Chapter 7: Mergers and Acquisition Strategies Introduction Corporations use merger and acquisition strategies to grow and deal with challenges in domestic markets and to deal with those in emerging global markets. Small firms use merger and acquisition strategies to grow in existing markets and to enter new markets. Both use these strategies to create stakeholder value. The Popularity of Merger and Acquisition Strategies Merger and acquisition (M&A) strategies are believed to have played a central role in the restructuring of US businesses during 1980s and 1990s. Continue to generate benefits. Changing conditions in external environment influence the type of M&A firms pursue. Shareholders of acquired firms often earn above-average returns, while shareholders of acquiring firms typically earn returns close to zero. In approximately 2/3 of all acquisitions, acquiring firm's stock price falls immediately after intended transaction is announced (reflects investors' skepticism of premium). Mergers, Acquisitions and Takeovers: What Are the Differences? o Merger : a strategy through which two firms agree to integrate their operations on a relatively coequal basis. Few true mergers actually take place - because one party to transaction is usually dominant in regard to various characteristics (market share, size, asset value). o Acquisition : a strategy through which one firm buys a controlling (or 100%) interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. After transaction, management of acquired firm reports to management of acquiring firm. Much more common than mergers or takeovers. o Takeover : a special type of acquisition wherein the target firm does not solicit the acquiring firm's bid; thus takeovers are unfriendly acquisitions. Pre-announcement Returns : largely anticipated and associated with significant increase in bidder's and target's share prices.
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