Mergers, LBOs, Divestitures, and Holding Companies
ANSWERS TO END-OF-CHAPTER QUESTIONS
Synergy occurs when the whole is greater than the sum of its parts. When applied to
mergers, a synergistic merger occurs when the postmerger earnings exceed the sum of
the separate companies' premerger earnings. A merger is the joining of two firms to
form a single firm.
A horizontal merger is a merger between two companies in the same line of business.
In a vertical merger, a company acquires another firm that is "upstream" or
"downstream"; for example, an automobile manufacturer acquires a steel producer. A
congeneric merger involves firms that are interrelated, but not identical, lines of
One example is Prudential's acquisition of Bache & Company.
In a con-
glomerate merger, unrelated enterprises combine, such as Mobil Oil and Montgomery
A friendly merger occurs when the target company's management agrees to the
merger and recommends that shareholders approve the deal. In a hostile merger, the
management of the target company resists the offer. A defensive merger occurs when
one company acquires another to help ward off a hostile merger attempt.
offer is the offer of one firm to buy the stock of another by going directly to the
stockholders, frequently over the opposition of the target company’s management.
target company is a firm that another company seeks to acquire. Breakup value is a
firm’s value if its assets are sold off in pieces. An acquiring company is a company
that seeks to acquire another firm.
An operating merger occurs when the operations of two companies are integrated
with the expectation of obtaining synergistic gains. These may occur due to
economies of scale, management efficiency, or a host of other reasons. In a pure
financial merger, the companies will not be operated as a single unit, and no operating
economies are expected.
The discounted cash flow (DCF) method to valuing a business involves the
application of capital budgeting procedures to an entire firm rather than to a single
The market multiple method applies a market-determined multiple to net
income, earnings per share, sales, book value, or number of subscribers, and is a less
precise method than DCF.
Under purchase accounting, the acquiring firm is assumed to have “bought” the
acquired company in much the same way it would buy any capital asset.
of the purchase price over the book value of assets is added to goodwill, which may
be expensed for Federal income tax purposes, but may not be expensed for
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