LUBIN SCHOOL OF BUSINESS
Fin 648 Mergers and Acquisitions
Prof. P.V. Viswanath
1. Read the following excerpt from the article, "Mutual-Fund Mergers Jump Sharply" by Eleanor Laise from the New York Times of March 9, 2006 and answer the questions below:
Combinations Can Cut Costs for Investors, But May Create Investment-Mix, Tax Problems
A growing number of mutual funds are merging as financial-services companies come under pressure to cut costs, but fund investors don't always come out winners.
Last year, 222 mutual funds were absorbed into other funds, a 66% jump from a year earlier, and the highest number since 2001, when fund companies eliminated more than 530 funds through mergers in the wake of the dot-com crash, according to investment-research firm Morningstar Inc. The trend is expected to continue as major Wall Street firms increasingly exit the competitive mutual-fund business, including last month's agreement by Merrill Lynch & Co. to sell its investment-management business to money manager BlackRock Inc. Independent fund companies also are consolidating more funds as they grapple with stiffer regulations and growing competition from other investment products.
Fund companies say mergers create economies of scale and allow them to trim certain overhead costs such as paying for audits and mailing prospectuses. Last year, Bank of America Corp.'s Columbia Management unit combined its Tax Managed Growth Fund I, which had an expense ratio of 1.31%, with its Tax Managed Growth Fund II, with expenses of 1.49%, to create a combined fund with a lower expense ratio of 1.22%.
There is another motivation for the mergers. Some mergers eliminate laggard funds, allowing a fund family to put a better face on its overall performance. RiverSource Investments, a unit of Ameriprise Financial Inc., plans to merge its $8.2 billion New Dimensions fund, whose returns fell near the bottom of its large-growth category over the past one and three years, into its $1.4 billion Large Cap Equity fund. The latter fund also has a poor three-year record, but ranked in the top half of its category over the past year, according to Morningstar. An Ameriprise spokesman says the combined fund will be managed using the strategy of the more successful Large Cap Equity fund.
While fund companies often benefit from combining funds, investors need to be wary. Fund mergers can depress the performance of an acquiring fund, while bestowing most of the merger's benefits, including lower fees and better returns, on the acquired fund's shareholders. Mergers that join funds with dissimilar strategies also can hit investors with higher taxes, and throw off shareholders' investment objectives.
When funds merge, "some red flags should go up immediately," says Phil Edwards, managing director of investment services at Standard & Poor's.
Mergers often need approval from shareholders, who have generally been willing to go along with the moves. But only shareholders of a fund being acquired get to vote on a deal, not the holders of an acquiring fund. There are no hard and fast rules that determine which fund is to be the acquiring fund in a merger, says a Securities and Exchange Commission official. The SEC has oversight powers to intercede in a merger.
Mergers also must be approved by the funds' boards. The Independent Directors Council, an arm of the mutual-fund trade group Investment Company Institute, is expected to deliver recommendations this spring on what issues directors should consider, including fund fees and performance, in approving mergers.
In a move that will bring higher expenses, TIAA-CREF plans to merge five stock mutual funds for individual investors into several of its institutional funds, which recently won shareholder approval for fee increases. The company will make available a special class of shares in its institutional funds for the individual investors. A TIAA-CREF spokeswoman says the company's funds "had been priced too low and had been losing money."
2. Your company is considering acquiring a patent for an innovative hard drive from a computer hardware company. The seller agrees to give you the right to purchase the patent after two years for $10 million. Based on market research data, the estimate value of the patent today is $8 million. But uncertainty about the patent's success leads you to conclude that its value has a future volatility of 25 percent. If the two-year risk free rate is 6% per annum, answer the following questions:
3. KMG Chemicals (Nasdaq: KMGB) reported Net Income of 1763, 1917 and 2685 for the financial years ending July 31 for 2004, 2003 and 2002 respectively (all numbers in thousands, unless otherwise stated). Capital Expenditures for the three years were $1,767; $276; and $1,361. Depreciation was $1,643; $1,423; and $1,391. Change in Non-Cash Working Capital for 2003 and 2004 were $549 and -$1,372.
4. (8 points each) Answer the following questions in brief (no more than half a page):
He wants TNT to become the market leader of the pan-European postal market as it deregulates. However, the company's mail unit, TNT Mail, which accounted for around 38% of group revenue in 2005, has to deal with electronic mail and increased competition. That partially explains why TNT's margins fell to 19.5% last year and are expected to decline further to 18% this year.
By using its complementary mail and express networks and simplifying
its organizational structure, TNT can further reduce costs, Mr. Bakker said.
"We can benefit from synergies between mail and express by using the
hubs and our road network. Also, management can be used for both businesses
as the economy of the delivery business is more or less the same. For example,
linking the road network we have in Southeast Asia with our China operations
should make us a leader in the express business in China within five years,"
Mr. Bakker said.
Would you describe the Chinese freight-management company acquisition as a real option? Explain why or why not.