RW6eCh23+Sol - CHAPTER 23 MERGERS AND ACQUISITIONS Answers...

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CHAPTER 23 MERGERS AND ACQUISITIONS Answers to Concepts Review and Critical Thinking Questions . 1. a. Greenmail refers to the practice of paying unwanted suitors who hold an equity stake in the firm a premium over the market value of their shares, to eliminate the potential takeover threat. b. A white knight refers to an outside bidder that a target firm brings in to acquire it, rescuing the firm from a takeover by some other unwanted hostile bidder. c. A golden parachute refers to lucrative compensation and termination packages granted to management in the event the firm is acquired. d. The crown jewels usually refer to the most valuable or prestigious assets of the firm, which in the event of a hostile takeover attempt, the target sometimes threatens to sell. e. Shark repellent generally refers to any defensive tactic employed by the firm to resist hostile takeover attempts. f. A corporate raider usually refers to a person or firm that specializes in the hostile takeover of other firms. g. A poison pill is an amendment to the corporate charter granting the shareholders the right to purchase shares at little or no cost in the event of a hostile takeover, thus making the acquisition prohibitively expensive for the hostile bidder. h. A tender offer is the legal mechanism required by the exchange when a bidding firm goes directly to the shareholders of the target firm in an effort to purchase their shares. i. A leveraged buyout refers to the purchase of the shares of a publicly-held company and its subsequent conversion into a privately-held company, financed primarily with debt. 2. Diversification doesn’t create value in and of itself because diversification reduces unsystematic, not systematic, risk. As discussed in the chapter on options, there is a more subtle issue as well. Reducing unsystematic risk benefits bondholders by making default less likely. However, if a merger is done purely to diversify (i.e., no operating synergy), then the NPV of the merger is zero. If the NPV is zero, and the bondholders are better off, then stockholders must be worse off. 3. A firm might choose to split up because the newer, smaller firms may be better able to focus on their particular markets. Thus, reverse synergy is a possibility. An added advantage is that performance evaluation becomes much easier once the split is made because the new firm’s financial results (and stock prices) are no longer commingled. 4. It depends on how they are used. If they are used to protect management, then they are not good for stockholders. If they are used by management to negotiate the best possible terms of a merger, then they are good for stockholders. 5. One of the primary advantages of a taxable merger is the write-up in the basis of the target firm’s assets, while one of the primary disadvantages is the capital gains tax that is payable. The situation is the reverse for a tax- free merger.
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