final report of finance

Case study on Mergers and Acquisitions of Integrated Asset Management Corporation and Fiera Capital Corporation

New York Institution of Technology

Financial Management - 601

Sai Eshwari Patha - 1259122

Swetha Ekambaram - 1135005

Vaishnavi Sudhakar - 1259660

Executive Summary

The present case study is based on the announcement from the Integrated Asset Management Corporation (IAM) that Fiera Capital Corporation in agreement with IAM will acquire IAM. Here both the firms are asset management firms. Since this is an acquisition IAM doesn’t need to change its name or structure to its parent company, Fiera. The Financial Analysis is carried out in the following step by step process to find out which company benefited and had positive end results in the acquisition process.

· Dupont analysis for 2 consecutive years 2017, 2018 is done for both the companies which showed that both the companies have greater ROE in 2018 compared to the previous year. ROE increase is with respect to Net Profit Margin and Asset Turnover. An increase in profit margin compared to the previous year's margin indicates an improvement in both operational efficiency and profitability.

· To estimate the which company is growing the P/E ratio and EV ratio is calculated for both the companies which resulted in higher P/E ratio and EV ratio for Fiera Capital compared to IAM. This means Fiera Capital is growing fast than IAM. Hence IAM’s acceptance to let Fiera Capital acquire IAM is a positive sign to IAM.

· To value both the firms evaluation is carried out in three methods Dividend Growth Model, Total Payout Model and Market Multiples Model. In all the three methods the Intrinsic values obtained are less than their respective current share price for both the companies. Hence the companies are overvalued.

· Debt/Equity ratio is used to analyse the capital structure of both companies and the results shows that both companies have low debt, which is a positive sign as there is low risk of indebtedness.

· The shares outstanding with IAM is 27.74M and Fiera Capital acquired all the outstanding shares of IAM for a total value of $74 million. Thus the bid price offered by Fiera Capital per share was 2.66 while the current share price of IAM is 2.74. Therefore, Fiera Capital bought IAM shares at a lower price. From the above analysis it is evident that Fiera Capital benefited by buying IAM shares at a lower price while IAM benefited by joining a growing firm.

Introduction

On March 22, 2019 - Integrated Asset Management Corp. (IAM) (TSX: IAM) announced that it has entered into a definitive arranged agreement with Fiera Capital Corporation (TSX: FSZ) under which Fiera Capital will acquire all the outstanding common shares of IAM pursuant to a statutory plan of arrangement under the Business Corporations Act (Ontario) (the “Transaction”).

IAM's private debt investment team will be incorporated within Fiera Private Lending and the industrial real estate team will be joining Fiera Properties, expanding the depth of strategies offered within Fiera Capital's Private Alternative Investments platform. The transaction received the unanimous support of the board of directors of both companies, and IAM shareholders holding 62% of issued and outstanding IAM Shares have entered into voting and support agreements in favour of the Transaction.

With this acquisition, Fiera Private Lending becomes one of the leading pan-Canadian non-bank lending platforms in the country. "In addition to an experienced team and a long track record of performance, IAM brings a complementary product offering with its long-term loans, strengthening Fiera Capital’s existing portfolio and providing Fiera Capital investors with even more opportunities for diversification.

Fiera Capital Corporation

Fiera Capital is a leading independent asset management firm with approximately C$144.9 billion in assets under management as of March 31, 2019. The Firm provides institutional, retail and private wealth clients with access to full-service integrated money management solutions across traditional and alternative asset classes. Clients and their portfolios derive benefit from Fiera Capital’s depth of expertise, diversified offerings and outstanding service. Fiera Capital trades under the ticker FSZ on the Toronto Stock Exchange.

Integrated Asset Management Corp

Integrated Asset Management Corp. is one of Canada’s leading alternative asset investment management companies with approximately $3.1 billion assets. The company provides investors with private equity, private corporate debt, managed futures, hedge funds, real estate investment management, property management and leasing, and merchant banking. It offers alternative asset class management to institutional, pension, and private clients. Integrated Asset Management Corp. was founded in 1998 and is headquartered in Toronto, Canada. IAM’s common shares trade on the TSX under the ticker symbol IAM.

Transaction Details:

· Total consideration to IAM shareholders of $74 million consisting of $55.5 million in cash and $18.5 million of Fiera Capital Class A subordinate voting shares.

· In addition, IAM shareholders will receive contingent consideration in the form of contingent value rights (“CVRs”) tied to a portion of certain incentive fees that may be received in the future from two real estate funds managed by IAM affiliates, as further described below.

· Represents IAM enterprise value of $64 million and $10 million of adjusted cash.

· IAM shareholders may elect to receive cash and/or Fiera Capital Shares, subject to proration in certain circumstances, as further described below. For each IAM Share held (i) $2.576 in cash, subject to proration such that the aggregate cash paid under the Transaction will not exceed $55.5 million, (ii) a number of Fiera Capital Shares equal to $2.576 divided by the volume-weighted average trading price of the Fiera Capital Shares on the Toronto Stock Exchange (the "TSX") over the five trading days immediately preceding the business day immediately preceding the effective date of the Transaction (the "5-Day VWAP"), subject to proration such that the aggregate number of Fiera Capital Shares issued under the Transaction will not exceed $18.5 million in value, or (iii) $1.932 in cash and a number of Fiera Capital Shares (or a fraction of a Fiera Capital Share) equal to $0.644 divided by the 5-Day VWAP.

· To the extent that IAM’s closing adjusted cash balance (as calculated under the Agreement, and further described below) exceeds $10 million, IAM will be entitled to declare and pay the excess amount as a special dividend to shareholders of record immediately prior to closing of the Transaction.

Opportunities

· This acquisition further strengthens and diversifies Fiera Capital's private alternatives lending platform, bringing significant capabilities in private debt in addition to expanding IAM’s real estate platform. With this acquisition, Fiera Private Lending becomes one of the leading pan-Canadian non-bank lending platforms in the country. IAM brings a complementary product offering with its long-term loans, strengthening IAM’s existing portfolio and providing Fiera Capital investors with even more opportunities for diversification.

· For Fiera’s clients it provides investment opportunities into an asset class with stable and recurring cash flows and a unique level portfolio diversification. Joining forces with Fiera Capital creates an opportunity for IAM shareholders to realise immediate value and liquidity as well as the opportunity to participate in a larger combined company well-positioned for future growth.

Risks

Main risks associated in the acquisition transaction are:

· Integration risk. Integrating the operations of both Fiera Capital and IAM is the most difficult task in practice than it seemed in theory. This may result in the combined company being unable to reach the desired targets in terms of cost savings from synergies and economies of scale.

· Overpayment. If company Fiera Capital is unduly bullish about company IAM’s prospects – and wants to forestall a possible bid for IAM from a rival – it may offer a very substantial premium for IAM. Once it has acquired company IAM, the best-case scenario that Fierra had anticipated may fail to materialize. Overpayment can be a major drag on future financial performance.

· Culture Clash. M&A transactions for Fiera Capital and IAM may fail because the corporate cultures of the potential partners are so dissimilar.

Financial Statement Analysis:

DuPont Analysis

In order to decide which company is a better opportunity, the investor decides to use DuPont analysis to determine what each company is doing to improve its ROE and whether that improvement is sustainable.

Dupont Analysis = ROE = Net Profit Margin * Asset Turnover * Financial Leverage

	FSZ 2017	FSZ 2018	IAM 2017	IAM 2018
Net Profit Margin	7.01	8.3	12.17	27.79
Asset Turnover	0.38	0.41	0.6	0.74
Financial Leverage	2.08	2.18	1.28	1.31
ROE	5.540704	7.41854	9.34656	26.93963

The Dupont Analysis clearly shows that ROE has increased from 2017 to 2018 for both Fiera and IAM companies. The result in the increase of ROE is because of Net Profit Margin and Asset Turnover for both the companies.

EPS

Earnings per share for Fierra has decreased from 0.13 to -0.05 which indicates decrease in profitability which is evident in the income statement.

Earnings per share for IAM has increased from 0.07 to 0.12 which indicates increase in profitability which is evident in the income statement.

P/E Ratio Comparing the P/E ratios the P/E ratio for Fiera is 67.91 whereas for IAM it is 24.2. The higher the P/E ratio the higher growth in the future. Thus Fiera can guide IAM to obtain a high growth rate.

EV Multiple

Enterprise Value multiple is used to compare the value of one company to the value of another company within the same industry. A lower enterprise value multiple implies the company is undervalued.

EV Multiple of Fiera Capital = 11.27

EV Multiple of IAM = 7.52

The above values indicates that Fiera is in better position, and this is why IAM has agreed to join Fiera Capital.

Estimation of Intrinsic Value

Dividend Growth Model:

Firstly, we have calculated the Intrinsic Value using the Dividend Growth Model. It is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate.

Fiera Capital Corporation:

Fiera Capital Corporation Dividends over the past 5 years

Year	Dividend per year	Growth rate
DY 2014	0.46
DY 2015	0.54	17%
DY 2016	0.62	15%
DY 2017	0.7	13%
DY 2018	0.78	11%

The following values are used to calculate the intrinsic value

Beta	0.56
Growth Rate	2%
Risk-free rate	2%
Expected Market Return	8%
Cost of Equity	5.386%
Dividend of the current year	0.21

The intrinsic value of the firm Fiera using Dividend growth model was $6.325301 which is less than the current share price of $11.08 which shows that the company is overvalued as per this model.

Integrated Asset Management

Integrated Asset Management Dividends over the past 5 years

Year	Dividend per year	Growth rate
DY 2014	0.06
DY 2015	0.06	0%
DY 2016	0.06	0%
DY 2017	0.08	0.33%
DY 2018	0.1	0.25%

The following values are used to calculate the intrinsic value

Beta	0.274
Growth Rate	2%
Risk-free rate	2%
Expected Market Return	8%
Cost of Equity	3.687560%
Dividend of the current year	0.03

The intrinsic value of the firm IAM using Dividend growth model was $1.8132 which is less than the current share price of $2.68 which shows that the company is overvalued as per this model.

Total Payout Model

The second method we used to find out the intrinsic values is the Total Payout Mode. Total Payout Model takes into consideration all payouts to equity holders– both dividends and share repurchases in-order to calculate the value of a firm.

Share price is calculated using the formula

Share Price = PV(Future Total Dividends + Repurchases)/Shares Outstanding

= (Dividends + Repurchases)/(Cost of equity - Growth rate)

Shares Outstanding

Fiera Capital

The table shows Fiera Capital Share repurchase, dividend, growth rate, cost of equity and shares outstanding.

Share Repurchase	73581000
Dividend	1333000
Growth Rate	2%
Cost of Equity	5%
Shares Outstanding	77380000

The intrinsic value for Fiera Capital using Total Payout Model is $29.16 which is less than the current share price of $11.08. This shows that the company is overvalued.

Integrated Asset Management

The table shows IAM’s Share repurchase, dividend, growth rate, cost of equity and shares outstanding values.

Share Repurchase	751487
Dividend	2503172
Growth Rate	2%
Cost of Equity	4%
Shares Outstanding	77380000

Using the Total Payout Model we obtained the intrinsic value of $0.124 which is less than the current IAM’s share price of $2.68. This implies the company is overvalued as per this model.

Market Multiples Model

Finally we used Market multiple model to find the intrinsic value. In Market Multiple Multiple model the valuation is based on the idea that similar assets sell at similar prices. It assumes that a ratio comparing value to a firm-specific variables, such as operating margins, or cash flow is the same across similar firms. Investors also refer to market multiples model as multiples analysis or valuation multiples.

Fiera Capital Corporation

The following table shows the competitor companies of fiera capital corporation, their current share price, trailing earnings per share and P/E ratio.

P/E Ratio = Current Share Price * Earnings Per Share

Intrinsic value = Average of P/E * Earnings Per Share

Company Name	Current Share Price	EPS(TTM)	P/E ratio
Brookfield asset management	48.15	3.14	15.3344
Difference Capital Financial	4.6	0.712	6.46067
Olympia Financial Groups	53.5	4.23	12.6478
Clairvest Group	51.25	7.3	7.02055
Canaccord Genuity Group	5.22	0.49	10.6531

Average P/E ratio = (15.33+6.46+12.65+7.02+10.65) / 5 = 10.4233

Earnings Per Share of Fiera Capital Corporation = 0.23

The intrinsic value of Fiera Capital Corporation using Market Multiples Model is $2.40 which is less than the current share price $11.08. This shows that the company is overvalued according to this model.

Integrated Asset Management

The following table shows the competitor companies of Integrated Asset Management, their current share price, Trailing earning per share, P/E ratio.

Company Name	Current Share Price	Trailing EPS	P/E ratio
Brookfield asset management	48.15	3.14	15.3344
Difference Capital Financial Income	4.6	0.712	6.46067
Olympia Financial Groups	53.5	4.23	12.6478
Clairvest Group	51.25	7.3	7.02055
Canaccord Genuity Group	5.22	0.49	10.6531

Average P/E ratio = (15.33+6.46+12.65+7.02+10.65) / 5 = 10.4233

The earnings per share of Integrated Asset Management is 0.11

The Intrinsic Value of IAM is $1.15 using Market Multiples Model, which is less than the current share price of $2.68. This implies that the share price is overvalued according to this model.

Capital Structure and Weighted Average

The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Capital structure can be a mixture of a firm's long-term debt, short-term debt, common equity and preferred equity. It, refers to a firm's debt-to-equity (D/E) ratio, which analyses how risky a company is. A company with high debt poses high risk to investors. This risk, however, may be the primary source of the firm's growth.

	Fiera Capital	IAM
Total Debt	421.5 M	0
Total Equity	633.7 M	19.03 M
D/E ratio	0.6651	0

The WACC is the weighted average of the cost of equity and the cost of debt based on the proportion of debt and equity in the company's capital structure. The proportion of debt is represented by D/V, a ratio comparing the company's debt to the company's total value. The proportion of equity is represented by E/V, a ratio comparing the company's equity to the company's total value.

WACC for Fiera Capital = 5.5%

WACC for IAM = 3.5%

Adjusted Present Value

The adjusted present value is the net present value (NPV) of a company financed solely by equity plus the present value (PV) of any financing benefits, which are the additional effects of debt. APV includes tax shields. The APV shows an investor the benefits of tax shields resulting from one or more tax deductions of interest payments or a subsidized loan at below-market rates. For leveraged transactions, APV is preferred.

APV = NPV + PV of debt financing advantages

	IAM
Free Cash Flow	6.05M
Total Equity	19.03
Total Debt	0
Cost of Equity	3.5%
Cost of Debt	0
Initial Investment	$1.2 B
APV	$1.02 B

The APV of IAM as per the above is around $1.02billions which is more than what Fiera is paying ($74M). Hence this is a better deal for Fiera.

Fiera Capital acquired all the outstanding shares of IAM for a total value of $74 M where IAM’s outstanding shares is 27.74M. Bid price offered by Fiera per share is 2.66 and the current share price of IAM is 2.74. This gives us that Fiera Capital bought IAM shares at a lower price.

References

Staff, M. (2019, June 30). TSE:FSZ - Dividend Yield, Dividend History & Payout Ratio for Fiera Capital. Retrieved from https://www.marketbeat.com/stocks/TSE/FSZ/dividend/

(n.d.). Retrieved from https://quotes.wsj.com/CA/XTSE/IAM/financials/annual/balance-sheet

(n.d.). Retrieved from http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/iam-to-integrated-asset-management-17065/

Dividend History. (n.d.). Retrieved from https://iamgroup.ca/investor-relations/dividends/

Integrated Asset Management Corp. (2019, June 24). Integrated Asset Management Announces Special Dividend. Retrieved from https://www.globenewswire.com/news-release/2019/06/24/1873352/0/en/Integrated-Asset-Management-Announces-Special-Dividend.html

Quotes and Data. (n.d.). Retrieved from https://www.baystreet.ca/quotedata/T.IAM/detailedquotetabchartnews/

Weir completes acquisition of ESCO Corp. (2018). Filtration Industry Analyst, 2018(8), 4. doi:10.1016/s1365-6937(18)30204-1