04 LEC - AEM 4230 M&A lecture November 4, 2008...

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AEM 4230 November 4, 2008 Prices are efficient Market prices of both the acquiring firm and the target firm coincide with their fundamental value Mergers hold the potential for synergy - Managers of acquiring firm will only go forward if the value of the synergy is positive. Behavioral issues Winners’ curse Overconfidence and excessive optimism Other issues? Winners’ Curse Auction theory – take away is that the winning bid in an auction always results in the winner overpaying. Between 91 and 2001, shareholders of acquiring firms lost $216 billion, thereby experiencing the winner’s curse. Disproportionate share traced to very large losses by a few acquirers during the period 1998 through 2001 - Man of the large loss acquirers had b e en active acquirers prior to their large loss acquisition a nd the m arket value of their firms had be en increasing. Overconfidence Symmetric information: rational managers and efficient prices Excessive optimism and overconfidence – inefficient prices and acquisition premium Optimistic, overconfident executives - Hubris hypothesis - Excessively optimistic, overconfident CEOs are m ore likely to have co mpleted an acquisition. o
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04 LEC - AEM 4230 M&A lecture November 4, 2008...

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