As the CEO of your company, you should write a letter to the Chairman of the Board of Directors which outlines your valuation analysis and strategy in the upcoming takeover battle.
· Which firm will you choose to target first in your takeover battle (Bel Vino and Starshine players are clearly limited here)? Why did you choose that particular target (Intl. Bev. Players only)?
· How much is your target firm worth? What is the basis for your reservation price? That is, how did you combine the valuations in Sections 2-4 & 6 to formulate a single reservation price? Explain why the assumptions of your particular valuation model of choice are valid and why the ones excluded are not.
· Describe your bidding strategy (Are you going to give a single high bid to end the game? Attempt a low-ball strategy to get the target cheap?). What will be your starting bid and how does it relate to the current market price?
· If your starting bid is accepted, will that be a value-enhancing deal for your shareholders (i.e., compare the market value of the bid to the market value of the reservation price to determine how much value is created or destroyed – the NPV of the merger)?
· (BV and SS Players) What share exchange ratio will you use for your opening bid? Is your proposed deal accretive or dilutive? That is, will your initial bid increase or decrease earnings per share? Note: This is not necessarily indicative of value creation (remember: show me the money!) and we will discuss this concept fully during our M&A lecture.
· (IB Players) How much leverage you intend to use and why that cash v. debt choice is value enhancing? Does the structure of your potential starting bid create or destroy value for each potential offer? What is the source (or sources) of these gains or losses (Hint: think about our discussion on capital structure)?
· When would you want to drop out of the bidding? Specifically, at what price and why?
Feel free to supplement your letter with supplementary charts and graphs (ex. projected sales, expense, market valuation comparisons, etc.) as additional enclosures where appropriate. Place these figures along with your enterprise valuation analysis and reference them in your discussion. Extra credit may be awarded upon merit.
Again, your business letter should include specific information from the foreground reading and your valuation analysis wherever possible. It should also be as succinct as possible, while quickly and easily conveying the required information. Avoid large paragraphs and overly wordy sentences.
Sample Letter to the Board
[Letterhead]
[Date]
Professor
Chairman of the Board
[Company Name (Bel Vino Corp., Starshine Vineyards, or International Beverage Corp.)]
[Corporate Address (have fun here)]
Dear Professor:
[Paragraph 1: Announce to your board who you intend to bid on and why might this combination make sense.]
[Paragraph 2: How much is your target worth, how did you value your target, and why are you relying upon that method as opposed to the others?]
[Paragraph 3: What is your overall bidding strategy and what is the basis for your starting bid?]
[Paragraph 4: How much are you offering per share in your initial offer?]
[Paragraph 5: What are the deal terms in the initial offer (share exchange ratio for BV/SS players or cash & debt used in starting offer for IB players)?]
[Paragraph 6: Is the initial offer accretive or dilutive (BV/SS players) or leverage increasing or reducing (IB players)? How do these deal features affect value (if at all)?]
[Paragraph 7: Why is the initial offer with these deal terms value increasing for the shareholders? At what point would you drop out of bidding if the offer prices change?]
Sincerely,
(Signature)
[First and Last Name]
Chief Executive Officer
Enclosure: Enterprise Valuation Analysis
Instructions
for
the
Letter
to
Your
Board
of
Directors
As
the
CEO
of
your
company,
you
should
write
a
letter
to
the
Chairman
of
the
Board
of
Directors
which
outlines
your
valuation
analysis
and
strategy
in
the
upcoming
takeover
battle.
Your
letter
should
clearly
articulate
each
the
following:
§
Which
firm
will
you
choose
to
target
first
in
your
takeover
battle
(
Bel
Vino
and
Starshine
players
are
clearly
limited
here)?
Why
did
you
choose
that
particular
target
(
Intl.
Bev.
Players
only)?
§
Why
does
this
combination
make
sense?
What
are
the
potential
synergies?
What
characteristics
of
the
two
companies
make
this
a
¡®
good
fit?
¡¯
You
should
review
your
work
on
the
first
simulation
worksheet
and
the
confidential
information
to
develop
this
answer.
§
How
much
is
your
target
firm
worth?
What
is
the
basis
for
your
reservation
price?
That
is,
how
did
you
combine
the
valuations
in
Sections
2-4
&
6
to
formulate
a
single
reservation
price?
Explain
why
the
assumptions
of
your
particular
valuation
model
of
choice
are
valid
and
why
the
ones
excluded
are
not.
§
Describe
your
bidding
strategy
(Are
you
going
to
give
a
single
high
bid
to
end
the
game?
Attempt
a
low-ball
strategy
to
get
the
target
cheap?).
What
will
be
your
starting
bid
and
how
does
it
relate
to
the
current
market
price?
§
If
your
starting
bid
is
accepted,
will
that
be
a
value-enhancing
deal
for
your
shareholders
(i.e.,
compare
the
market
value
of
the
bid
to
the
market
value
of
the
reservation
price
to
determine
how
much
value
is
created
or
destroyed
¨C
the
NPV
of
the
merger)?
§
(BV
and
SS
Players)
What
share
exchange
ratio
will
you
use
for
your
opening
bid?
Is
your
proposed
deal
accretive
or
dilutive?
That
is,
will
your
initial
bid
increase
or
decrease
earnings
per
share?
Note:
This
is
not
necessarily
indicative
of
value
creation
(remember:
show
me
the
money!)
and
we
will
discuss
this
concept
fully
during
our
M&A
lecture.
§
(IB
Players)
How
much
leverage
you
intend
to
use
and
why
that
cash
v.
debt
choice
is
value
enhancing?
Does
the
structure
of
your
potential
starting
bid
create
or
destroy
value
for
each
potential
offer?
What
is
the
source
(or
sources)
of
these
gains
or
losses
(Hint:
think
about
our
discussion
on
capital
structure)?
§
When
would
you
want
to
drop
out
of
the
bidding?
Specifically,
at
what
price
and
why?
Feel
free
to
supplement
your
letter
with
supplementary
charts
and
graphs
(ex.
projected
sales,
expense,
market
valuation
comparisons,
etc.)
as
additional
enclosures
where
appropriate.
Place
these
figures
along
with
your
enterprise
valuation
analysis
and
reference
them
in
your
discussion.
Extra
credit
may
be
awarded
upon
merit.
paper_instructions.docx
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