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Sld20 External Growth Through Merger
Sld20 External Growth Through Merger
TWENTY
External Growth
Through Mergers
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Table 20-1
Ten largest mergers and acquisitions in 1998
Buyer
Block
Hirt
Short
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Exxon . . . . . .
Travelers Inc. . .
SBC . . . . . . .
NationsBank . . .
ATT . . . . . . .
Bell Atlantic . . .
British Petroleum
Daimler-Benz . .
WorldCom . . . .
Zenca Group . . .
Sandoz AG. . . .
Mitsubishi Bank .
Acquired Company
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
.
.
.
.
.
.
.
.
.
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.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Mobil
Citicorp
Ameritech
BankAmerica
Tele-Communications
GTR
Amoco
Chrysler
MCI
AB Astra
Ciba-Geigy AG
Bank of Tokyo
Value
($ billions)
$79
73
66
60
54
53
49
43
41
35
34
34
FIF T H
th
CANADIAN
EDI TI ON
Table 20-2
Largest (proposed) mergers and acquisitions in Canada in 1998
Value
(Cdn.
$ billions)
Merger Partners
Block
Hirt
Short
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Royal Bank . . . . . .
CIBC
. . . . . . .
Seagram . . . . . . . .
Trans Canada Pipelines .
Northern Telecom . . .
Union Pacific Resources.
Bowater . . . . .
Call-Net . . . . . . .
Nova. . . . . . . . .
Merrill Lynch . . . . .
McGraw-Hill Ryerson
. . Bank of Montreal
Toronto Dominion
. . Polygram
. . Nova
. . Bay Networks
. . Norcen Energy
Avenor
Fonorola
Huntsman
. . Midland W
$23.1
22.0
15.6
15.0
13.4
3.7
2.5
1.8
1.3
1.3
FIF T H
th
CANADIAN
EDI TI ON
Table 20-3
Financial data on potential merging firms
Small
Corporation
Total earnings. . . . . . .
Shares of
stock outstanding . . . .
Earnings per share . . . .
Price-earnings ratio (P/E) .
Market price per share . .
. . $200,000
.
.
.
.
.
.
.
.
50,000
$4.00
7.5x
$30.00
Expand
Corporation
$500,000
200,000
$2.50
12x
$30.00
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
EDI TI ON
Table 20-4
Post-merger earnings per share
$700,000
250,000
250,000
= $2.80
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 20-4
EDI TI ON
Figure 20-1
Impact of alternate plans on Expand Corporation
Earnings per share for Expand Corporation ($)
7
6
5
4
3
2
1
0
1
10
Year
Block
Hirt
Short
No merger . . . . . . . . . . . . . . . . . . . .
Merger with Small Corporation . .
Merger with Growth Corporation
McGraw-Hill Ryerson
Immediate
Effect
$2.50
2.62
2.12
10-year
Effect
$6.49
6.07
6.79
McGraw-Hill Ryerson Limited 2000
FIF T H
th
CANADIAN
EDI TI ON
Figure 20-2
Risk-reduction portfolio benefits
Probability of occurrence
1.00
Without merger
With merger
.50
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Chapter 20 - Outline
LT 20-1
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 20-2
Consolidation:
when 2 or more companies are combined to form an entirely new
entity
more common in U.S.
Block
Hirt
Short
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
3 Types of Mergers
LT 20-3
Horizontal Merger:
unites direct competitors
ex., 2 shoe companies combine
Vertical Merger:
unites buyers and sellers
ex., a shoe manufacturer buys a leather producer
Conglomerate Merger:
merging of firms in totally unrelated industries
ex., a shoe company joins with a beverage company
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 20-4
Negotiated Offer:
a friendly merger that is negotiated between officers
and directors of the participating corporations
it is agreed upon by all sides
Block
Hirt
Short
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Takeover Terminology
LT 20-5
White Knight:
a friendly company that agrees to bid a higher price for
a targeted company
Crown Jewels:
targeted company sells prize division or asset of
company to make it less attractive to buyer
Poison Pill:
present shareholders entitled to buy more shares at
reduced prices
Golden Parachute:
contract that pays existing management if they lose
their jobs in a takeover
McGraw-Hill Ryerson
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Why Merge?
LT 20-6
Financial motives:
to reduce risk through diversification
to increase operating efficiency
to improve access to financial markets
to obtain a tax carry-forward benefit
Non-financial motives:
to protect / increase market share
to expand through acquisition rather than internal
growth
to expand marketing and management capabilities
to allow for new product development
to provide synergistic benefits (2+2=5)
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 20-7