Mergers & Acquisitions BA 469 Prof. Dowling Spring Term, 2007

Mergers & Acquisitions n M & A’s are the quickest route companies have to new markets and capabilities n Changes in technology make M & A’s attractive strategy for growth n 1998 – 12, 356 M & A’s in U.S. with value of $1.63 trillion (versus 10,000 deals - $650M of activity in 1996) n 1988 – 4,066 M & A’s in U.S. with value of $378.9 billion

Changes in M & A Financing n 1988 – 60 % of large deals over $100 million financed entirely with cash, only 2% entirely with stock n 1998 – 50% financed with stock, only 17% financed entirely with cash

Market Skepticism to M & A’s n M & A announcements bring negative reaction in market, acquirer’s stock price falls about 2/3 of the time n Drop in stock price reflects skepticism about the acquirer's ability to maintain values of the acquired business and achieve synergy

Why is the Market Skeptical? 1) Performance bar set too high 2) Benefits of acquisition are easily replicated by competitors 3) Acquisitions require full payment up front: =‘s pressure for timely performance gains 4) Purchase price of acquisition driven by pricing of other “comparable” acquisitions rather than expected performance gains – no connection to achievable value