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ADM 658: Chapter 6 - Mergers and Acquisition


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ADM 658: Chapter 6 - Mergers and Acquisition

  1. 1. ADM658 – CHAPTER 6: MERGER AND ACQUISITION Merger •One firm is acquired by another •Acquiring firm retains name and acquired firm cease to exist. •Advatage - legally simple •Disadvantage - must be approved by stockholder of both firms. Consolidation •Entirely new firm is create from combination of existing firm. Acquisitions •Firm can be acquired by another firms or individual purchasing voting shares of the firm's stock •Tender offer - public offer to buy shares •Stock acquisition •No stockholder vote acquired •Can deal directly with stockholders •May be delayed if some target shareholders hold out for more money - complete absorption requires a merger. •Classification •Horizontal : both firm same industry •Vertical : firms are different stages of production process •Conglomerate : firms are unrelated. Takeovers •Control of a firm transfer from one group to another. •Possible forms: •Acquisition •Merger or consolidation •Acquisition of stock •Acquisition of assets •Proxy contest •Going private. Synergies •Concept of that the value and performance of 2 companies combined will be greater than the sum of the seperated individuals part. The potential benefit (financial) achieved through the combining of companies. •Some mergers create synergies because the firm can either cut cost ir use the combinedassets more effectively. •Benefits: •Revenue enhancement: marketing gains/strategic benefits/market power •Costs reduction: economies of scale/economies of vertical integration/complimentary resources •Reducing capital needs
  2. 2. ADM658 – CHAPTER 6: MERGER AND ACQUISITION General rules •Do not rely on book values alone - the market provides information about the true worth of assets •Estimate only incremental cash inflows •Use an appropriate discount rate •Consider transaction costs - these can add up quickly and become a substantial cash outflow. EPS growth •Mergers may create the appearance of growth in earning per share Diversification •Not a good reason for a merger •Stockholding can normally diversify their own portfolio cheaper than a firm can diversify by acquisition •Stockholders wealth may actually decrease after the merger because the reduction of risk, in effect transfers wealth from the stockholders to the bondholders. Stock acquisition •Cost of acquisition: •Depends on the number of shares given to the target stockholders •Depends on the price of the combined firms stock after the merger •Consideration when choosing between cash and stock: •Sharing gains: target stockholders don't participate in a stock price appreciation with a cash acquisition •Taxes: cash acquisition are generally taxable •Control: cash acquisition do not dilute control NPV of a merger •Consideration from bidder firm to target firm can be •In cash •In shares of bidder firm •Whether acquire or not, it depends on the NPV of the merger and the market price of bidder shares after the merger. Defensive tactics •Corporate charter: •Establishes condition that allows for a takeover •Targeted repurchases •Standstill aggreements •Poison pills (share right plans) •Leveraged buyouts Evidence on acquisition •Shareholders of tager companies tend to earn excess returns in a merger •Shareholders of bidding firms earn a small excess return in a tender offer, but none in a straight merger. Divestitures and restructuring •Divestiture: company sells a piece of itself to another company •Equity carve out: company creates a new company out of a subsidiary and then sells a minority interests to the public through an IPO. •Spin-off: company creates a new company out of a subsidiary and distributes the shares of the new company to the parent company's stockholders •Split-up: company is split into 2 or more companies are distributed to the original firm's shareholders.