M&A_1 - Mergers & Acquisitions Basic principle: A...

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Basic principle: A firm acquires another if it expects that the combined will enhance shareholder value But the net present value of such merger often difficult to estimate; and payoffs may take much longer Example: Daimler-Chrysler; HP and Compaq AOL and Time Warner
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Synergies: must have benefits to acquiring firm (not easy to estimate) There are tax and legal implications A way of “firing” managers Often leads to a “hostile takeover” But managers may resort to defensive tactics “Poison pill”
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Varieties of Takeovers Takeovers Acquisition Proxy Contest Going Private (LBO) Merger Acquisition of Stock Acquisition of Assets
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Let A be acquirer; and B the target firm • Suppose V A is market value of A; and V B is the value of B; V AB value of combined Synergy= V AB -(V A +V B ) If positive, then there are synergies Premium: the difference between what A pays for B and V B , the market value of B – e.g, if cash, then premium=(payment - V B )
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Synergy Suppose firm A is contemplating acquiring firm B. The synergy from the acquisition is Synergy = V AB – ( V A + V B ) The synergy of an acquisition can be determined from the usual discounted cash flow model: Synergy = Σ t = 1 T where
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Reasons for a merger Market share; hence has to be approved by regulators (anti-trust laws) Cost reduction (there may be economies of scale) BAD reasons for a merger: Earnings growth: sum of parts same if no synergies Diversification: non-systematic, yes…. . But investors can diversify portfolio at lesser cost. But why acquire? Why not buy stocks of B?
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The NPV of a Merger Typically, a firm would use NPV analysis when making acquisitions. The analysis is straightforward with a cash offer, but gets complicated when the consideration is stock.
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The NPV of a Merger: Cash NPV of merger to acquirer = Synergy – Premium Premium = Price paid for B V NPV of merger to acquirer = Synergy – Premium
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This note was uploaded on 03/26/2008 for the course EC 150 taught by Professor Kutsoati during the Spring '08 term at Tufts.

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M&A_1 - Mergers & Acquisitions Basic principle: A...

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