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Slides by Matthew Will

Principles of Corporate Finance Brealey and Myers Sixth Edition. Mergers. Slides by Matthew Will. Chapter 33. Irwin/McGraw Hill. The McGraw-Hill Companies, Inc., 2000. Topics Covered. Sensible Motives for Mergers Some Dubious Reasons for Mergers Estimating Merger Gains and Costs

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Slides by Matthew Will

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  1. Principles of Corporate Finance Brealey and Myers Sixth Edition • Mergers Slides by Matthew Will Chapter 33 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000

  2. Topics Covered • Sensible Motives for Mergers • Some Dubious Reasons for Mergers • Estimating Merger Gains and Costs • The Mechanics of a Merger • Takeover Battles • Mergers and the Economy

  3. 1997 and 1998 Mergers

  4. 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 $ $

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

  6. Sensible Reasons for Mergers Economies of Vertical Integration • Control over suppliers “may” reduce costs. • Over integration can cause the opposite effect. Pre-integration (less efficient) Company S S S S S S S

  7. Sensible Reasons for Mergers Economies of Vertical Integration • Control over suppliers “may” reduce costs. • Over integration can cause the opposite effect. Pre-integration (less efficient) Post-integration (more efficient) Company Company S S S S S S S S

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

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

  10. 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.

  11. Dubious Reasons for Mergers • Diversification • Investors should not pay a premium for diversification since they can do it themselves.

  12. Dubious Reasons for Mergers The Bootstrap Game Acquiring Firm has high P/E ratio

  13. 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)

  14. 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

  15. 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.

  16. Dubious Reasons for Mergers Earnings per dollar invested (log scale) World Enterprises (after merger) World Enterprises (before merger) Muck & Slurry .10 .067 .05 Time Now

  17. Estimating Merger Gains • Questions • Is there an overall economic gain to the merger? • Do the terms of the merger make the company and its shareholders better off? ????

  18. Estimating Merger Gains • Economic Gain

  19. Takeover Defenses 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.

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