Chapter 23 IM 10th Ed

Chapter 23 IM 10th Ed - CHAPTER 23 Corporate Restructuring...

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CHAPTER 23 Corporate Restructuring: Combinations and Divestitures CHAPTER ORIENTATION Corporate restructuring comes through combining assets (mergers and acquisitions) and uncombining assets (divestitures). This chapter examines how mergers and acquisitions can create shareholder wealth and the methods used to value a potential merger candidate. Firms may also increase shareholder wealth by divesting themselves of some portion of its current operations. This chapter discusses the different divestiture options available to a firm. CHAPTER OUTLINE I. There are two principal ways by which a firm may grow: A. Internally, through the acquisition of specific assets which are financed by the retention of earnings and/or external financing, or B. Externally, through the combination with another company. We turn now to a discussion of external growth through mergers with, and acquisition of, other firms. II. There have been five identifiable time periods where the number and amount of mergers and acquisitions were particularly accentuated. A. End of the 19th century and beginning of the 20th century. During this time, many industries were merged. The resulting firms had enormous economic power. Example firms include U.S. Steel, American Tobacco, and Standard Oil. B. The decade of the 1920s. This merger wave was closely related to the creation of oligopolies (industries dominated by a few firms), such as IBM, General Foods, and Allied Chemical. During this time, the developments in transportation, communications, and merchandising fostered the growth. 53
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C. Between the 1950s and the 1970s. No longer permitted by the Federal Trade Commission to acquire firms in their own industry, companies actively began acquiring companies outside their own industries. The bringing together of these dissimilar firms into one corporate entity came to be known as the conglomerate. 1. The creation of a conglomerate was thought to be an efficient way of monitoring individual businesses by subjecting them to regular quantitative evaluations by the central office. 2. With hindsight we now see that conglomerate acquisitions have, for the most part, proven unsuccessful. D. The 1980s. In this period, the pattern became that of acquiring a conglomerate, breaking it up into its individual business units, and selling off the segments to large corporations in the same businesses. The 1980s merger activity came to an end, however, largely because the huge amounts of debt financing used to fund many of the acquisitions dried up. E. The 1990s. During the 90s the financial services and telecommunication industries went through a period of consolidation resulting in some of the largest mergers ever recorded. III. Why mergers create value. For a merger to create wealth it has to provide shareholders with something they get for free by merely holding the individual shares of the two firms. Such benefits might include: A. Tax benefits: If a merger were to result in a reduction of taxes that is not otherwise possible, then wealth is created by the merger. This can be the case with a firm that has lost money and thus generated tax credits, but does
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Chapter 23 IM 10th Ed - CHAPTER 23 Corporate Restructuring...

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