1. 23-0 Synergy 23.4 The whole is worth more than the sum of the parts Some mergers create synergies because the firm can either cut costs or use the combined assets more effectively This is generally a good reason for a merger Need to examine whether the synergies create enough benefit to justify the cost LO1 & LO7

2. 23-1 Revenue Enhancement Marketing gains Advertising Distribution network Product mix Strategic benefits Market power LO1 & LO7

3. 23-2 Cost Reductions Economies of scale Ability to produce larger quantities while reducing the average per unit cost Most common in industries that have high fixed costs Economies of vertical integration Coordinate operations more effectively Reduced search cost for suppliers or customers Complimentary resources LO1 & LO7

4. 23-3 Tax Gains Take advantages of net operating losses Carry-backs and carry-forwards Merger may be prevented if the IRS believes the sole purpose is to avoid taxes Unused debt capacity Surplus funds Pay dividends Repurchase shares Buy another firm Asset write-ups LO1 & LO7

5. 23-4 Reducing Capital Needs A merger may reduce the required investment in working capital and fixed assets relative to the two firms operating separately Firms may be able to manage existing assets more effectively under one umbrella Some assets may be sold if they are redundant in the combined firm (this includes human capital as well) LO1 & LO7

6. 23-5 General Rules Do not rely on book values alone – the market provides information about the true worth of assets Estimate only incremental cash flows Use an appropriate discount rate Consider transaction costs – these can add up quickly and become a substantial cash outflow LO6 & LO7

7. 23-6 Evidence on Acquisitions 23.8 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 LO7

8. 23-7 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 LO7