Chapter

20 External Growth
Through Mergers

Prepared by:

Terry Fegarty
Seneca College

McGraw-Hill Ryerson ©2003©McGraw-Hill Ryerson

2003 McGraw-Hill RyersonLimited
Limited
 PPT 20-2

Chapter 20 - Outline

Mergers vs. Consolidations

3 Types of Mergers
Negotiated vs. Tender Offers
Takeover Terminology
Why Merge?
Motives of Selling Shareholders
Summary and Conclusions

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-3
Table 20-1
Largest mergers and acquisitions
Value
Buyer Acquired Company ($ U.S. billions) Year

1. America Online . . . . Time Warner $183 2000

2. Vodaphone Airtouch . . Mannesmann 149 2000
3. Bell Atlantic . . . . . . GTE 85 2000
4. SBC Communications . Ameritech 81 1999
5. Exxon . . . . . . . . . Mobil 79 1998
6. Vodaphone . . . . . . Airtouch 74 1999
7. Pfizer . . . . . . . Warner-Lambert 73 2000
8. Travelers Inc. . . . . . Citicorp 71 1998
9. AT&T . . . . . . . . . MediaOne Group 63 2000
10. National Bank . . . . . BankAmerica. 60 1998

© 2003 McGraw-Hill Ryerson Limited

Table 20-2 PPT 20-4
Largest mergers and acquisitions in
Canada
Merger Partners Value
(Cdn. billions)

1. Seagram . . . . . . . . Polygram $15.6

2. TransCanada Pipelines . . Nova 15.0
3. Northern Telecom . . . . . Bay Networks 13.4
4. PanCanadian . . . Alberta Energy
10.6
5. Sun Life . . . . . Clarica 7.0

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-5
Table 20-3
Financial data on potential merging firms

SmallExpand
Corporation Corporation

Total earnings. . . . . . . . . $200,000 $500,000

Shares of
stock outstanding . . . . . . 50,000 200,000
Earnings per share . . . . . . $4.00 $2.50
Price-earnings ratio (P/E) . . . 7.5x 12x
Market price per share . . . . $30.00 $30.00

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-6
Table 20-4
Post-merger earnings per share

Total earnings: Small ($200,000) + Expand ($500,000) . . . $700,000

Shares outstanding in surviving corporation:
Old (200,000) + New (50,000) . . . . . . . . . . . . . 250,000

$700,000
New earnings per share for Expand Corporation = = $2.80
250,000

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-7
Figure 20-1
Risk-reduction portfolio benefits
Probability of occurrence
1.00
Without merger With merger

.50

0
Earnings per share Earnings per share

= $2.50 (expected value) = $2.50 (expected value)

= $1.00 (standard deviation) = $ .50 (standard deviation)

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-8

Mergers vs. Consolidations

A business combination can be either a merger or a

consolidation
Merger:
 a combination of 2 or more companies where the acquirer buys
the voting shares of the target company, but both remain as
separate legal entities
 a holding company controls one or more other companies with a
minimal equity investment
Consolidation:
 when 2 or more companies are combined to form a new entity
 more common in U.S.
Acquirer may pay in cash, in its own shares, or in both
© 2003 McGraw-Hill Ryerson Limited
 PPT 20-9
3 Types of Mergers

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

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-10

Types of Mergers
Conglomerate H o r iz o n ta l
V e r tic a l Merger M e rg e r
M e rg e r
F ir m B F ir m A F ir m C
F ir m A Firm A
F ir m B
Firms of similar
type
F ir m C Firm B Unrelated Firms

Firms who
supply/buy
from each other.
© 2003 McGraw-Hill Ryerson Limited
 PPT 20-11
Negotiated vs. Tender Offers

Negotiated Offer:
 a “friendly” merger that is negotiated between
officers and directors of the participating
corporations
 it is agreed upon by all sides

Takeover (or Unsolicited) Tender Offer:

 when a company attempts to acquire a target firm
against its will (an “unfriendly takeover”)
 unsolicited tender offers for a target company have

gained in popularity

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-12
Takeover Terminology
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
© 2003 McGraw-Hill Ryerson Limited
 PPT 20-13
Why Merge?
Financial motives:
 to reduce risk through diversification
 to increase operating efficiency
 to improve access to financial markets
 to obtain a tax loss carry-forward benefit
 To buy companies at values lower than replacement cost of their assets
 To increase earnings per share
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”)

© 2003 McGraw-Hill Ryerson Limited

 PPT 20-14

Motives of Selling Shareholders

 Price offered for their stock is attractive
 Desire to receive acquiring firm’s stock which may
have greater acceptability in the market
 Provides shareholders an opportunity to diversify
their holdings
 Officers of selling company may receive attractive
post-merger management contracts or directorships
 Avoids the bias against smaller businesses

© 2003 McGraw-Hill Ryerson Limited


Summary and Conclusions
In a merger, the buying company
acquires most or all of the shares of
the selling company, but both
usually remain after the acquisition
PPT 20-15
Payment by the buying company
can be in cash and/or its own shares
The motives of the buying
company may include greater
efficiencies and access to capital,
assets available below replacement
costs, or tax loss benefits.
The motives of the selling
company may include an attractive
offer, a desire for growth, or an
opportunity to liquidate
A holding company has control
over one or more other companies
with a minimum equity investment
© 2003 McGraw-Hill Ryerson Limited