20 Chapter External Growth Through Mergers

PPT 20-1

PPT 20-2

PPT 20-3

PPT 20-3

Chapter 20 - Outline LT 20-1 Mergers vs. Consolidations Why Merge? 3 Types of Mergers Motives of Selling Stockholders Terms of Exchange Negotiated vs. Tender Offers Wall Street Takeover Terminology

Mergers vs. Consolidations LT 20-2 A business combination can be either a merger or a consolidation Merger: a combination of 2 or more companies where the resulting firm keeps the identity of the acquiring company Consolidation: when 2 or more companies are combined to form an entirely new entity

Why Merge? LT 20-3 Financial motives: Nonfinancial motives: –to reduce risk (the portfolio effect) – to increase operating efficiency – to improve access to financial markets – to obtain a tax carry-forward benefit Nonfinancial motives: – to expand marketing and management capabilities – to allow for new product development – to provide synergistic benefits (the “2+2=5” effect)

3 Types of Mergers LT 20-4 Horizontal Merger: Vertical 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

Motives of Selling Stockholders LT 20-5 Desire to receive the acquiring firm’s stock which may have greater acceptability in the market Provides stockholders an opportunity to diversify their holdings Gain on sale of the stock at an attractive price Officers of selling company may receive attractive postmerger management contracts and directorships in the acquiring firm Avoids the bias against smaller businesses

Terms of Exchange LT 20-6 Cash Purchases: Stock-For-Stock Exchange: takes on many characteristics of a classical capital budgeting decision Stock-For-Stock Exchange: often a trade-off between an immediate gain or dilution in EPS and future growth

Negotiated vs. Tender Offers LT 20-7 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

Wall Street Takeover Terminology LT 20-8 Saturday Night Special: – a surprise offer made right before the market closes for the weekend – takes the target company’s officers by surprise White Knight: – a third firm that management calls on to help it avoid an unfriendly takeover – not always successful at winning