1. Chapter 20 External Growth through Mergers

2. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 20-1 TABLE 20-1 Largest acquisitions ever

3. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 20-2 TABLE 20-2 Financial data on potential merging firms

4. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 20-3 TABLE 20-3 Postmerger earnings per share

5. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 20-3 FIGURE 20-1 Risk-reduction portfolio benefits

6. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

7. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

8. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Merge? LT 20-3 Financial 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)

9. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 Types of Mergers LT 20-4 Horizontal 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

10. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

11. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Terms of Exchange LT 20-6 Cash Purchases: 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

12. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

13. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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