8- 1 Outline 8 8.1 The Market for Corporate Control 8.2 Sensible Motives for Mergers 8.3 Dubious Reasons for Mergers 8.4 Evaluating Mergers 8.5 Merger.

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Presentation transcript:

8- 1 Outline The Market for Corporate Control 8.2 Sensible Motives for Mergers 8.3 Dubious Reasons for Mergers 8.4 Evaluating Mergers 8.5 Merger Tactics 8.6 Leveraged Buy-Outs

8- 2 The Merger Market  Proxy battle for control of the board of directors  Firm purchased by another firm  Leveraged buyout by a group of investors  Divestiture of all or part of the firm’s business units Methods to Change Management

8- 3 Recent Mergers

8- 4 The Merger Market Tools Used To Acquire Companies Proxy Contest Acquisition Leveraged Buy-Out Management Buy-Out Merger Tender Offer

8- 5 Sensible Reasons for Mergers Economies of Scale A larger firm may be able to reduce its per unit cost by using excess capacity or spreading fixed costs across more units. $ $ $ Reduces costs

8- 6 Sensible Reasons for Mergers Economies of Vertical Integration  Control over suppliers “may” reduce costs.  Over integration can cause the opposite effect.

8- 7 Sensible Reasons for Mergers Combining Complementary Resources Merging may results in each firm filling in the “missing pieces” of their firm with pieces from the other firm. Firm A Firm B

8- 8 Sensible Reasons for Mergers Mergers as a Use for Surplus Funds If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.

8- 9 Dubious Reasons for Mergers  Diversification  Investors should not pay a premium for diversification since they can do it themselves.

8- 10 Dubious Reasons for Mergers The Bootstrap Game Acquiring Firm has high P/E ratio Selling firm has low P/E ratio (due to low number of shares) After merger, acquiring firm has short term EPS rise Long term, acquirer will have slower than normal EPS growth due to share dilution.

8- 11 Evaluating Mergers  Questions  Is there an overall economic gain to the merger?  Do the terms of the merger make the company and its shareholders better off? ????

8- 12 Evaluating Mergers  Economic Gain

8- 13 Evaluating Mergers Example - Given a 20% cost of funds, what is the economic gain, if any, of the merger listed below?

8- 14 Evaluating Mergers  Estimated net gain

8- 15 Merger Tactics White Knight - Friendly potential acquirer sought by a target company threatened by an unwelcome suitor. Shark Repellent - Amendments to a company charter made to forestall takeover attempts. Poison Pill - Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.

8- 16 Leveraged Buy-Outs Unique Features of LBOs Large portion of buy-out financed by debt Shares of the LBO no longer trade on the open market