Event Leading to Mergers and Acquisition - Phelps Dodge - Assignment Example

Question one; Event leading to mergers and acquisition Phelp dodge announcement came merely a month into Falconbridge execution of poison bill to mitigate the company from hostile takeover by Xstrata, which is a giant mining company that had accumulated more than 20% of Falconbridge securities. Ultimately, the attempted amalgamation between phelp dodge limited and Falconbridge failed as well as inco when Xstrata increased its bid for Falconbridge board of directors for Falconbridge to acknowledge the higher bid and to decline phelp dodge limited (Anthony F. Buono, 2003). As the even with Xstrata spread-out, A Brazilian based mining company campanhia vale dio rio doce (CVRD) made spontaneous all cash offer to inco of C$86 per share which was considered by the analyst that the offer price will be welcomed by the shareholders of the company. By September 2006, phelp dodge and inco part ways and thereafter CVRD attained victory in acquiring inco. The event as anticipated by the analysis will soon make phelp dodge limited to change from being a bidder to a target in the deal market that has overcome the global mining industry. Some reasons why Phelps Dodge was an attractive target for acquisition by other players 2006 Return on Asset Net profit/total Asset 3.16/6.29 0.5 Return on equity net profit/total equity 3.16/5.6 0.56 Current ratio Current Asset/current liability 4.07/0.0168 2.4 Debt to equity ratio Debt/Equity 4.76/5.6 0.85 From the above ratio analysis for the company. it can be observed that Phelps dodge is having an ideal financial performance since, the return on asset and equity is quite higher and consequently it depict that investment in this company will generate a return of more than 50% which is strong financial indicators that the business venture will yield positive return from investment. The current ration depicts a value of 2.4, which is more than one. The interpretation is that the working capital of the company is effective and thus them business is going to fiancé its daily operation effectively (DePamphilis, 2013). In this regards, the company long term capital structure will facility growth since the business is able to meets its financial obligations and when they fall due and thus fixed capital will prospect for company’s asset diversification by holding a portfolio. Having a portfolio of business venture will consequently minimize business risk and as a result, the going concern assumption of the business will effective and reliable. Question two; JPMorgan and Merrill Lynch’s involvement in the merger transaction prior to the announcement The parties were involved in the merger arrangement as a financing institution, which was a joint commitment between JPMorgan’s and Merrill Lynch to merge the $6 billion loan bride before endorsement of the merger. JPMorgan’s and Merrill Lynch together underwrote a note offering and terms loan as well as led the loan capacity. The bank also was actively involved in advisory process as well as issuing of debt and equity underwriting process. All this process was performed by the investment bank in order to ensure that there is an efficient and reliable merger transaction and that the security on sell will realize high market value consequential from the market limit executed by the bank (Fiordelisi, 2008). The bank success and threat depend on the effective restructuring of the acquired business and consequently the investment bank will ensure that the underwriting process is efficient as well as the debt and equity security are sold in the market at a higher value in order to attract more shareholders in the market so as to boost business growth and expansion. Task that JPMorgan’s and Merrill Lynch undertook after the announcement JPMorgan’s and Merrill Lynch under took the process of trading the two linked mandatory convertible preferred and common stock as mutual book runners. Both companies has shared the fees and league table loan for the dealings every quarter, league table positioning the key investment bank by underwriting the proceeds from numerous grouping in term of debt capital, equity, bond e.t.c are realized. JPMorgan was ranked first in US convertible with 23.9 percent market share as well as realized proceeds worth $6 billion from convertible issuance while at the same time, Merrill lynch was ranked third with $ 4billion which is worth 15.8% in market share. Significant risks in their undertaking for the investment banks Capita / finance risk The investment bank will be faced with capital risk. This is a financial risk linked with loan provision by way of financing commitment linked with acquisition process. The bank that finance an acquisition process find themselves in a huge amount of loan processing and this will make the investment bank more susceptible to business risk. This one of the risk that bank majorly faces and therefore a comprehensive underwriting process must executed in order to clearly comprehend the business situation a s we’ll as understand the threat that there company is facing at present so as to mitigate for risk in case they occur (Helén Anderson, 2012). The bank therefore consider setting aside capital so as to act as collateral for loan in case of financial difficulties subsequent to merger and acquisition process in order to save the bank and the company from facing serious financial and liquidity problem. Reputation risk The is less tangible but not that much significant it is the risk consequential from associating the bank within the investment company that requires loan for acquisition of another company. Where the company is faced with serious performance problems, the bank will as well as is affected and consequently, the threat to the investment bank performance. Probability of sustaining huge losses from adverse business risks this risk such as the credit risk. The investment bank always understand the business current and historic performance in order to comprehend the future business trend as well as the that the financing structure that is applicable to the bank. The reputation of a company clearly affect its performance and consequently the ability of the company to pay its obligation as and when they fall due will rarely be met which in turn will affect the bank consequential from amount loaned to the business for restructuring and merger processing this regards, the bank must be satisfied with the company’s reputation prior to involving itself in the underwriting process as well as the merger and acquisition process. Question three; why JPMorgan and Merrill Lynch were selected to perform the tasks JPMorgan and Merrill Lynch is the largest investment bank with good reputation in investment trading. The investment bank are ranked among the top three in the U.S convertible market and consequently, it is considered significant t for the merger acquisition company to appreciate an investment institution with highest loan capital as well as the reputation and experience in trading convertible securities in the stock. In this regards, the merger process was deemed effective when the two big investment bank was considered for the process as well as saves time and cost in the merger process. The role of the leveraged finance group at JPMorgan and why was its involvement important to the acquisition The leveraged fiancé group was accountable for appraisal behind making the bridge funding obligation to the company. The bridge note was somehow significant to enhance FCX to depict dedicated funding to Phelps dodge. Set aside capital when it completes underwriting transactions To set aside capital is the funds reserved to cover unanticipated loss after the underwriting process is complete. The regulatory capital provides that every investment bank to set aside funds to mitigate for any business risk connected with the underwriting process. It therefore implies that bank will invest extra cash in other portfolio venture to minimize the consequence of risk occurrence. The process of setting aside capital when the underwriting process is complete is there a process by whi9ch bank mitigate for business risk and will thus act as controlling fund in order to secure the business and bank from collapsing consequential form financial loss. Question four; Credit rating agencies Moody’s and S&P Rating agencies were considered to secure the superior credit rating on the bond in the forthcoming bond offering. S&P upgraded the FXC bond rating from B+ to BB+ and consequently to BBB-.correspondingly, Moody’s was also considered to rate the FCX bonds, the rating agency had the company on positive watch, this followed form an upgrade from B1 to Ba2 and then to Baa3 in march 2007.the credit upgrade lead raising of both more than $5 billion in equity capital through the common stock as well as convertible offering leading to increase in cash flow consequential from the merger process. The importance of the credit rating agencies is that it increases the value of the bond in the stock market as well as placing it in a sportive watch to investors. This lead to an increase in the level of cash flow to the business consequential from the mergers and acquisition. Role of an Equity Capital Markets Syndicate group They provide market intelligence and expertise in helping structuring as well as optimal distribution of entire equity and equity associated securities inclusive of the initial public offer. The group work close with the investment bank and sales trading team to help coherent the business to investors as well as pricing the company equity transaction moderately and efficiently. Limit order and how it impact on the sale function This is an order placed with a brokerage to buy or sell shares of particular price. Since the limit order is not market a order, it might not be performed where the price set by the investors cannot be attained at the time of placing the order is open (Rezaee, 2004). Limit order therefore permit an investor to limit the length of time an order might be outstanding prior to being given up for lost. The impact of limit order on sales function is that it boosts the sales of equity in the stock market since, limit order places some restriction on time the equity is open for buy or sells as well as the time the equity is canceled. This therefore provides a platform and period to trade the equity price hence boosting the purchase and or disposal of the equity security in the stock market. Question five; Freeport-McMahan’s operating and financial performance prior to, and following the merger       2006 Return on Asset Net profit/total Asset 2,769/40,661 0.07 Return on equity net profit/total equity 1396/2445 0.56 Current ratio Current Asset/current liability 907/680 1.3 Debt to equity ratio Debt/Equity 680,115/2,445,101 0.28       2007 Return on Asset Net profit/total Asset 2,769/40,661 0.07 Return on equity net profit/total equity 2769/18234 0.15 Current ratio Current Asset/current liability 1626/ 7211 0.2 Debt to equity ratio Debt/Equity 7211/18234 0.4 From the above graph and data analysis, it can be observed that the financial performance for MCMoran limited has been declining because the business has invested heavily in the acquisition of Phelps Dodge limited. In this regards, the company anticipate to depict higher debt to equity ratio in the first year of its business operation subsequent to the merger process since, the business is still heavy financed by the investment bank and thus it is under strict obligation to owner the debt owed. The return on asset for the bank is also declining since the business has not yet realized profit from investment owing to the fact that the business merger is still under the process of restructuring and re-organizing the acquired firm. The return on equity as depicted the graph above also depict an decline trend from 2006 which is an indication that shareholders of the company didn’t receive dividend due to huge capital investment in their merger process and as result it is deemed that the shareholders will realize return from investment from subsequent years when all the reorganization and restructuring process has completed by the investment bank and the equity capital market syndicate. Would you rate the acquisition of Phelps Dodge a ‘success’? Yes, the acquisition of Phelps dodge limited is a success to the MCMoran limited since a return inform of profit is going too realized from investment. The financial indicators provide a positive liquidity position of the company subsequent to acquisition which is the case to all merger process that financial situation will slightly decline before improving due to huge capital investment. From the case study, the company invested over $6billion in the merger and acquisition process which is significant amount of money that put the company at risk ,Nevertheless, the 2007 financial report depict an I proving business performance and consequently it act as a good financial indicators that the acquisition of Phelps dodge is a success to MCMoran and thus the business is going to realize huge profit from investment hence shareholders of the company will realize huge dividend consequential from improved return on equity . Placing reliance on the financial indicators devoid of considering the external business risk that might the new venture business performance will lead to high business risk that lead to liquidity problem. As a result, the company should ensure that business threat is clearly handled with care specifically to the acquisition the new company in order to safeguard the company huge investment capital as well as ensure that the shareholders wealth is maximized in return. Understanding the business situation after the acquisition will ensure that the company is financial analyst appraise the new venture business performance as well as providing recommendation where applicable to guarantee business performance. References Anthony F. Buono, ‎.L.B., 2003. The Human Side of Mergers and Acquisitions: Managing. DePamphilis, D., 2013. Mergers, Acquisitions, and Other Restructuring Activities:. - Page 118. Edward P. Halibozek, ‎.L.K., 2005. Mergers and Acquisitions Security: Corporate Restructuring. Fiordelisi, F., 2008. Mergers and Acquisitions in European Banking, New York: Palgrave Macmillan.The structure of Financial Supervision Approaches and Challenges in a Global. washington D.C. Helén Anderson, ‎.H.‎.N., 2012. Mergers and Acquisitions: The Critical Role of Stakeholders. INC., M.C.&.G., 2007. FREEPORT-MCMORAN COPPER & GOLD INC. Rezaee, Z., 2004. Financial Institutions, Valuations, Mergers, and. - Page xxii. Snow, B., 2011. Mergers and Acquisitions For Dummies. Timothy J. Galpin, ‎.H., 2010. The Complete Guide to Mergers and Acquisitions. . Read More