Merger Math

Several big merger or acquisition announcements have been in the news recently. And, although we argue that the analysis of a potential merger is an NPV analysis with consideration for synergies, many mergers and the payment are done by the "seat of your pants" method. For example, when Elon Musk announced he was considering taking Telsa private at $420 per share, his bid was based on a 20 percent premium to the current stick price, rounded up to $420 dollars per share. A cash flow analysis of Tesla was not necessary since it has no operating cash flows. And when Disney announced it was increasing its bid for 21st Century Fox by $19 billion, it was because the intrinsic value of these assets has increased, notably due to tax reform and operational improvements." While mergers tend to be a tricky analysis, we have severe doubts about any merger done by the seat of your pants method.