Ch029 - Chapter 29: Mergers and Acquisitions 29.1 The...

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Chapter 29: Mergers and Acquisitions 29.1 The salient point here is that both firms are shown at market value. Therefore, Lager is paying 300,000 for an asset valued at 200,000 (the total value of Philadelphia Pretzel shown on the balance sheet). The merger creates $100,000 of goodwill (300,000 - 200,000). Balance Sheet Lager Brewing (in $ thousands) Current assets $480 Current liabilities $200 Other assets 140 Long-term debt 400 Net fixed assets 580 Equity 700 Goodwill 100 Total assets $1,300 Total liabilities $1,300 29.2 In this problem, Lager is paying 300,000 for an asset worth 240,000. Since the balance sheet for Philadelphia Pretzel shows assets at book value instead of market value, the goodwill will be only $60,000 (=$300,000 - $240,000). Thus, the net fixed assets are $620,000 (=$1,300,000 - $480,000 - $140,000 - $60,000). Balance Sheet Lager Brewing (in $ thousands) Current assets $480 Current liabilities $200 Other assets 140 Long-term debt 400 Net fixed assets 620 Equity 700 Goodwill 60 Total assets $1,300 Total liabilities $1,300 29.3 Now, they will use the pooling-of-interests method, so the assets are carried at the pre-merger levels, and the aggregate value of the two firms is unchanged by the merger. Balance Sheet Lager Brewing (in $ thousands) Current assets $480 Current liabilities $280 Other assets 140 Long-term debt 100 Net fixed assets 580 Equity 820 Total assets $1,200 Total liabilities $1,200 B-188
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29.4 a. False. Although the reasoning seems correct, the Stillman-Eckbo data do not support the monopoly power theory. b. True. When managers act in their own interest, acquisitions are an important control device for shareholders. It appears that some acquisitions and takeovers are the consequence of underlying conflicts between managers and shareholders. c. False. Even if markets are efficient, the presence of synergy will make the value of the combined firm different from the sum of the values of the separate firms. Incremental cash flows provide the positive NPV of the transaction. d. False. In an efficient market, traders will value takeovers based on “Fundamental factors” regardless of the time horizon. Recall that the evidence as a whole suggests efficiency in the markets. Mergers should be no different. e. False. The tax effect of an acquisition depends on whether the merger is taxable or non-taxable. In a taxable merger, there are two opposing factors to consider, the capital gains effect and the write-up effect. The net effect is the sum of these two effects. f. True. Because of the coinsurance effect, wealth might be transferred from the stockholders to the bondholders. Acquisition analysis usually disregards this effect and considers only the total value. 29.5
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This note was uploaded on 03/29/2010 for the course ECON 134a taught by Professor Lim during the Spring '08 term at UCSB.

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Ch029 - Chapter 29: Mergers and Acquisitions 29.1 The...

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