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ACER

2005 2006 2007


Revenue 204,958,099 350,816,353 462,066,080
Cost 196,625,680 312,645,040 404,647,770
COSTS AS % OF REVENUES 95.9% 89.1% 87.6%
Gross profit margin 8,332,419 38,171,313 57,418,310
Depreciation & Amortization 1,496,294 1,227,218 1,527,628
Income before Interest and Tax 6,316,179 36,693,225 55,339,402
Interest Expenses 385,293 443,087 509,550
Tax 1,172,654 3,330,065 2,149,704
% of Tax on Operating Income
Net profit after interest & tax 4,758,232 32,920,073 52,680,148
NET Working Capital (CA-CL) 37,083,959 51,297,201 48,783,627
Change in WC 14,213,242 2,513,574 -
Cash Flow Impact of Working 14,213,242 - 2,513,574
NATCF-Net After Tax Cash Flow 6,254,526 19,934,049 56,721,350
Cash consideration $724,742
Liabilities assumed $1,146,086
Less: Non-cash assets acquired -$1,097,258
Less: Goodwill -$513,466
Total $3,481,552
GATEWAY 2005 2006
Revenue 3,854,061 $3,980,803
Cost 3,809,094 $3,967,982
Cost as % of revenues 99% 100%
Gross profit margin 44,967 $12,821
Depreciation & Amortization 38,816 $27,578
Income before Interest and Tax 6,151 -$14,739
Interest expenses $18
Tax benefit 10 $24,400.00
% of tax on EBIT 0.16% -165.55%
Net profit after interest & Tax 6,161 $9,643
NET Working Capital (CA-CL) 269,105 $232,159
Change in WC -$36,946
Cash Flow Impact of Working $36,946
NATCF-Net After Tax Cash Flow 44,977 $74,167
Currency: in thous USD
Cash acquired from acquisition of Gateway, Inc.:
Currency: TWD
2005 2006 2007
Revenue $6,243,678 $10,765,531 $14,245,910
Cost $5,989,846 $9,594,165 $12,475,652
COSTS AS % OF REVENUES 95.93% 89.12% 87.57%
Gross profit margin $253,832 $1,171,366 $1,770,258
Depreciation & Amortization $45,582 $37,660 $47,098
Income before Interest and Tax $208,250 $1,133,707 $1,723,160
Interest Expenses $11,737 $13,498 $15,523
Tax $35,723 $102,190 $66,277
% of Tax on EBIT 17% 9% 4%
Net profit after interest & tax $144,951 $1,010,221 $1,624,176
NET Working Capital (CA-CL) $1,129,696 $1,574,162 $1,504,043
Change in WC $444,466 -$70,119
Cash Flow Impact of Working Capital -$444,466 $70,119
NATCF-Net After Tax Cash Flow $190,533 $603,415 $1,741,393
We will analyse whether this project - acquiring Gateway is a good decision or not
ACER Inc. Currency: in thous USD
2006 2007
Revenues in year 2006-2007 $10,765,531 $14,245,910
Costs as % of Revenues 89.12% 87.6%
Tax Rate on income 8% 8%
Interest Expenses $13,497.84 $15,522.52
Current Depreciation and Amortization $37,660 $47,098
NET Working Capital (CA-CL) $1,574,162 $1,504,043
Change in WC $444,466 ($70,119)
Cash Flow Impact of Working Capital ($444,466) $70,119
Investment in Working Capital as % of Revenue 5.0% 5.0%
Expected growth rate - next 5 years 8.83%
Expected growth rate - after 5 years 6.00%
Beta of the stock (from Reuters.com) 1.01 Market Beta=1.29
2006 2007
Revenues in year 2006 $3,980,803
Costs as % of Revenues 99.68%
Tax Rate on income 30%
Interest Expenses $18
Current Depreciation and Amortization $27,578
NET Working Capital (CA-CL) $232,159
Change in WC ($36,946)
Cash Flow Impact of Working Capital $36,946
Investment in Working Capital as % of Revenue 5.00%
Expected growth rate - next 5 years 3.75%
Expected growth rate - after 5 years 2.20%
Beta of the GATEWAY Inc Stock 1.12
Current riskfree rate 6.66%
Risk premium over riskfree rate 5.63%
What form does the merging benefit take? 1 Formulation: (1: Cost reduction ; 2:Cost reduction and Increase growth: 3: Only increase growth)
Current Financial Information
Information on the bidding firm - ACER INC.
MERGING VALUATION WORKSHEET
Projections of growth in earnings
Risk measures
Information on the target firm - GATEWAY INC.
Current Financial Information
General Informationbased on assumptions
Risk measures
Projections of growth in earnings
Information on Merging benefits
I. % of the costs to revenues without merge is 91.97%
If the merge is going to reduce % costs to revenue 87.6%
IIa. The growth rate in earnings in the next five years without merge is 8.34%
If the merging will increase growth, - the new growth rate is 12.00%
IIb. The growth rate after year 5 is expected to be 5.70%
If the merging will increase this growth rate - the new growth rate is 7.00%
ACER (Bidder) GATEWAY (Target) A+B: No Merge A+B (Merge)
NATCF (Free Cashflow ) $614,760 $66,292 $681,051 $1,080,181
Growth rate for first 5 years 8.83% 3.75% 8.34% 8.34%
Growth rate after five years 6.00% 2.20% 5.70% 5.70%
Beta 1.01 1.12 1.02 1.02
Req. rate of return (Discount Rate) 12.35% 12.97% 12.38% 12.38%
Riskfree Rate 6.66%
YEARS FCF (Acer) Term Val (A) FCF (Gateway) Term. Val (B) FCF (A+G)
1st Year (2007) $669,043 $68,778 $737,821
2nd Year (2008) $728,119 $71,357 $799,476
3rd Year (2009) $792,412 $74,033 $866,445
4th Year (2010) $862,382 $76,809 $939,191
5th Year (2011) $938,531 $15,675,944 $79,689 $756,508 $1,018,220
PRESENT VALUE $11,555,648 $669,868
NOTES:
(1) It is not simple to back out the growth rates for the combined companies when there is no merge because growth rates will change.
(2) It is far simpler to remember that in the absence of merge the cashflows, terminal value and present value of the combined firm
will always be equal to the sum of the same for the individual firms.
(3) To back out the growth rate of the combined firms in the absence of merge we used the combined terminal value estimated
in conjunction with the required rate of return to solve for the growth rate.
Most that ACER can bid for GATEWAY
% Premium over the market price
CONCLUSION
Gains from Merge
ATTENTION
(1: Cost reduction ; 2:Cost reduction and Increase growth: 3: Only increase growth)
PLEASE HAVE A LOOK AT COMMENTS ENTERED EACH CELL
Term Value (A+B) FCF (A+B:S) TV (A+B:S)
$1,170,220
$1,267,764
$1,373,439
$1,487,922
$16,432,451 $1,611,948 $25,516,085
$12,224,482 $19,080,216
$6,855,734
$7,525,602
1023%
(1) It is not simple to back out the growth rates for the combined companies when there is no merge because growth rates will change.
(2) It is far simpler to remember that in the absence of merge the cashflows, terminal value and present value of the combined firm
(3) To back out the growth rate of the combined firms in the absence of merge we used the combined terminal value estimated