1. CH.11 MERGERS AND ACQUISITIONS

2. Motivation for M&A Taking advantage of economics of scale
Improving target management
Combining complementary resources
Capturing tax benefits
Providing low-cost financing to financially constrained target
Increasing product-market rents

3. Acquisition Pricing Analyzing premium offered to target stockholders
Compare the premium offered to target stockholders to premium offered in similar transactions
Problems: (1) how to define a comparable transactions?; (2) measured premiums can be misleading if an offer is anticipated by investors; and (3) ignores the value of the target to the acquirer after the acquisition

4. Acquisition Pricing (Cont’d)
Analyzing value of the target to the acquirer
Compare the offer price to the estimated value of the target to the acquirer
Computed using the valuation techniques discussed in ch 7 & 8

5. Acquisition Pricing (Cont’d)
Earnings multiples
Forecasting earnings: assuming no acquisition
Determining the price-earnings multiple:
Use the pre-acquisition PE multiple?
Limitations: (1) growth expectations are likely to change. Valued using a multiple for firms with comparable growth and risk characteristics; (2) premerger PE multiples are unavailable for unlisted targets; and (3) ensure that the multiple is calculated prior to any acquisition announcement

6. Acquisition Pricing (Cont’d)
Discounted abnormal earnings or cash flows
Forecast abnormal earnings/free cash flows
Compute the discount rate: use postacquisition cost of capital/cost of equity
Analyze sensitivity

7. Acquisition Financing
Effect of form of financing on target stockholders
Tax effects
Transaction costs and the form of financing
Effect of form of financing on acquiring stockholders
Capital structure
Information problem

8. Acquisition Outcome
Other potential acquirers who could pay an even higher premium to target stockholders than is currently offered
Target management entrenchment: likely to oppose an offer