Professional Documents
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CH 30
CH 30
CH 30
Chapter Thirty
Mergers andCorporate
Acquisitions
Finance
Ross Westerfield Jaffe 30
Sixth Edition
Prepared by
Gady Jacoby
University of Manitoba
and
Sebouh Aintablian
American University of
Beirut
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
30-2
Chapter Outline
30.1 The Basic Forms of Acquisitions
30.2 The Tax Forms of Acquisitions
30.3 Accounting for Acquisitions
30.4 Determining the Synergy from an Acquisition
30.5 Source of Synergy from Acquisitions
30.6 Calculating the Value of the Firm after an Acquisition
30.7 A Cost to Stockholders from Reduction in Risk
30.8 Two "Bad" Reasons for Mergers
30.9 The NPV of a Merger
30.10 Defensive Tactics
30.11 Some Evidence on Acquisitions
30.12 Summary and Conclusions
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
30-3
Merger or Consolidation
• A merger refers to the absorption of one firm by another.
The acquiring firm retains its name and identity, and
acquires all the assets and liabilities of the acquired firm.
After the merger, the acquired firm ceases to exist as a
separate entity.
• A consolidation is the same as a merger except that an
entirely new firm is created. In a consolidation, both the
acquiring firm and the acquired firm terminate their previous
legal existence.
• An advantage of using a merger to acquire a firm is that it is
legally straightforward and does not cost as much as other
forms of acquisition.
• A disadvantage is that a merger must be approved by a vote
of the shareholders of each firm.
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
30-5
Acquisition of Stock
• A firm can acquire another firm by purchasing
target firm’s voting stock in exchange for cash,
shares of stock, or other securities.
• A tender offer is a public offer to buy shares made
by one firm directly to the shareholders of another
firm.
– If the shareholders choose to accept the offer, they tender
their shares by exchanging them for cash or securities.
– A tender offer is frequently contingent on the bidder’s
obtaining some percentage of the total voting shares.
– If not enough shares are tendered, then the offer might be
withdrawn or reformulated.
Acquisition of Assets
• One firm can acquire another by buying all of its
assets.
• A formal vote of the shareholders of the selling firm
is required.
• Advantage of this approach: it avoids the potential
problem of having minority shareholders that may
occur in an acquisition of stock.
• Disadvantage of this approach: it involves a costly
legal process of transferring title.
A Classification Scheme
• Financial analysts typically classify acquisitions
into three types:
– Horizontal acquisition: when the acquirer and the target
are in the same industry.
– Vertical acquisition: when the acquirer and the target are
at different stages of the production process; example: an
airline company acquiring a travel agency.
– Conglomerate acquisition: the acquirer and the target are
not related to each other.
A Note on Takeovers
• Takeover is a general and imprecise term referring
to the transfer of control of a firm from one group
of shareholders to another.
• Takeover can occur by acquisition, proxy contests,
and going-private transactions.
• In a proxy contest, a group of shareholders attempts
to gain controlling seats on the board of directors by
voting in new directors.
• A proxy authorizes the proxy holder to vote on all
matters in a shareholders’ meeting.
Varieties of Takeovers
Merger
Going Private
(LBO)
Divestitures
• The basic idea is to reduce the potential
diversification discount associated with commingled
operations and to increase corporate focus.
• Divestiture can take three forms:
– Sale of assets: usually for cash
– Spinoff: parent company distributes shares of a subsidiary
to shareholders. Shareholders wind up owning shares in two
firms. Sometimes this is done with a public IPO.
– Issuance if tracking stock: a class of common stock whose
value is connected to the performance of a particular
segment of the parent company.
Takeover Successful
Technique Targets Bidder
Target Bidder
Mergers 1964--83 9% 3%
Going private
Transactions 1977--89 25% NA
- Minority buyouts 27% NA
- Non-controlling bidder 24% NA