[MUSIC] In this course, we'll be talking a lot about how to create shareholder wealth, right. In particular, in Module 3, we discuss the concept of net present value and how we can use net present value to measure the contribution of a new product to shareholder wealth, okay. So this we learned already, in this module, what we're gonna talk about is mergers and acquisitions, okay? Buying another company that has made that valuable project is another way in which another company can create shareholder value, right? So you either make the cool product yourself, or you buy the other company that has made that. And in some cases you can actually create value by selling, right? If you sell the company to another owner that values the company more than you do, then you're also going to be creating value, so M&A is a very active market. It's a way in which shareholders can actually make money. So, it's very important for us to discuss that as well. So, one of our goals here is to discuss a few very important topics in M&A. Unfortunately, we don't have time to talk about everything. We could definitely do an entire class just on M&A. We don't have that much time, okay. So what we're going to do is focus on a few specific issues that I think are the most important for us to consider. We're going to understand the key motivations for M&A. We're going to think about valuations, how to value them. And then we're going to think about pricing, how to price an M&A deal, okay? We're going to do mostly in thinking about deals between two companies. Okay, and acquiring a target, but we're also going to talk about leveraged buyouts. okay. Leveraged buyouts is a major form of M&A deal in recent years and as we're going to learn, there is some specific facts about leveraged buyouts which make them different from a merger between two companies, okay?. So we're going to talk about LBOs and we're going to try to understand how LBOs can create shareholder value as well. Okay, and then the other main topic we're going to discuss in Module 4 is uncertainty. So far, for example, if you look at our examples in Module 3, we have been assuming that we knew the forecasts. We always have the forecasts, we know what the schedules are going to be and then we do the valuation. Okay? Of course, in the real world that's unlikely to be the case. Every time you create something new, every time you create a new product, every time you make an acquisition, there is going to be a lot of uncertainty associated with that decision. So we have to discuss the notion of uncertainty and how we address uncertainty when valuing an investment. That's gonna be the other major topic we're going to talk about in this module, okay? We're going to learn how to deal with uncertainty and how to incorporate that into our evaluation. There are standard finance tools, there are standard techniques that we use to deal with uncertainty and make sure that our evaluation takes that into account. And finally, what you're going to learn is that you can use these tools, okay? These tools that we have to measure uncertainty, we can actually use them to measure performance. So that's gonna be an interesting idea we're going to learn at the end. Okay? We're gonna be able to measure whether a project or division is generating real economic value or not. And what you're going to learn is that the answer to this question is directly related to the previous question that we made, how do we address, how do we incorporate uncertainty into the evaluation. So that's going to be a very interesting discussion that we're going have in this module as well. In terms of specific objects, right, we're going to start with M&A. We're going to talk about the concept of synergies, which is the most important idea in M&A. We're going to think about how to value synergies, using NPV techniques. So that's going to use the same net present value technique that you already learned. And then we're going to think about how synergies determine the pricing of M&A deals, okay? Then we're gonna think about means of payment, right? Some mergers are paid with cash, some mergers are paid with stock. We have to understand, what's the difference? What does it mean to pay with stock? That's another topic we're gonna be talking about. Then we're going to talk a little bit about LBOs, specifically the specific characteristics of leverage buyouts and how they can add value, okay? After we do that, we're going to move and start talking about uncertainty, okay? So we're going to learn how to perform sensitivity analysis, how to incorporate sensitivity analysis into investment decisions and then we're going to learn a very important concept in finance, which is the idea of changing the discount rate to incorporate risk into the valuation. So what we're going to learn is that the discount rate that we've been taking as given is the key number that we're going to use to incorporate risk into the valuation. Okay? And then we're going to learn how to estimate a discount rate for a real-world company using the weighted average cost of capital formula. Okay? As we're going to learn, that's the way in which we're going to estimate the discount rate when we are valuing a new investment by a real-world company. Okay? And then we're going to use this WACC, the weighted average cost of capital, to estimate economic value added, which is going to be our measure of performance, so as I said before, our measure of performance is going to directly linked to this formula that we're going to use to incorporate risk into the valuation. So WACC and EVA are going to be very related concepts, as we're going to learn in this module.
