Chapter 28

Mergers and Acquisitions

28-1. What are the two primary mechanisms under which ownership and control of a public
corporation can change?
Either another corporation or group of individuals can acquire the target firm, or the target firm can
merge with another firm.

28-2. Why do you think mergers cluster in time, causing merger waves?
There are many competing theories as to why this is so. They generally fall into two camps: either
stock market valuations drive merger activity or industry shocks accompanying economic expansions
drive merger activity. It is clear that merger activity is much greater during economic expansions than
during contractions and that merger activity strongly correlates with bull markets. Thus, there must be
something about economic expansions in general and higher stock market valuations in particular that
grease the wheels of the merger process. However, unless you are willing to believe that the majority
of managers simply buy other companies because they can, without regard to economic reasoning, this
can’t be the whole story. There must be real economic impetus to the activity. Many of the same
technological and economic conditions that lead to bull markets also motivate managers to reshuffle
assets through merger and acquisitions. Thus, it takes a combination of forces usually only present
during strong economic expansions to drive peaks in merger activity.

28-3. What are some reasons why a horizontal merger might create value for shareholders?
Horizontal mergers are more likely to create value for acquiring shareholders. Horizontal mergers
combine two firms in the same industry. This provides for greater potential synergies in eliminating
redundant functions within the two firms and potentially increased pricing power with both vendors
and customers.

28-4. Why do you think shareholders from target companies enjoy an average gain when acquired,
while acquiring shareholders on average often do not gain anything?
The acquiring firm has to compete against other firms, thus reducing the gains it can obtain from the
transaction. Target shareholders benefit from this competition, as they obtain higher bids for the
company.

28-5. If you are planning an acquisition that is motivated by trying to acquire expertise, you are
basically seeking to gain intellectual capital. What concerns would you have in structuring the
deal and the post-merger integration that would be different from the concerns you would have
when buying physical capital?
In cases where you are buying a lot of intangible assets, especially human capital, you have to be
particularly worried about how you are going to create incentives for the target’s employees to stay on.
Retention bonuses are common for key employees in these types of acquisitions. It is also hard to be
successful with a hostile acquisition when retention of target employees is critical. Keeping uncertainty
low and moving quickly during the integration phase are both critical to acquisitions of expertise.

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372 Berk/DeMarzo, Corporate Finance, Fourth Edition

28-6.

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