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mergers and acquisitions

Chapter 23. mergers and acquisitions . 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. Legal Forms of Acquisitions.

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mergers and acquisitions

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  1. Chapter 23 mergers and acquisitions

  2. 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

  3. Legal Forms of Acquisitions • Merger or consolidation • Acquisition of stock • Acquisition of assets

  4. Merger versus Consolidation • Merger • 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

  5. 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

  6. 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

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

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

  9. 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

  10. 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

  11. Gains from Acquisition • Synergy • Revenue enhancement • Cost reductions • Tax gains

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

  13. Revenue Enhancement • Marketing gains • Advertising • Distribution network • Product mix • Strategic benefits • Market power

  14. 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

  15. Taxes • Tax losses • Unused debt capacity • Surplus funds • Asset write-ups

  16. 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

  17. 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

  18. 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

  19. 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)

  20. 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

  21. Shares vs. Common Stock • Sharing rights • Taxes • Control

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

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

  24. 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

  25. 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

  26. 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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