Corporate Finance A Case Study Of The Hostile Takeover Process Accounting Essay

Question 1: Bash you agree that the Granada ‘s Bid was a Take Over waiting to Happen?

The Corporate coup d’etats normally happen when one populace limited ( stock exchange traded ) company is non able to execute good and in bend is in fiscal crisis. The other companies try to get the financially underperforming company in order to bring forth more stockholder wealth. The ground frequently stated by fiscal directors is that the market value after geting the company is greater so the person market value of the two companies that is the purchaser and the acquired company. This addition in the stockholders wealth is mathematically defined as follows, presuming Ten and Y are two companies.

PVX+Y & gt ; ( PVX + PVY )

Economic motivations are obviously present, why Granada Group plc is interested in purchasing Forte plc. The gross revenues of Forte over last five old ages has shown the potency of increasing Granada ‘s gross coevals and hence increased hard currency flows, besides maintaining in head the synergisms present in the concerns besides directs towards reduced costs of operation. For illustration if we combine 1995 ‘s sale of both the companies ( 2.38b + 1.79b ) we can see a addition of about 130 % in grosss of Granada which is one of the grounds why the coup d’etat was waiting to go on.

One of the Granada ‘s division, Leisure and services comprised of budget hotels, subject Parkss, expressway services, travel services and contract providing to the full complement Forte ‘s concerns ( Hotels and roadside eating houses ) and hence synergy arises for increased profitableness.

Over the old ages the involvement screen is decreased for Forte doing it more vulnerable to default and unable to pay its debts. This is another ground why I think the coup d’etat was waiting to go on.

The likely addition in Earnings per Share ( EPS ) besides directs towards a successful coup d’etat, in 1995 the EPS for Granada was 41.3p and the EPS for Forte was 10.10p, these figures compared to the comparative market capitalisation of both the companies ( 4.5 billion and 2.6 billion ) indicates the addition in EPS after the coup d’etat, The Price to Earning ratio of Granada in besides greater so Forte which besides predicts the same consequence.

The upward tendency in the industry after the Gulf war and stabilising exchange rates provide a high clip for the bidder to capitalise on the state of affairs. Provided with the scheme given by the Granada to take the current potency of Forte in catering to up to 40 per centum in non something to make with restructuring or other investing but it is merely unlocking the current potency.

Finally I would state taking in to consideration the hapless public presentation of Forte financially and the last five twelvemonth Granada ‘s continued growing by geting different concerns and executing good above the industry FTA-ALL portion index by 150 per centum is the ground why this coup d’etat was waiting to go on.

Question 2: See the ratings of Forte presented in the Case survey. Knock these, on the information given. What value would you hold placed for Forte?

The book value given by the balance sheet is ?2,462 million for the terminal of January 1995 and the market value of Forte is ?2.6 billion. The geartrain is 60 % for the terminal of 1995, this gives the debts are ?1477.2 million, so one thing is clear that Forte is 60 % debt financed. The rating is farther become complex by issue of scrip portions in exchange of hard currency dividends, this makes the computation of net incomes per portion more complex and the disagreement between the implied EPS ( 8.78p ) printed by Financial times and announced EPS ( 10.1p ) by Forte gives a baffled signal about the companies gaining, based on this individual disagreement we can state that the market capitalisation is non a true representation of this company and that it could be really under valued in the market.

Even utilizing industry mean Price to gaining ratio ( 17.3 ) as a benchmark and Forte ‘s ain forecasted EPS of 14.1p per portion gives a rating ( ?2.3 billion ) which is even under valued so the market value of the company. We can infer that there is some possible in the company for future gaining from these figures and therefore the true rating is likely to be more than the current market rating which is ?2.6 billion.

Granada ‘s initial rating of Forte was 3.3 billion ( paper and hard currency ) and concluding rating was 3.8 billion ( paper and hard currency ) , this rating was really optimistic given the pitching ratio of Forte, which cost Granada to pay out a concluding sum of ?5,267 million ( Equity and hard currency ) . As we seen above the market rating is besides manner below these estimations, which makes the Granada ‘s command excessively optimistic about the future public presentation of the hotel budget sector particularly in UK. Furthermore the Tax recognition benefit is merely for non-tax remunerators portion holders. The figure in the instance study clearly shows the initial command by Granada is far above by all other ratings but after the initial command the market moves in favor of the Forte ‘s portion monetary value and showed that the market outlook has grown and accordingly the concluding command was higher than the initial 1. Nevertheless the concluding command was still lower so the interruption up value of Forte that suggested Granada was taking break-up value of single concerns as their chief rating method.

If we consider Fortes ‘ anticipation of dividend of 14.1p to be paid in 1996 and take the historic return on overall stock market to be 8 % and predict that the Fortes ‘ portion monetary value to be 693 * [ 8 % +1.27 ( 8 % ) ] = 819.126 ( as per given in the instance survey ) in 1996 when the dividend will be paid out. That makes the estimated future monetary value of the Fortes ‘ portion to be 819.126. If we discount this sum with 18.2 per centum after adding the optimistic dividend prognosis we get the portion monetary value to be somewhat higher so 693p but this is because of the optimistic anticipations, the lone thing which adds the value are the beef uping market conditions specially for the tourer industry and Granada ‘s capableness to include concerns for value creative activity.

Question 3: To what extent do you see the Forte ‘s defense mechanism was believable?

The Forte ‘s defense mechanism tactics was chiefly based on the statement that the restructuring of the direction squad that includes engaging 200 new directors over the last 3 old ages and disposal of the non-cash bring forthing assets of deserving 900 million over the last two old ages will assist them to accomplish the mark of ?185 million of net incomes this twelvemonth that is in 1996. The chief defense mechanism was Forte claiming to its portion holders about the bow coming of the market up tendency in the Hotel industry, which I think was the really ground Granada was interested in this hostile coup d’etat. Making the portion holder believe that the market conditions are good and the predicted hereafter net incomes are good come-at-able will non merely hike the company moral but besides leave the portion monetary value unaffected by the unsuccessful command by Granada Group plc.

The tactics were good justified as Forte was involve in disposals of more and more non-profitable concerns. I think the demerging of hotels and eating house concerns was a really of import measure to prolong its concerns.

The stigma attached to Sir Rocco ‘s name was a major factor in the command processes, and to do the things right, Forte dispose of 68 % interest in Savoy Hotels ( The coup d’etat was considered Sir Rocco ‘s personal aspiration ) in order to demo that the concern is running strictly on progressive attitude instead so personal aspirations.

The defense mechanism in the media from the Forte was really strong, as some of the moves by Granada ‘s Robinson were anticipated by Sir Rocco and decently confronted on the media ; this gives some positive column about the Forte ‘s trade to sell its route side providing concern to the Whitbread for ?1.05 billion.

The Granada would revamp Forte ‘s in-between and budget-market hotels under the Posthouse and Travelodge names. It would “ capitalize resolutely ” on Forte ‘s upmarket hotel trade name, Meridian, axe Lilywhites, and dispose of its interest in the Savoy Group and the Alpha Airports Group. The eating house trade names, which include Happy Eater and Little Chef, would be “ rejuvenated ” , harmonizing to the command papers but much of what Granada is proposing is already on Forte ‘s docket and their defense mechanism make sense, particularly given the some what non synergism of Granada with hotel industry.

I think the defense mechanism was believable to the extent where the Forte was seeking to reconstitute its concerns and adding hard currency through selling non-core divisions to acquire more focussed on the hotel industry and beef uping its trade name name which is originally its chief concern, as Forte was one of the oldest established hotel concern in the UK and combined with Whitbread the market portion was about 3rd of the industry.

Question 4: Why do you believe no White Knight Emerged?

White knight in the Mergers & A ; Acquisitions ‘ footings is the friendly acquirer of the company. The command was wholly hostile and was ferociously fought against and created media ballyhoo every bit good, for this ground we can state that there were no outlooks from the beginning that any white knight will emerge. The motivations given in the instance survey by Granada were the success of the group in geting different concern and grow in size to greater grosss and put the concerns in-line with their concerns with out altering much of the nucleus the acquired concern, but merely altering the construction and strategic aims. Granada ‘s Robinson was ab initio in 1992 was trusting for the direction buy-out of Gardner Merchant ( Owned by Forte ) but left hopeless when Forte decided to put in this concern of theirs alternatively of puting it for direction bargain out, this started a corporate struggle between these two companies.

Furthermore Granada acquisitions were more by and large motivated by industrial consolidation and managerial synergisms but here we see that Granada has failed to demo proper involvement in Forte due to it is been a concern that compliment Granada ‘s concerns but more importance was given to Forte ‘s current hapless stock public presentation and held the direction responsible for deficiency of public presentation instead so the built-in potency of the concern that statement is certain to convey direction struggles and no white knight expected to emerge.

On the other manus Forte ‘s opposition to Granada ‘s command make it really hard for any friendly acquisition. The trade name built by Sir Rocco male parent has an attached household name and the terminal of a dynastic concern surely non give any white knights.

Finally the values for the concern the two company clasp are different, there is no warrant that the acquirer will keep the same values to the household trade name names and non dispose them for mere fiscal additions. For illustration at the clip of the command Forte was already reconstituting harmonizing to their values and claimed they are making the some strategic wise what Granada wants to make, so the demand to purchase out concern is non relevant. Arguments like these from both sides surely make certain that there are no white knight emerged from this acquisition.

Question 5: Has Granada delivered the goods?

The basis of Granada ‘s hostile 3.8bn command for the Forte group is a pitiless reappraisal of the company ‘s trade names and based on this the undermentioned stairss taken by the Granada Group are given in chronological order taken from hypertext transfer protocol: // These are the stairss taken to form the coup d’etat in line with the current concern.

Forte coup d’etat

1996 buys Forte hotels and providing group for ?3.6bn

1996 sells White Hart hotel concatenation for ?121.7m

1996 sells George V Hotel in Paris to Prince al-Waleed bin Talal for ?104m

1996 sells Hyde Park Hotel for ?86m

1996 sells 25 % interest in Alpha Airports providing to Mohamed Al Fayed for ?52.3m

1997 sells Brown ‘s Hotel for ?45m

1997 closes 100 of Granada ‘s 562 high street shops

1997 sells 21-strong Welcome Break service station concatenation to Investcorp of Bahrain for ?476m

1997 Granada Media Group formed after acquisition of Yorkshire-Tyne Tees Television for ?711m

1997 sells Westbury hotels for ?90m

1997 sells American Adventure subject park in Ilkeston, Derbyshire for ?3.5m

1997 sells National Sporting Club for ?1m

1997 buys AJ ‘s Family Restaurants for ?3m

1997 buys Baxter & A ; Platts contract providing for ?15m

1997 Granada, News-controlled BSkyB and Carlton Communications announce British Digital Broadcasting pool

1998 BSkyB withdraws, Granada and Carlton launch ON Digital

1998 Granada sells 9.5 % interest in Granada Sky Broadcasting to BSkyB, retaining 50.5 % keeping

1998 buys Post Office ‘s 49 % interest in Quadrant catering for ?20m

1998 sells Camelot subject park for ?16m

1998 sells Cavendish, The Russell, and The Saint-George ‘s hotels in London for ?140m

1998 sells Granada Vending Services for ?35m

1998 Artist Services acquired by Granada for est $ 28m

1999 buys 9.9 % interest in Liverpool Football Club for ?22m

1999 buys Letts Educational publication

1999 buys Black Cat package

1999 establishes Box Clever as joint venture with Rental Holdings. Box Clever pays ?600m for Granada Technology Group

The group presently has

several ITV franchises ( accounting for over half the UK commercial television advertisement gross ) ,

a digital telecasting unit and bets in traditional wage television,

strategic involvements in two football nines,

a big movie library,

film/tv production units and

bets inA Australia’sA Seven NetworkA and Village Roadshow.

From above chronologically given fiscal determinations up boulder clay 1999 we see the concerns acquired by the Granada from Forte are invariably been removed from the portfolio, the grounds are non clear as non much survey been done in this regard but surely the Group is more focussed towards media industry particularly TV industry. This in a manner justifies the Forte ‘s defense mechanism that the Group seeking to purchase itself will miss focal point and finally will take wealth depletion for the portion holders.