Business Proposal: Merger &amp Acquisitions

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SAMPLE EXCERPT:

[. . .] 93%

35.52%

36.24%

38.63%

35%

35%

35%

35%

30%

30%

Net Profit

45.2

12.9

98.7

Growth Rate

-71.46%

74.16%

34.96%

30%

30%

30%

30%

30%

The table 1 reveals that the growth that Merck Company achieved within five years between 1998 and 1992. Using the CAGR (compound annual growth rate) of 12.32% within the past 5 years, it is revealed that the 12.32% is good starting point for forecasting. The paper uses the average growth for forecasting (10.29%+17.11%+12.14%+12.32%) =12.9%. Since most companies may not be able to sustain the average growth rate for some time. The paper uses the 12% as the forecasting point for revenue for the Merck & Co. Based on the results of the forecasting, it is revealed that the company would be able to maintain 12% growth rate in sales at post-merger. Moreover, the company will be able to maintain 20% growth rate for the net income.

Moreover, the table 2 reveals the Medco free cash flow that shows that the company would be able to maintain growth rate of average of 35% within 5 years after 1993. Using the revenue growth analysis, it is revealed that both companies will maintain a healthy growth in revenue within five years after the merger. Moreover, Medco would be able to maintain the health growth rate of 30% for the net income five years at post-merger.

The price $6.6 billion that Merck paid for the merger was good because the company book value per share will increase from $7.30 instead of $4.33 before the merger. Typically, Merck book value per common share was $4.33 while Medco book value per common share was $6.12. Merger would assist Merck to boost its book value to $7.30.

Based on the results of the projected cash flow, this report provides the recommendations whether both companies should proceed with the merger process or not.

Recommendations

This report advises that both Merck and Medco should proceed with the merger process based on the results of the analysis delivered in Table 1 and 2. The external evaluation of the Medco financial performances after the merger reveals that the company would record a healthy financial record at post-merger. The data in the table 3 reveal that Medco will record the $3.5 billion in sales in 1994, $4.7 billion sales in 1995 and 6.4 billion sales in 1996. Moreover, Medco will record an increase in the net income from $199 million in 1994 to $389 million in 1996. Moreover, the company will record the increase in the cash flow from financial and operating activities from $182.9 million in 1994 to $270.5 million in 1996. Based on the data delivered, it is revealed that the Merck will enjoy several financial and non-financial benefits by initiating merger with Medco. (Main, Wiss, Motoba, et al. 2012).

Table 3: Projection for Medco ($Million) Except share amount

1994

1995

1996

Sales

3.542.0

4.779.9

6.439.0

Net Operating Profit

Net Income

Earning Per Shares

1.21

1.68

2.32

Change in Working Capital

(66.4)

(129.0)

(207.5)

Capital Expenditure

(45.0)

(40)

(40)

Cash Flow from Operating & Financing Activities

Source: Thomson Reuters. (1993).

Merck will enjoy the following benefits by initiating merger process with the Medco:

One of the benefits of the merger is that Merck will be able to increase its annual sales making the company to dominate the pharmaceutical industry. The unaudited pro-formal financial record reveals that the Merck will record annual sales of $6.3 Billion immediately after the merger. With the increase in the sales growth rate of both Merck and Medico, the Merck would able to record the 47% growth rate in sales after the merger instead of the 12% growth if there was no merger process. Moreover, the company will enjoy increase in the overall net income after the merger. Typically, the Merck would be able to record 50% growth rate in the net income after the merger. However, if Merck did not initiate the merger, the company will only record 20% annual growth in the net income.

"Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones." (Investopedia, 2010).

Moreover, the Merck would be able to enjoy economic of scale by proceeding with the merger process thereby making the company to enjoy a decline in the cost of capital and offered low prices for the goods and services delivered to customers in the market. The decline in the cost of operations would assist the company to dominate the market thereby beat its domestic and international competitors. Additional benefits are that Merck would be able to enjoy supernormal profits because the company would able to enjoy $1 billion annual saving in redundant marketing. The company would be able to achieve a more precise marketing strategies brought about with the merger… [END OF PREVIEW]

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