Mergers, LBOs, Divestitures, and Holding Companies
ANSWERS TO END-OF-CHAPTER QUESTIONS
a. Synergy occurs when the whole is greater than the sum of its parts.
When applied to mergers, a synergistic merger occurs when the
postmerger earnings exceed the sum of the separate companies'
premerger earnings. A merger is the joining of two firms to form a
b. A horizontal merger is a merger between two companies in the same
line of business. In a vertical merger, a company acquires another
firm that is "upstream" or "downstream"; for example, an automobile
manufacturer acquires a steel producer. A congeneric merger involves
firms that are interrelated, but not identical, lines of business.
One example is Prudential's acquisition of Bache & Company. In a
conglomerate merger, unrelated enterprises combine, such as Mobil
Oil and Montgomery Ward.
c. A friendly merger occurs when the target company's management agrees
to the merger and recommends that shareholders approve the deal. In a
hostile merger, the management of the target company resists the
offer. A defensive merger occurs when one company acquires another to
help ward off a hostile merger attempt.
A tender offer is the offer
of one firm to buy the stock of another by going directly to the
stockholders, frequently over the opposition of the target company’s
A target company is a firm that another company seeks
to acquire. Breakup value is a firm’s value if its assets are sold
off in pieces. An acquiring company is a company that seeks to
acquire another firm.
d. An operating merger occurs when the operations of two companies are
integrated with the expectation of obtaining synergistic gains. These
may occur due to economies of scale, management efficiency, or a
host of other reasons. In a pure financial merger, the companies will
not be operated as a single unit, and no operating economies are
e. The discounted cash flow (DCF) method to valuing a business involves
the application of capital budgeting procedures to an entire firm
rather than to a single project.
The market multiple method applies
a market-determined multiple to net income, earnings per share,
sales, book value, or number of subscribers, and is a less precise
method than DCF.
f. A pooling of interests is, in theory, a merger among equals, and
hence the consolidated balance sheet is constructed by simply adding
Answers and Solutions:
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