Chapter 29 Mergers and Acquisitions

Chapter 29 Mergers and Acquisitions

Chapter 29: Mergers and Acquisitions

Basic terms and definitions concerning mergers and acquisitions Reasons for mergers and acquisitions Real world empirical observations An example of valuing a potential acquisition

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Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Merger: One firm absorbs the assets and liabilities of the other firm in a merger. The acquiring firm retains its identity. In many cases, control is shared between the two management teams. Transactions were generally conducted on friendly terms. In a consolidation, an entirely new firm is created. Mergers must comply with applicable state laws. Usually,

shareholders must approve the merger by a vote.

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Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Acquisition: Traditionally, the term described a situation when a larger corporation purchases the assets or stock of a smaller corporation, while control remained exclusively with the larger corporation. Often a tender offer is made to the target firm (friendly) or

directly to the shareholders (often a hostile takeover). Transactions that bypass the management are considered hostile, as the target firm’s managers are generally opposed to the deal.WSU EMBA Corporate Finance 29-3

Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions In reality, there is always a bidder and a target. Almost all

transactions could be classified as acquisitions. Some modern finance textbooks use the two terms interchangeably. Divestiture: a transaction in which a firm sells one of its subsidiaries or divisions to another firm. Spin-off: a transaction in which a firm either sells or issues all or part of its subsidiaries to its existing public investors, by issuing public equity. In 1997 PepsiCo spun-off its restaurant division. Shareholders received one share of the new restaurant company (TRICON), for every 10 issues of Pepsi they held.WSU EMBA Corporate Finance 29-4

Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Target: the corporation being purchased, when there is a clear buyer and seller. Bidder: The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm. Friendly: The transaction takes place with the approval of each firm’s management Hostile: The transaction is not approved by the management of the target firm.WSU EMBA Corporate Finance 29-5

Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Reasons for mergers & acquisitions: Strategic: The combined FCFs (Free Cash Flows) of the merged operation are greater than the sum of

the individual cash flows. Financial: The cash flows and also the market value of the target are below their true value, due to perhaps inefficient management. Such firms are typically restructured after the acquisition.WSU EMBA Corporate Finance 29-6

Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Reasons for mergers & acquisitions (continued): Diversification: “Don’t put all your eggs in one basket.”

Current finance literature seriously qu

estions the merits of this reasoning: Why does the management know better than the shareholders how to achieve diversification? It is usually the case that shareholders can diversify much more easily than can a corporation. Individuals can easily diversify by buying shares in mutual funds.

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Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Reasons given for divestitures and spin-offs: To undo non-profitable mergers (originally motivated by

pure diversification) To “break up” a inefficiently run conglomerate In the case of spin-offs, to improve managerial efficiency in the subsidiary, by offering a directly observable stock price as an (admittedly imperfect) measure of managerial performance. Also, in the case of spin-offs, to give equity investors more flexibility in diversifying their investment portfolios.

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Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Calculate the incremental financial Free Cash Flows ( FCFs) resulting from either: synergies (increased market power, reduced costs, etc.) better management discipline

Calculate the total Free Cash Flows of the merged corporation (M), by adding together the incremental cash flows, the “old” cash flows of the target (T), and

the “old” cash flows of the bidder (B): FCF(M) = FCF(T) + FCF(B) + FCF(M)WSU EMBA Corporate Finance

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Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions Discount FCF(M) at the cost of capital or WACC of the new corporation Obtain the present value of the new corporation V(M).

If V(M) > V(T) + V(B) then proceed with the merger. How much should the bidder pay for the target? At least V(T). In this case the bidder shareholders keep most

benefits from merger. At most V(M)-V(B). Here benefits accrue to target shareholders.WSU EMBA Corporate Finance 29-10

Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions The evidence suggests that bidders generally

realize zero NPV on their M&A transactions. In contrast, target shareholders appear to realize most (if not all) of the benefits resulting from the M&A transaction.

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Chapter 29 Mergers and Acquisitions

Mergers and Acquisitions In efficient markets, the stock market reaction on the day of the

merger announcement represents the NPV of the transaction. Generally, bidder stock prices remain unchanged or even dr …… 此处隐藏：5499字，全部文档内容请下载后查看。喜欢就下载吧 ……