External Growth through Mergers

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TABLE 1-1 Largest acquisitions ever

TABLE 1-2 Financial data on potential merging firms

TABLE 1-3 Postmerger earnings per share

FIGURE 1-1 Risk-reduction portfolio benefits

Outline Mergers vs. Consolidations Why Merge? 3 Types of Mergers Motives of Selling Stockholders Terms of Exchange Negotiated vs. Tender Offers Wall Street Takeover Terminology

Mergers vs. Consolidations

Why Merge?

3 Types of Mergers

Motives of Selling Stockholders

Terms of Exchange

Negotiated vs. Tender Offers

Wall Street Takeover Terminology

Mergers vs. Consolidations A business combination can be either a merger or a consolidation Merger: a combination of 2 or more companies where the resulting firm keeps the identity of the acquiring company Consolidation: when 2 or more companies are combined to form an entirely new entity

A business combination can be either a merger or a consolidation

Merger:

a combination of 2 or more companies where the resulting firm keeps the identity of the acquiring company

Consolidation:

when 2 or more companies are combined to form an entirely new entity

Why Merge? Financial motives: – to reduce risk (the portfolio effect) – to increase operating efficiency – to improve access to financial markets – to obtain a tax carry-forward benefit Non financial motives: – to expand marketing and management capabilities – to allow for new product development – to provide synergistic benefits (the “2+2=5” effect)

Financial motives:

– to reduce risk (the portfolio effect)

– to increase operating efficiency

– to improve access to financial markets

– to obtain a tax carry-forward benefit

Non financial motives:

– to expand marketing and management capabilities

– to allow for new product development

– to provide synergistic benefits (the “2+2=5” effect)

3 Types of Mergers Horizontal Merger: – unites direct competitors – ex., 2 shoe companies combine Vertical Merger: – unites buyers and sellers – ex., a shoe manufacturer buys a leather producer Conglomerate Merger: – merging of firms in totally unrelated industries – ex., a shoe company joins with a beverage company

Horizontal Merger:

– unites direct competitors

– ex., 2 shoe companies combine

Vertical Merger:

– unites buyers and sellers

– ex., a shoe manufacturer buys a leather producer

Conglomerate Merger:

– merging of firms in totally unrelated industries

– ex., a shoe company joins with a beverage company

Motives of Selling Stockholders Desire to receive the acquiring firm’s stock which may have greater acceptability in the market Provides stockholders an opportunity to diversify their holdings Gain on sale of the stock at an attractive price Officers of selling company may receive attractive postmerger management contracts and directorships in the acquiring firm Avoids the bias against smaller businesses

Desire to receive the acquiring firm’s stock which may have greater acceptability in the market

Provides stockholders an opportunity to diversify their holdings

Gain on sale of the stock at an attractive price

Officers of selling company may receive attractive postmerger management contracts and directorships in the acquiring firm

Avoids the bias against smaller businesses

Terms of Exchange Cash Purchases: takes on many characteristics of a classical capital budgeting decision Stock-For-Stock Exchange: often a trade-off between an immediate gain or dilution in EPS and future growth

Cash Purchases:

takes on many characteristics of a classical capital budgeting decision

Stock-For-Stock Exchange:

often a trade-off between an immediate gain or dilution in EPS and future growth

Negotiated vs. Tender Offers Negotiated Offer: – a “friendly” merger that is negotiated between officers and directors of the participating corporations – it is agreed upon by all sides Takeover (or Unsolicited) Tender Offer: – when a company attempts to acquire a target firm against its will (an “unfriendly takeover”) – unsolicited tender offers for a target company have gained in popularity

Negotiated Offer:

– a “friendly” merger that is negotiated between officers and directors of the participating corporations

– it is agreed upon by all sides

Takeover (or Unsolicited) Tender Offer:

– when a company attempts to acquire a target firm against its will (an “unfriendly takeover”)

– unsolicited tender offers for a target company have gained in popularity

Wall Street Takeover Terminology Saturday Night Special: – a surprise offer made right before the market closes for the weekend – takes the target company’s officers by surprise White Knight: – a third firm that management calls on to help it avoid an unfriendly takeover – not always successful at winning

Saturday Night Special:

– a surprise offer made right before the market closes for the weekend

– takes the target company’s officers by surprise

White Knight:

– a third firm that management calls on to help it avoid an unfriendly takeover

– not always successful at winning

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