Chapter 20

External Growththrough Mergers

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PPT 20-1

TABLE 20-1Largest acquisitionsever

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PPT 20-2

TABLE 20-2Financial data onpotential merging firms

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PPT 20-3

TABLE 20-3Postmerger earningsper share

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PPT 20-3FIGURE 20-1Risk-reductionportfolio benefits

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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

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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 companyConsolidation:

when 2 or more companies are combined to form an entirely new entity

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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)

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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

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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

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Terms of Exchange LT 20-6

Cash Purchases:takes on many characteristics of a classical

capital budgeting decisionStock-For-Stock Exchange:

often a trade-off between an immediate gain or dilution in EPS and future growth

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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

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Wall Street TakeoverTerminology 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