FM8e- ch25 - 25 1 CHAPTER 25 Mergers LBOs Divestitures and...

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25 - 1 . Types of mergers Merger analysis Role of investment bankers LBOs, divestitures, and holding companies CHAPTER 25 Mergers, LBOs, Divestitures, and Holding Companies
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25 - 2 . Synergy: Value of the whole exceeds sum of the parts. Could arise from: Operating economies Financial economies Differential management efficiency Taxes (use accumulated losses) What are some valid economic justifications for mergers? (More...)
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25 - 3 . Break-up value : Assets would be more valuable if broken up and sold to other companies.
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25 - 4 . Diversification Purchase of assets at below replacement cost Acquire other firms to increase size, thus making it more difficult to be acquired What are some questionable reasons for mergers?
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25 - 5 . Five Largest Completed Mergers (as of January 2002) VALUE BUYER TARGET (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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25 - 6 . Friendly merger : The merger is supported by the managements of both firms. Differentiate between hostile and friendly mergers (More...)
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25 - 7 . 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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25 - 8 . 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 Reasons why alliances can make more sense than acquisitions
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25 - 9 . Reason for APV 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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25 - 10 . 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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25 - 11 . 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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25 - 12 . Note to APV APV is the best model to use when the capital structure is changing. The Corporate Valuation model is easier than APV to use when the capital structure is constant—such as at the horizon.
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25 - 13 .
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