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