There are three basic legal procedures for mergers and acquisitions: merger or consolidation, acquisition of stock, and acquisition of assets. Mergers and acquisitions can provide gains through synergy, revenue enhancement, cost reductions, lower taxes, and reducing capital needs. The net present value (NPV) of a merger is the value of firm B to firm A (V*B) minus the acquisition cost. An illustration shows how to calculate NPV for a cash acquisition versus a stock acquisition. Cash is generally better than stock if the acquisition has a positive NPV, while stock is better if the acquisition has a negative NPV because the loss is shared between firms.

1. Pertemuan 9
Rabu, 5 Desember 2012

2. MERGER AND ACQUISITION

3. Three Basic Legal Procedures
• Merger or consolidation
– Merger  Acquiring firms retains its name and its
identity, and it acquires all the asset and liabilities
of the acquired firm.
– Consolidation  entirely new firm is created
• Acquisition of stock
– Purchase the firm’s voting stock with an exchange
of cash, shares of stock or other securities
• Acquisition of assets
– Buying most or all of acquired company’s assets

4. Gains from Acquisition
• Synergy
– VAB > VA + VB  ΔV = VAB – (VA + VB )
• Revenue enhancement
• Cost reductions
• Lower taxes
• Reducing in capital needs

5. Financial Side Effects of Acquisition
• Assume no synergy

6. Cost of Acquisition
• ΔV = VAB – (VA + VB )
• Total value of firm B to firm A, V*B , is
– V*B = ΔV + VB
• NPV of the merger is therefore
– NPV = V*B – Cost to firm A of the acquisition
• Merger premium
– Kelebihan pembayaran diatas market value

7. Illustration
• Suppose firm A estimate that firm B will give
incremental value to it by 100.
• Firm B will agree if the price offered is 150,
payable in cash or stock

8. Illustration
• NPV = V*B – Cost to firm A of the acquisition
• NPV = (ΔV + VB)– Cost to firm A of the acquisition
• (ΔV + VB) = 100 + 100 = 200
• Case 1: Cash Acquisition
• NPV = (ΔV + VB)– Cost to firm A of the acquisition
• NPV = 200 – 150 = 50 (profitable)
• AB still have 25 shares outstanding, value of firm A after
the merger
– VAB = VA + (V*B - cost)
– VAB = 500 +200 – 150 = $550
– Price per share after merger = $550/25 = $22

9. Illustration
• Case 2 Stock Acquisition  Firm B come in as
new shareholders in the merged firm
• VAB = VA + VB + ΔV = $500 + $100 + $100 = $700
• Firm A should issue additional shares:
– $150/20 = 7.5 additional shares
– After merge, outstanding shares 25 + 7.5 = 32.5 
price per share = $700/32.5 = $21.54
– Firm B received 7,5 shares equivalent with
• 7,5 x $21.54 = $161.55
• NPV = V*B – Cost to firm A of the acquisition =
– $200 - $161.55 = $38.45

10. Cash or Stock?
• If acquisition results a gain (positive NPV)
– Cash is better than stock
• If acquisition results a loss (negative NPV)
– Stock is better than cash because the loss is
shared between the two firms
• Control  acquisition by paying cash does not
affect the control of the acquiring firm