its Chief Financial Officer and Executive Vice President. David joined Genentech in 1994 and served in a number of roles, including Senior Vice President, Product Operations; Vice President, Product Development; and Director, Business Development. Prior to Genentech, David worked as a research analyst at Oppenheimer & Company Inc. He serves on the board of Ironwood Pharmaceuticals and was selected as a Fellow in the Henry Crown Fellowship Program. David holds a bachelors in economics and international relations from Brown University.
Mike Schroepfer(Chief Technology Officer and Vice President of Engineering)
Mike Schroepfer is the Chief Technology Officer and Vice President of Engineering at Facebook. Mike is responsible for harnessing the organizations culture of speed, creativity and exploration to build products, services and infrastructure that support the more than 1 billion people worldwide who use Facebook. Before coming to Facebook, Mike was the Vice President of Engineering at Mozilla Corporation, where he led the global, collaborative, open and participatory product development process behind Mozilla’s popular software,such as the Firefox web browser. Mike was formerly the Chief Technology Officer for Sun Microsystems’ data center automation division (“N1”) and founder, Chief Architect and Director of Engineering at CenterRun.
Mike holds a bachelor’s degree and a master’s degree in computer science from Stanford University.
In terms of acquiring the Sina, The Facebook team will dispatch the David Ebersman to be a new CEO of Sina, and set up different strategies to reduce the cost of Sina for operating. And MikeSchroepfer will be helping Sina to see whether they need any advanced technology which they do not have and Facebook can give them support, such as technology transfer or sharing server of using cloud service to reduce the budget of building the server for establishing database. And our strategy is we will not do any change of board, but we would dispatch our officer and technician (such as CEO, CFO and key engineer) to take over original team in order to implement our new strategy.
The final goal of acquiring the Sina is we want it become profitable and we target the Chinese market in terms of Sina Vibo membership and Chinese population to make the easy access to get in. This is the rare opportunity that any other companies does not have, particularly our main competitor Twitter.
Brief strategy on how the company will operate after the merger
As one of the largest online social networking service around the world, Facebook Inc. is delighted to acquire Sina Corp, a well-known online media company base solely in China. Due to tough restrictions and regulations from the Chinese government vis-a-vis the social network, we have decided to put in-place a well craft strategy that would benefit both companies on eliminating duplications and other economies of scale, reduce company expenses while increase efficiencies.
Limited decision will take place in order to maintain the culture aspect of the Sina Company. Management will remain active and continue to manage the brand, while Facebook will remain on top slot running the firm. Sina Corp would operate as an independent subsidiary and would have its own independent board of directors, and the CEO would report to both Facebook and Sina Cord board.
Sinas management would have full preference over which of Facebooks HR policies it would chose to adopt. We dont feel obligate to make drastic change that would potentially impact the well being of Sina Corp. the company is profitable and have shown growth for the past three years. We expect such trend to continue and will potentially exceed expectation after the merge
Discounted cashflow Model/ Analysis
In terms of our projection of Sina futures 10 years (which is from 2013-2022), we take the measure to evaluate the Sinas value to decide if it is worth to merge it and how profitable it can bring to Facebook, Which is Discounted cash flow model.
First and foremost, we predict the future 10 years revenue and each category such as add-back depreciation, working capital and total capital investment) over the income statement, balance sheet and cash flow statement, and then we put each predicted number on each category in order to calculated the net cash flow of each year, and eventually we use the 15% discounted rate to count the net present value of Sina Vibo.
According to discounted cash flow model, we got the NPV of Sina Vibo which is around 6 billion, so we think it is the accurately implied value of Sina Vibo. Overall we think we will be willing to pay 6 billion to finish this acquisition.
Secondly, within our board meeting, we recognized the Sina Vibo is the biggest social networking service in China. If Sina Vibo offering price is above 6 billion, whether or not we should make this acquisition, our conclusion is that our maximum price is only add 0.5 billion to our decided value which is total 6.5 billion to finish these acquisition if their offering price is above our NPV and Goodwill value, otherwise this acquisition will fail.
According to our research of market share in China using DSO model, we decided to pay 6 billion to merge the Sina Vibo, just because Facebook wants to expand their membership in China through merging Sina Vibo to achieve our final goal to increase the revenue of Facebook.
Accretive Dilutive Analysis
Income statement Acquired Company Projections
Year 1 Year 2
Revenue 7,124,600,000 9,974,440,000
COGS 1,422,000,000 1,530,000,000
Gross Margin 5,702,600,000 8,444,440,000
SG&A 1,856,000,000 1,963,000,000
Depreciation -1,298,000,000 -2,596,000,000
Total Expenses 3,256,000,000 3,493,000,000
EBIT 599,500,000 659,450,000
Debt Service 1,033,000,000 1,033,000,000
Accretive Dilutive -300,000,000 450,000,000
Through debt service the transaction is dilutive in the first year but the acquisition added earnings by Year 2.
Later years in the acquisition model indicate the NPV .
Facebook is not at risk of acquiring Sina Vibo because we are minimizing the dilutive impact in later/coming years to minimize the risk associated with this acquisition.
(The transaction is not dilutive beyond 2yrs so no need to carefully re-evaluate & discuss given their impact to immediate earnings and stock value)
We have a 2.9 Billion dollar cushion in the 2nd year Consider 1st year income statement projections (synergy miscalculations,economies of scale, misjudgement in integration process which obviously delay the target companys (Sina Vibo) contribution to the consolidated earnings.)
Facebook has the ability to to issue shares, thus our purchase price of Sina Vibo is divided by the stock price of the acquiring company (FB)
Any assumed long-term liabilities, so long as our debt will not be paid off with an issue of equity, wil not be included in the calculation for the issue of stock.
Purchase Price $ 6,385,527,131
Acquiring Firm Stock Price $ 15
Shares To Be Issued $ 550,000,000
Facebook (Acquiring Company) Financial Data: Earnings per share using a weighted average approach equivalent to $0.86.
(We calculated the Earnings per share using a weighted average approach to be equivalent to $0.86. We did this before Sina Vibo was rolled into the existing financials.)
Target Company (Sina Vibo) Financial Data:
Earinings per Issued Share $0.98
Calculated using the shares issued for the transaction.
Note that Sina Vibos EPS is greater than FacebooK EPS. Thus, the transaction will be beneficial to the shareholders of the purchasing company.
Consolidated Financial Data
Target company new share balance $ 567,000,000
Acquiring Company Prior Shares $ 678,000,000
New Total Shares Outstanding $ 1,245,000,000
Target company earnings $ 527,000,000
Acquiring company earnings $ 576,000,000
Consolidated Earnings $ 1,103,000,000
Consolidated EPS $ 0.93
Prior EPS $0.86
Net benefit per share $ 0.7
Purchase price – $ 6.3 billion dollars, of which $ 3.3billion will be financed with a bond issue.
Purchase price $ 6,385,527,131
Debt Financing $ 3,500,000,000
Amount financed through equity $ 2,885,527,131
Assumptions: The acquiring company will have a pretax debt service cost of 10% and a tax rate of 45%.
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Debt Service
Debt Financing $3,500,000,000
Coupon 10% $350,000,000
Tax Rate 45.0% $ 1,575,000,000
After Tax cost of Debt $1,567,000,000
Due to after tax cost of debt and present stock price of the acquiring company, it is more favorable to use debt to finance the transaction.
Integration
Due Diligence
Compatible cultures
Synergies No loss, no inability to take advantage of cost overlaps in administration expenditure between the two firms.
No agency issues Company not operating on its own, management is shuffled & shareholders receive a higher purchase price.
Letter Of Intent
In the LOI facebook defines the purchase price, where the financing will be obtained, whether working capital is to be purchased /funded by acquiring firm & any other terms the buyer wants to address.
Defines how the transaction will be concludedand if any other offer will be paid at a later date.
Conditions to close/ Breaking the deal – Includes a method for the party making the offer to walk away from the deal without legal repurcussions (not the case here)
Other Assumptions:
– Single tax versus Double Tax
-No poison Pills
– No Stock Repurchases
– No need for The White Knight and Squire
-No need for government involvement
Conclusion
According to the trend of merge and acquisition, it is not hard to find the phenomenon that when the company met the difficulties to operate, the bigger company usually will take their advantage to do the acquisition in order to hit the field they want to step in, such as Nokia is acquires by Microsoft and blackberry is acquired by the telecommunication company, so we can jump the conclusion that the merge not only can help the company to overcome its difficulties of operating but also the effective merge and acquisition will increase the revenue stream of the company.