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Chapter 22 Mergers and Acquisitions. Chapter 22 Mergers and Acquisitions.

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Presentation on theme: "Chapter 22 Mergers and Acquisitions. Chapter 22 Mergers and Acquisitions."— Presentation transcript:

1 Chapter 22 Mergers and Acquisitions

2 Chapter 22 Mergers and Acquisitions

3 Chapter Outline 22.1 Background and Historical Trends 22.2 Market Reaction to a Takeover 22.3 Reasons to Acquire 22.4 The Takeover Process 22.5 Takeover Defenses 22.6 Who Gets the Value Added from a Takeover?

4 Learning Objectives  Discuss the types of mergers and trends in merger activity.  Understand the stock price reactions to takeover announcements.  Critically evaluate the different reasons to acquire.  Follow the major steps in the takeover process.

5 Learning Objectives (cont’d)  Discuss the main takeover defenses.  Identify factors that determine who gets the value-added in a merger.

6 22.1 Background and Historical Trends  The market for corporate control  Acquirer (aka bidder)  Target  Two primary mechanisms  Acquisition  Merger

7 22.1 Background and Historical Trends  Merger Waves  Peaks of heavy takeover activity followed by troughs of few transactions.  Merger activity is greater during economic expansions than contractions  Also correlates with bull markets

8 Table 22.1 Twenty Largest Merger Transactions, August 2000 – July 2010

9 Figure 22.1 Percentage of Public Companies Taken Over Each Quarter,

10 22.1 Background and Historical Trends  Types of Mergers  Horizontal merger  Target and acquirer are in the same industry  Vertical merger  Target’s industry buys or sells to acquirer’s industry  Conglomerate merger  Target and bidder are in different industries

11 22.1 Background and Historical Trends  Types of Mergers  Stock swap  Cash merger or acquisition  Payments can be very complex  Usually some combination of forms of payment

12 22.2 Market Reaction to a Takeover  Most acquirers pay a substantial acquisition premium. TABLE 22.2 Average Acquisition Premium and Stock Price Reactions to Mergers

13 22.2 Market Reaction to a Takeover  Three questions:  Why do acquirers pay a premium?  Why does the price of the target rise by less than the premium?  If the merger is a good idea, why does the acquirer’s price not have a large increase?

14 22.3 Reasons to Acquire  Acquirer might be able to add economic value as a result of the acquisition.  Synergies

15 22.3 Reasons to Acquire  Economies of Scale and Scope  Economies of scale  Savings from producing goods in high volume  Economies of scope  Savings from combining the marketing and distribution of related products

16 22.3 Reasons to Acquire  Vertical Integration  Merger of two companies in the same industry that make products required at different stages of the production cycle.  Principal benefit is coordination

17 22.3 Reasons to Acquire  Expertise  May be more efficient to purchase a company for its talent pool that is already a functioning unit  Monopoly Gains  Antitrust laws

18 22.3 Reasons to Acquire  Efficiency Gains  Elimination of duplication  Improvement in poor management  Tax Savings from Operating Losses  Can’t write off a tax loss unless you have a profit elsewhere.

19 Example 22.1 Taxes for a Merged Corporation Problem:  Consider two firms, Ying Corporation and Yang Corporation. Both corporations will either make $50 million or lose $20 million every year with equal probability. The only difference is that the firms’ profits are perfectly negatively correlated. That is, any year Yang Corporation earns $50 million, Ying Corporation loses $20 million, and vice versa. Assume that the corporate tax rate is 34%.

20 Example 22.1 Taxes for a Merged Corporation Problem (cont’d):  What are the total expected after tax profits of both firms when they are two separate firms? What are the expected after-tax profits if the two firms are combined into one corporation called Ying-Yang Corporation, but are run as two independent divisions? (Assume it is not possible to carry back or carry forward any losses.)

21 Example 22.1 Taxes for a Merged Corporation Solution: Plan:  We need to calculate the after-tax profits of each firm in both the profitable and unprofitable states by multiplying profits by (1 – tax rate). We can then compute expected after-tax profits as the weighted average of the after-tax profits in the profitable and unprofitable states. If the firms are combined, their total profits in any year would always be $50 million - $20 million = $30 million, so the after-tax profit will always be $30 × (1- tax rate).

22 Example 22.1 Taxes for a Merged Corporation Execute:  Let’s start with Ying Corporation. In the profitable state, the firm must pay corporate taxes, so after-tax profits are $50 × ( ) = $33 million. No taxes are owed when the firm reports losses, so the after-tax profits in the unprofitable state are -$20 million.  Thus, the expected after-tax profits of Ying Corporation are 33(0.5) + (- 20)(0.5) = $6.5 million.

23 Example 22.1 Taxes for a Merged Corporation Execute (cont’d):  Because Yang Corporation has identical expected profits, its expected profits are also $6.5 million. Thus, the total expected profit of both companies operated separately is $13 million.  The merged corporation, Ying-Yang Corporation, would have after-tax profits of $30 × (1-0.34) = $19.8 million.

24 Example 22.1 Taxes for a Merged Corporation Evaluate:  Ying-Yang Corporation has significantly higher after-tax profits than the total stand-alone after-tax profits of Ying Corporation and Yang Corporation. This is because the losses on one division reduce the taxes on the other division’s profits.

25 Example 22.1a Taxes for a Merged Corporation Problem:  Consider two firms, Tally Corporation and Ho Corporation. Both corporations will either make $100 million or lose $50 million every year with equal probability. The only difference is that the firms’ profits are perfectly negatively correlated. That is, any year Tally Corporation earns $100 million, Ho Corporation loses $50 million, and vice versa. Assume that the corporate tax rate is 34%.

26 Example 22.1a Taxes for a Merged Corporation Problem (cont’d):  What are the total expected after tax profits of both firms when they are two separate firms? What are the expected after-tax profits if the two firms are combined into one corporation called Tally-Ho Corporation, but are run as two independent divisions? (Assume it is not possible to carry back or carry forward any losses.)

27 Example 22.1a Taxes for a Merged Corporation Solution: Plan:  We need to calculate the after-tax profits of each firm in both the profitable and unprofitable states by multiplying profits by (1 – tax rate). We can then compute expected after-tax profits as the weighted average of the after-tax profits in the profitable and unprofitable states. If the firms are combined, their total profits in any year would always be $100 million - $50 million = $50 million, so the after-tax profit will always be $50 × (1- tax rate).

28 Example 22.1a Taxes for a Merged Corporation Execute:  Let’s start with Tally Corporation. In the profitable state, the firm must pay corporate taxes, so after-tax profits are $100 × ( ) = $66 million. No taxes are owed when the firm reports losses, so the after-tax profits in the unprofitable state are -$50 million.  Thus, the expected after-tax profits of Tally Corporation are 66(0.5) + (- 50)(0.5) = $8.0 million.

29 Example 22.1a Taxes for a Merged Corporation Execute (cont’d):  Because Ho Corporation has identical expected profits, its expected profits are also $8.0 million. Thus, the total expected profit of both companies operated separately is $16 million.  The merged corporation, Tally-Ho Corporation, would have after-tax profits of $50 × (1-0.34) = $33 million.

30 Example 22.1a Taxes for a Merged Corporation Evaluate:  Tally-Ho Corporation has significantly higher after-tax profits than the total stand-alone after-tax profits of Tally Corporation and Ho Corporation. This is because the losses on one division reduce the taxes on the other division’s profits.

31 22.3 Reasons to Acquire  Diversification  Risk reduction  Debt capacity and borrowing costs  Liquidity

32 22.3 Reasons to Acquire  Earnings growth  It is possible that two companies combined can have higher earnings per share than the premerger earnings per share of either company, even if the merger creates no economic value.

33 Example 22.2 Mergers and Earnings Per Share Problem:  Consider two corporations that both have earnings of $5 per share. The first firm, OldWorld Enterprises, is a mature company with few growth opportunities. It has 1 million shares that are currently outstanding, priced at $60 per share. The second company, NewWorld Corporation, is a young company with much more lucrative growth opportunities. Consequently, it has a higher value: Although it has the same number of shares outstanding, its stock price is $100 per share.

34 Example 22.2 Mergers and Earnings Per Share Problem (cont’d):  Assume NewWorld acquires OldWorld using its own stock, and the takeover adds no value. In a perfect market, what is the value of NewWorld after the acquisition? At current market prices, how many shares must NewWorld offer to OldWorld’s shareholders in exchange for their shares? Finally, what are NewWorld’s earnings per share after the acquisition?

35 Example 22.2 Mergers and Earnings Per Share Solution: Plan:  Because the takeover adds no value, the post-takeover value of NewWorld is just the sum of the values of the two separate companies: 100 × 1 million + 60 × 1 million = $160 million. To acquire OldWorld, NewWorld must pay $60 million. We need to first calculate how many shares NewWorld must issue to pay OldWorld shareholders $60 million. The ratio of NewWorld shares issued to OldWorld Shares will give us the exchange ratio.

36 Example 22.2 Mergers and Earnings Per Share Plan (cont’d):  Once we know how many new shares will be issued, we can divide the total earnings of the combined company by the new total number of shares outstanding to get the earnings per share.

37 Example 22.2 Mergers and Earnings Per Share Execute:  At its pre-takeover stock price of $100 per share, the deal requires issuing 600,000 shares ($60 million / $100 = 600,000). As a group, OldWorld’s shareholders will then exchange 1 million shares in OldWorld for 600,000 shares in NewWorld. The exchange ratio is the ratio of issued shares to exchanged shares: 600,000/1 million = 0.6. Therefore, each OldWorld shareholder will get 0.6 share in NewWorld for each 1 share in OldWorld

38 Example 22.2 Mergers and Earnings Per Share Execute (cont’d):  Notice that the price per share of NewWorld stock is the same after the takeover: The new value of NewWorld is $160 million and there are 1.6 million shares outstanding, giving it a stock price of $100 per share.  However, NewWorld’s earnings per share have changed. Prior to the takeover, both companies earned $5/share ×1 million shares = $5 million. The combined corporation thus earns $10 million.

39 Example 22.2 Mergers and Earnings Per Share Execute (cont’d):  There are 1.6 million shares outstanding after the takeover, so NewWorld’s post-takeover earnings per share are  By taking over OldWorld, NewWorld has raised its earnings per share by $1.25.

40 Example 22.2 Mergers and Earnings Per Share Evaluate:  Because no value was created, we can think of the combined company as simply a portfolio of NewWorld and OldWorld. Although the portfolio has higher total earnings per share, it also has lower growth because we have combined the low-growth OldWorld with the high-growth NewWorld. The higher current earnings per share has come at a price—lower earnings per share growth.

41 Example 22.2a Mergers and Earnings Per Share Problem:  Consider two corporations that both have earnings of $8 per share. The first firm, Beenaround, is a mature company with few growth opportunities. It has 2 million shares that are currently outstanding, priced at $50 per share. The second company, Movenin Corporation, is a young company with much more lucrative growth opportunities. Consequently, it has a higher value: Although it has the same number of shares outstanding, its stock price is $80 per share.

42 Example 22.2a Mergers and Earnings Per Share Problem (cont’d):  Assume Movenin acquires Beenaround using its own stock, and the takeover adds no value. In a perfect market, what is the value of Movenin after the acquisition? At current market prices, how many shares must Movenin offer to Beenaround’s shareholders in exchange for their shares? Finally, what are Movenin’s earnings per share after the acquisition?

43 Example 22.2a Mergers and Earnings Per Share Solution: Plan:  Because the takeover adds no value, the post-takeover value of Movenin is just the sum of the values of the two separate companies: 50 × 2 million + 80 × 2 million = $260 million. To acquire Beenaround, Movenin must pay $100 million. We need to first calculate how many shares Movenin must issue to pay Beenaround shareholders $100 million. The ratio of Movenin shares issued to Beenaround Shares will give us the exchange ratio.

44 Example 22.2a Mergers and Earnings Per Share Plan (cont’d):  Once we know how many new shares will be issued, we can divide the total earnings of the combined company by the new total number of shares outstanding to get the earnings per share.

45 Example 22.2a Mergers and Earnings Per Share Execute:  At its pre-takeover stock price of $80 per share, the deal requires issuing 1,250,000 shares ($100 million / $80 = 1,250,000). As a group, Beenaround’s shareholders will then exchange 2 million shares in Beenaround for 1,250,000 shares in Movenin. The exchange ratio is the ratio of issued shares to exchanged shares: 1,250,000/2 million = Therefore, each Beenaround shareholder will get share in Movenin for each 1 share in Beenaround

46 Example 22.2a Mergers and Earnings Per Share Execute (cont’d):  Notice that the price per share of Movenin stock is the same after the takeover: The new value of Movenin is $260 million and there are 3.25 million shares outstanding, giving it a stock price of $80 per share.  However, Movenin’s earnings per share have changed. Prior to the takeover, both companies earned $8/share ×2 million shares = $16 million. The combined corporation thus earns $32 million.

47 Example 22.2a Mergers and Earnings Per Share Execute (cont’d):  There are 3.25 million shares outstanding after the takeover, so Movenin’s post-takeover earnings per share are  By taking over Beenaround, Movenin has raised its earnings per share by $1.85.

48 Example 22.2a Mergers and Earnings Per Share Evaluate:  Because no value was created, we can think of the combined company as simply a portfolio of Movenin and Beenaround. Although the portfolio has higher total earnings per share, it also has lower growth because we have combined the low-growth Beenaround with the high-growth Movenin. The higher current earnings per share has come at a price—lower earnings per share growth.

49 Example 22.3 Mergers and the Price-Earnings Ratio Problem:  Calculate NewWorld’s price-earnings ratio, before and after the takeover described in Example 22.2.

50 Example 22.3 Mergers and the Price-Earnings Ratio Solution: Plan:  The price-earnings ratio is price per share / earnings per share. NewWorld’s price per share is $100 both before and after the takeover, and its earnings per share is $5 before and $6.25 after the takeover.

51 Example 22.3 Mergers and the Price-Earnings Ratio Execute:  Before the takeover, NewWorld’s price-earnings ratio is:  After the takeover, NewWorld’s price-earnings ratio is:

52 Example 22.3 Mergers and the Price-Earnings Ratio Evaluate:  The price-earnings ratio has dropped to reflect the fact that after taking over OldWorld, more of the value of NewWorld comes from earnings from current projects than from its future growth potential.

53 Example 22.3a Mergers and the Price- Earnings Ratio Problem:  Calculate Movenin’s price-earnings ratio, before and after the takeover described in Example 22.2a.

54 Example 22.3a Mergers and the Price- Earnings Ratio Solution: Plan:  The price-earnings ratio is price per share / earnings per share. Movenin’s price per share is $80 both before and after the takeover, and its earnings per share is $8 before and $9.85 after the takeover.

55 Example 22.3a Mergers and the Price- Earnings Ratio Execute:  Before the takeover, Movenin’s price-earnings ratio is:  After the takeover, Movenin’s price-earnings ratio is:

56 Example 22.3a Mergers and the Price- Earnings Ratio Evaluate:  The price-earnings ratio has dropped to reflect the fact that after taking over Beenaround, more of the value of Movenin comes from earnings from current projects than from its future growth potential.

57 22.3 Reasons to Acquire  Managerial motives to merge  Conflicts of interest  Overconfidence

58 22.4 The Takeover Process  Valuation  Compare the target to similar companies  Rough estimate  Does not incorporate synergies  Discounted cash flows  Harder to implement, but does include synergies

59 22.4 The Takeover Process  The Offer  Public announcement  Cash transaction  Stock swap  Exchange ratio  Positive NPV transaction if share price of merged firm exceeds premerger acquirer price

60 22.4 The Takeover Process  Stock swap is positive NPV if:  Where:  A = premerger value of acquirer  T = premerger value of target  S = value of synergies  N A = shares outstanding of acquirer premerger  x = number of shares issued in the merger Eq. 22.1

61 22.4 The Takeover Process  Re-writing eq to solve for the maximum value of x that will still give a positive NPV: Eq. 22.2

62 22.4 The Takeover Process  We can express this as an exchange ratio by dividing both sides by the premerger number of target shares (N T ): Eq. 22.3

63 22.4 The Takeover Process  Rewrite Eq in terms of premerger target and acquirer share prices P T =T/N T and P A =A/N A : Eq. 22.4

64 Example 22.4 Maximum Exchange Ratio in a Stock Takeover Problem:  At the time Sprint announced plans to acquire Nextel in December 2004, Sprint stock was trading for $25 per share and Nextel stock was trading for $30 per share. If the projected synergies were $12 billion, and Nextel had billion shares outstanding, what is the maximum exchange ratio Sprint could offer in a stock swap and still generate a positive NPV? What is the maximum cash offer Sprint could make?

65 Example 22.4 Maximum Exchange Ratio in a Stock Takeover Solution: Plan:  We can use Eq to compute the maximum shares Sprint could offer and still have a positive NPV. To compute the maximum cash offer, we can calculate the synergies per share and add that to Nextel’s current share price.

66 Example 22.4 Maximum Exchange Ratio in a Stock Takeover Execute:  Using Eq. 22.4,  That is, Sprint could offer up to shares of Sprint stock for each share of Nextel stock and generate a positive NPV.  For a cash offer, given synergies of $12 billion/1.033 billion shares = $11.62 per share, Sprint could offer up to $ = $41.62.

67 Example 22.4 Maximum Exchange Ratio in a Stock Takeover Evaluate:  Both the cash amount and the exchange offer ($25 × = $41.62) have the same value. That value is the most that Nextel is worth to Sprint - if Sprint pays $41.62 for Nextel, it is paying full price plus paying Nextel shareholders for all the synergy gains created - leaving none for Sprint shareholders. Thus, at $41.62, buying Nextel is exactly a zero-NPV project.

68 22.4 The Takeover Process  Merger Arbitrage  Uncertainty about the takeover’s success  Hence, market price does not rise by the amount of the premium upon announcement.  Risk arbitrageurs  Merger-arbitrage spread  Difference between target’s stock price and implied offer price.  Not really arbitrage

69 Figure 22.2 Merger-Arbitrage Spread for the Merger of HP and Compaq

70 22.4 The Takeover Process  Tax and Accounting Issues  Form of payment affects taxes of target shareholders and combined firm.  Cash received triggers immediate tax liability.  Stock swap defers taxes until shares are sold.

71 22.4 The Takeover Process  Tax and Accounting Issues  If acquirer purchases target assets directly, basis is stepped up.  Higher depreciable basis reduces future taxes  Goodwill can be amortized.

72 22.4 The Takeover Process  Board and Shareholder Approval  Friendly takeover  Hostile takeover  Corporate raider

73 22.4 The Takeover Process  Board and Shareholder Approval  Board may not approve even if a premium is offered  Might think offer price is too low  In a stock swap, might think acquirer is overvalued  Might be self interest (agency problem)  Many times entire management team is changed

74 22.4 The Takeover Process  Board and Shareholder Approval  In theory, target board’s duty is to act in the best interest of target shareholders.  Revlon duties – must seek the highest value  Unocal – when board takes defensive actions those actions are subject to extra scrutiny  Defenses must not be coercive or designed to preclude a deal

75 22.5 Takeover Defenses  Proxy fight  Acquirer attempts to convince target shareholders to use proxy votes to support acquirers’ candidates for election to the target board.  Several strategies to stop this process:  Can force a bidder to raise the bid.  Can entrench management more securely.

76 22.5 Takeover Defenses  Poison Pills  Rights offering that gives existing target shareholders the right to buy shares in the target at a deeply discounted price under certain conditions.  Makes it more difficult to replace bad managers  Firm’s stock price drops when poison pill is adopted  Firms with poison pills have below average financial performance

77 22.5 Takeover Defenses  Staggered Boards  Board of directors’ terms are staggered so that only one-third of the directors are up for election each year.  White Knights  Target looks for a friendlier company to acquire it.  White squire

78 22.5 Takeover Defenses  Golden Parachutes  Lucrative severance package guaranteed to senior managers in the event that the firm is taken over and the managers are let go.  Empirical evidence suggests that it is value-increasing because management is more likely to be receptive to a takeover.

79 22.5 Takeover Defenses  Recapitalization  Company changes capital structure to make itself less attractive.  For example, pay out large dividend  Other Defensive Strategies  Supermajority  Restricted voting rights for large shareholders  “Fair” price

80 22.5 Takeover Defenses  Regulatory Approval  Sherman Act  Clayton Act  Hart-Scott-Rodino Act

81 22.6 Who Gets the Value Added from a Takeover?  The Free Rider Problem  Assume HighLife Corporation has 1 million shareholders, each holding 1 share.  The management is not doing a good job, so the shares trade at a deep discount.  They currently trade at $45 per share  With good management they could be worth $75 each

82 22.6 Who Gets the Value Added from a Takeover?  The Free Rider Problem  A simple majority is required to make all decisions, so control can be bought with 50% of outstanding shares.  T. Boone Icon wants to fix the situation by making a tender offer at $60 per share.  If 50% of shareholders tender, T. Boone makes a large profit ($15 per share when performance improves).

83 22.6 Who Gets the Value Added from a Takeover?  The Free Rider Problem  The offer price exceeds the current price, so tendering shareholders make a profit ($60 - $45 = $15 per share).  However, if the offer succeeds, remaining shareholders make a higher profit ($75 - $45 = $30 per share) by allowing the other shareholders to tender.

84 22.6 Who Gets the Value Added from a Takeover?  The Free Rider Problem  All shareholders know this, so the offer will not be successful.  The only way enough shareholders will tender is for T. Boone to offer at least $75 per share.  The raider gives up his profit.  Existing shareholders do not have to invest time and effort, hence the term “free rider.”

85 22.6 Who Gets the Value Added from a Takeover?  Toeholds  An initial ownership stake in a firm that a corporate raider can use to initiate a takeover attempt.  T. Boone can acquire up to about 10% of the firm in secret.  He can then buy another 40% for $75 per share and realize a profit from his initial 10%.  Corporate raiders perform an important service because management knows they exist.

86 22.6 Who Gets the Value Added from a Takeover?  The Leveraged Buyout  Another lower-cost mechanism for corporate raiders  T. Boone announces a tender offer for half the outstanding shares at $50 per share.  Instead of using his own cash, he borrows money through a shell corporation with the shares as collateral.  If the tender offer succeeds, T. Boone can merge the target with the shell corporation and debt is owed by the target.  Shareholders will tender because the outstanding debt makes the share price $50 after the takeover.

87 Example 22.5 Leveraged Buyout Problem:  FAT Corporation stock is currently trading at $40 per share. There are 20 million shares outstanding, and the company has no debt. You are a partner in a firm that specializes in leveraged buyouts. Your analysis indicates that the management of this corporation could be improved considerably. If the managers were replaced with more capable ones, you estimate that the value of the company would increase by 50%.

88 Example 22.5 Leveraged Buyout Problem (cont’d):  You decide to initiate a leveraged buyout and issue a tender offer for at least a controlling interest—50% of the outstanding shares. What is the maximum amount of value you can extract and still complete the deal?

89 Example 22.5 Leveraged Buyout Solution: Plan:  Currently, the value of the company is $40 × 20 million = $800 million and you estimate you can add an additional 50%, or $400 million. If you borrow $400 million and the tender offer succeeds, you will take control of the company and install new management. The total value of the company will increase by 50% to $1.2 billion. You will also attach the debt to the company, so the company will now have $400 million in debt.

90 Example 22.5 Leveraged Buyout Plan (cont’d):  You can then compute the value of the post-takeover equity and your gain. You can repeat this computation assuming you borrow more than $400 million and confirming that your gain does not change.

91 Example 22.5 Leveraged Buyout Execute:  The value of the equity once the deal is done is the total value minus the debt outstanding: Total Equity = $1200 million - $400 million = $800 million The value of the equity is the same as the premerger value. You own half the shares, which are worth $400 million, and paid nothing for them, so you have captured the value you anticipated adding to FAT.

92 Example 22.5 Leveraged Buyout Execute (cont’d):  What if you borrowed more than $400 million? Assume you were able to borrow $450 million. The value of equity after the merger would be: Total Equity = $1200 million - $450 million = $750 million  This is lower than the premerger value. Recall, however, that in the United States, existing shareholders must be offered at least the premerger price for their shares.

93 Example 22.5 Leveraged Buyout Execute (cont’d):  Because existing shareholders anticipate that the share price will be lower once the deal is complete, all shareholders will tender their shares. This implies that you will have to pay $800 million for these shares, and so to complete the deal, you will have to pay $800 million - $450 million = $350 million out of your own pocket. In the end, you will own all the equity, which is worth $750 million. You paid $350 million for it, so your profit is again $400 million.

94 Example 22.5 Leveraged Buyout Evaluate:  In each case, the most you can gain is the $400 million in value you add by taking over FAT. Thus, you cannot extract more value than the value you add to the company by taking it over.

95 22.6 Who Gets the Value Added from a Takeover?  The Freezout Merger  Used by companies acquiring other companies  Leveraged buyout is used by groups of investors  Acquiring company makes a tender offer at a slight premium  If offer succeeds, acquirer gains control and merges into a new corporation.  Non-tendering shareholders get the right to receive the tender offer price.

96 22.6 Who Gets the Value Added from a Takeover?  Competition  Competition in the takeover market means that most of the benefit to the merger goes to target shareholders.  If the premium is not high enough, another company will submit a higher bid.

97 Chapter Quiz 1. What are merger waves? 2. What is the difference between a horizontal and a vertical merger? 3. On average, what happens to the target share price on the announcement of a takeover? 4. On average, what happens to the acquirer share price on the announcement of a takeover?

98 Chapter Quiz (cont’d) 5. Explain why risk diversification benefits and earnings growth are not good justifications for a takeover intended to increase shareholder wealth. 6. What are the steps in the takeover process? 7. What do risk arbitrageurs do? 8. What defensive strategies are available to help target companies resist an unwanted takeover? 9. How can a hostile acquirer get around a poison pill?

99 Chapter Quiz (cont’d) 10. What mechanisms allow corporate raiders to get around the free rider problem in takeovers? 11. Based on the empirical evidence, who gets the value added from a takeover? What is the most likely explanation of this fact?


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