FM11 Ch 25 Instructors Manual

FM11 Ch 25 Instructors Manual - Chapter 25 Mergers, LBOs,...

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Chapter 25 Mergers, LBOs, Divestitures, and Holding Companies ANSWERS TO END-OF-CHAPTER QUESTIONS 25-1 a. 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. b. 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 business. One example is Prudential's acquisition of Bache & Company. In a con- glomerate merger, unrelated enterprises combine, such as Mobil Oil and Montgomery Ward. c. 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. A tender 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. A 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. d. 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. e. 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 project. 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. f. 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. Any excess 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 shareholder reporting. Answers and Solutions: 25 - 1
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g. A white knight is a friendly competing bidder that a target management likes better than the company making a hostile offer, and the target solicits a merger with the white knight as a preferable alternative. A poison pill is a deliberate action that a company takes which makes it a less
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FM11 Ch 25 Instructors Manual - Chapter 25 Mergers, LBOs,...

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