©2012 McGraw-Hill Ryerson Limited 1 of 23 Learning Objectives 1.Explain some defensive measures taken to avoid an unfriendly takeover. (LO1) 2.Analyze the motives for mergers and divestitures, including financial considerations and the desire to increase operating efficiency. Also, perform an NPV analysis for a merger proposal. (LO2)

©2012 McGraw-Hill Ryerson Limited 2 of 23 Business Combinations Legal definition of amalgamation: -a statutory combination under one of the provincial corporations or companies acts, the Canada Corporations Act, or the Canada Business Corporations Act Merger (and acquisition) refers to a transaction by which two or more companies are combined either under a statutory amalgamation or by ownership, that is: - one firm buys a majority or all of the voting shares of another firm LO2

©2012 McGraw-Hill Ryerson Limited 3 of 23 Financial Motives for Business Combinations To reduce risk through diversification –Portfolio effect To improve financing posture -Larger firms enjoy greater access to capital -Greater financing capability may be achieved if the acquired firm has a strong cash position or low debt-equity ratio To obtain tax loss carry-forward benefit To gain synergistic effect -Synergy: the whole is greater than the sum of the parts -Overlapping functions in production and marketing are eliminated -Engineering and administrative capabilities are meshed LO2

©2012 McGraw-Hill Ryerson Limited 4 of 23 Non-financial Motives for Business Combinations Management desires –Expand in more dynamic industries to upgrade their image Marketing Expansion –Merge with companies in allied but not directly related fields Acquiring Technology –Obtain technology and related patents LO2

©2012 McGraw-Hill Ryerson Limited 5 of 23 Motives of Selling Shareholders To receive the acquiring company’s shares To diversify their holdings into many new investments To escape the bias against smaller businesses LO2