CHAPTER 21

Mergers and Divestitures

 Types of mergers
 Merger analysis
 Role of investment bankers
 Corporate alliances
 LBOs, divestitures, and holding
companies
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Why do mergers occur?
 Synergy: Value of the whole exceeds sum
of the parts. Could arise from:
 Operating economies
 Financial economies
 Differential management efficiency
 Increased market power
 Taxes (use accumulated losses)
 Break-up value: Assets would be more
valuable if sold to some other company.
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What are some questionable
reasons for mergers?
 Diversification
 Purchase of assets at below
replacement cost
 Get bigger using debt-financed
mergers to help fight off takeovers

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What is the difference between a
“friendly” and a “hostile” takeover?
 Friendly merger:
 The merger is supported by the managements of
both firms.
 Hostile merger:
 Target firm’s management resists the merger.
 Acquirer must go directly to the target firm’s
stockholders try to get 51% to tender their
shares.
 Often, mergers that start out hostile end up as
friendly when offer price is raised.

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Reasons why alliances can make
more sense than acquisitions
 Access to new markets and
technologies
 Multiple parties share risks and
expenses
 Rivals can often work together
harmoniously
 Antitrust laws can shelter cooperative
R&D activities

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Do mergers really create value?
 The evidence strongly suggests:
 Acquisitions do create value as a result
of economies of scale, other synergies,
and/or better management.
 Shareholders of target firms reap most
of the benefits, because of competitive
bids.

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Functions of Investment Bankers
in Mergers
 Arranging mergers
 Assisting in defensive tactics
 Establishing a fair value
 Financing mergers
 Risk arbitrage

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 Recent Mergers in Jamaica
 CIBC + Barclays = FCIB
 Pan Jam's Hardware & Lumber + Grace Kennedy's Rapid & Sheffield
= ????
 DB&G + Issa Trust & Merchant Bank = ????
 Sagicor + LOJ = ????
 LOJ + First Life = ????
 First Global + George & Branday = ????
 Pan Caribbean Financial Services + Manufacturers Sigma Merchant
Bank = ????
 Sigma Unit Trust + MMB = MSMB
 NEMWIL + Caribbean Home Insurance Company in Trinidad merged
= Guardian General Insurance Limited
 Globe Insurance + Jamaica General Insurance Company = ????
 Supreme Ventures Ltd. + Jamaica Lottery Company = ????
 First Global + George & Branday = ????

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