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Ch 26 Revised - CHAPTER 26 Mergers LBOs Divestitures and...

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  1 CHAPTER 26 Mergers, LBOs, Divestitures,  and Holding Companies
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  2 Topics in Chapter Types of mergers Merger analysis Role of investment bankers LBOs, divestitures, and holding  companies
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  3 What are some valid  economic justifications for mergers? Synergy:  Value of the whole exceeds  sum of the parts.  Could arise from: Operating economies Financial economies Differential management efficiency Taxes (use accumulated losses) (More...)
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  4 Valid Reasons (Continued) Break-up value:  Assets would be more  valuable if broken up and sold to other  companies.
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  5 What are some questionable reasons for mergers? Diversification Purchase of assets at below  replacement cost Acquire other firms to increase size,  thus making it more difficult to be  acquired
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  6 Five Largest Completed Mergers (as of January, 2006) BUYER TARGET VALUE  (Billion) Vodafone  AirTouch Mannesman $161 Pfizer Warner-Lambert 116 America Online Time Warner 106 Exxon Mobil 81 Glaxo Wellcome SmithKline  Beecham 74
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  7 Differentiate between hostile  and friendly mergers Friendly merger:  The merger is supported by the  managements of both firms. (More... )
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  8 Hostile merger: Target firm’s management resists the  merger. Acquirer must go directly to the target  firm’s stockholders, try to get 51% to  tender their shares. Often, mergers that start out hostile end up  as friendly, when offer price is raised.
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  9 Reasons why alliances can make  more sense than acquisitions Access to new markets and  technologies Multiple parties share risks and  expenses  Rivals can often work together  harmoniously Antitrust laws can shelter cooperative  R&D activities
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  10 Reason for Adjusted Present  Value Approach Often in a merger the capital structure  changes rapidly over the first several  years. This causes the WACC to change from  year to year. It is hard to incorporate year-to-year  changes in WACC in the corporate  valuation model.
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  11 The APV Model    Value of firm if it had no debt + Value of tax savings due to debt = Value of operations First term is called the  unlevered value  of the firm .  The second term is called  the value of the  interest tax shield .   (More... )
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  12 APV Model Unlevered value of firm = PV of FCFs  discounted at unlevered cost of equity, r sU . Value of interest tax shield = PV of interest  tax savings at unlevered cost of equity.   Interest tax savings = Interest(tax rate) = TS t .
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  13 Note to APV APV is the best model to use when the  capital structure is changing.
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