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Definition The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing.

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Presentation on theme: "Definition The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing."— Presentation transcript:

0 Chapter 23 mergers and acquisitions

1 Definition The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

2 Business valuation The five most common ways to valuate a business are
asset valuation, historical earnings valuation, future maintainable earnings valuation, relative valuation (comparable company & comparable transactions), discounted cash flow (DCF) valuation

3 Chapter Outline The Legal Forms of Acquisitions
Accounting for Acquisitions Gains from Acquisition The Cost of an Acquisition Defensive Tactics Some Evidence on Acquisitions Divestitures and Restructurings

4 Legal Forms of Acquisitions
Merger or consolidation Acquisition of stock Acquisition of assets

5 Merger versus Consolidation
One firm is acquired by another Acquiring firm retains name and acquired firm ceases to exist Consolidation Entirely new firm is created from combination of existing firms

6 Stock Acquisition (1) A firm can be acquired by purchasing voting shares of the firm’s stock Tender offer – public offer to buy shares Circular bid – takeover bid communicated to shareholders by direct mail Stock exchange bid – takeover bid communicated to shareholders through a stock exchange

7 Stock Acquisition (2) No stockholder vote required
Can deal directly with stockholders, even if management is unfriendly May be delayed if some target shareholders hold out for more money – complete absorption requires a merger

8 Acquisition Classifications
Horizontal – both firms are in the same industry Vertical – firms are different stages of the production process Conglomerate – firms are unrelated

9 Takeovers Control of a firm transfers from one group to another
Possible forms Acquisition Proxy contest Going private (LBO vs. MBO)

10 Alternatives to Merger
Strategic alliance = agreement between firms to cooperate in pursuit of a joint goal Joint venture = an agreement between firms to create a separate, co-owned entity established to pursue a joint goal

11 Accounting for Acquisitions
The Purchase Method Assets of acquired firm are written up to fair market value Goodwill is created – difference between purchase price and estimated fair market value of net assets

12 Gains from Acquisition
Synergy Revenue enhancement Cost reductions Tax gains

13 Synergy The whole is worth more than the sum of the parts
Synergies should create enough benefit to justify the cost

14 Revenue Enhancement Marketing gains Strategic benefits Market power
Advertising Distribution network Product mix Strategic benefits Market power

15 Cost Reductions Economies of scale
Ability to produce larger quantities while reducing the average per unit cost Economies of vertical integration Coordinate operations more effectively Reduced search cost for suppliers or customers Complimentary resources

16 Taxes Tax losses Unused debt capacity Surplus funds Asset write-ups

17 Reducing Capital Needs
Firms may be able to manage existing assets more effectively under one umbrella Some assets may be sold if they are not needed in a combined firm

18 Diversification Diversification, in and of itself, is not a good reason for a merger Stockholders can diversify their own portfolio cheaper than a firm can diversify by acquisition

19 EPS Growth Mergers may create the appearance of growth in earnings per share If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth In this case, the P/E ratio should fall because the combined market value should not change

20 The Cost of Acquisition: Cash Acquisition
The NPV of a cash acquisition is NPV = VB* – cash cost Value of the combined firm is VAB = VA + (VB* - cash cost)

21 The Cost of Acquisition: Stock Acquisition
Value of combined firm VAB = VA + VB + V Cost of acquisition Depends on the number of shares given to the target stockholders Depends on the price of the combined firm’s stock after the merger

22 Shares vs. Common Stock Sharing rights Taxes Control

23 Defensive Tactics(1) Corporate charter Targeted repurchase (Greenmail)
Establishes conditions that allow for a takeover Supermajority voting requirement Targeted repurchase (Greenmail) Standstill agreements Exclusionary offers Poison pills Share rights plans

24 Defensive Tactics (2) Leveraged buyouts (LBO) Other defensive tactics
Golden parachutes Crown jewels White knight

25 Evidence on Acquisitions
Shareholders of target companies tend to earn excess returns in a merger Shareholders of target companies gain more in a tender offer than in a straight merger Target firm managers have a tendency to oppose mergers, thus driving up the tender price

26 More Evidence Shareholders of bidding firms do not earn much excess return in either a tender offer or a straight merger Anticipated gains from mergers may not be achieved Bidding firms are generally larger, so it takes a larger dollar gain to get the same percentage gain Management may not be acting in stockholders best interest Takeover market may be competitive Announcement may not contain new information about the bidding firm

27 Divestitures and Restructurings
Divestiture = sale of assets, operations, or divisions to a third party Equity carve-out Spin-off Split-up

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