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BAE takes over Babcock.
Imagine you are in the position of a director of BAE, deciding if a takeover would now be appropriate, and recommending a possible price and a takeover strategy.
Evaluating the possibility of taking over Babcock. The following points should be addressed in your report:
a) Why would you choose Babcock, rather than any other company?
b) What cost of capital (WACC?) would you use for valuing Babcock?
c) Assuming that Babcock??s growth will be approximately in line with treasury bond interest rates, what is a fair value for Babcock on a stand-alone basis?
d) Compare this figure with current market value of Babcock, and try to explain the difference, if any
e) Now consider, if BAE purchases Babcock, that Babcock??s sales volume for the next five years only, will increase 2% per year faster than in (c) above. Also, due to cost-saving synergies, the expense ratio [(GP-NP)/Sales] will be reduced once only, by 1%, and this 1% saving will last forever. On this basis, what would be a new ??fair value?? for Babcock?
f) Will you be recommending a bid and for how much? What is the maximum price you will be willing to pay? Recommend the format the bid should take (ie. merger or acquisition: try for an agreed acquisition or go directly for a hostile: opening bid: cash or shares, etc?)
g) particularly from the papers by Faccio and Masulis (2005), Fishman (1989), Petzemas (2009), Trautwein (1990), and Alexandridis et al (2008).
Please provide precise calculation process and the source of data collection.
please cite the paper by the authors above.
As for question c) “a fair value for Babcock on a stand-alone basis?” please use the formula “FCF = (EBI+ Depreciation and amortization – ??Net working capital )- Gross capital expenditures ” and give precise calculation process and the source of data collection.
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