FFM CH21 - Mergers and Divestitures Chapter 21 Types of...

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Unformatted text preview: Mergers and Divestitures Chapter 21 Types of Mergers Merger Analysis Role of Investment Bankers Corporate Alliances Private Equity Investments and Divestitures 21-1 What is a merger? Definition: The combination of two or more single companies to form a single firm. Examples: Wachovia acquired by Wells Fargo Washington Mutual acquired by JP Morgan 21-2 Types of Mergers Horizontal merger The two firms are in the same line of business Example : XM and Sirius Satellite Radio stations Vertical Merger The firms share a supplier/customer relationship Example : Ford Motor purchasing a tire manufacturer 21-3 Types of Mergers (contd) Congeneric Merger The two firms are in the same general industry, but not through a supplier/customer relationship. Example : Cadbury PLC and Kraft mergers Conglomerate Merger A merger if firms in completely different industries. Example : General Electric under Jack Welch, expanding an industrial company into entertainment (NBC) and financial products. 21-4 What is the difference between a friendly and a hostile merger? Friendly merger The merger is supported by the managements of both firms. Management of the target sends a letter to shareholders recommending the transaction. Hostile merger Target firms management resists the merger. Acquirer must go directly to the target firms stockholders and try to get 51% to sell their shares to them. Target mgt will issue own statement against action. Often, mergers that start out hostile end up as friendly when offer price is raised. 21-5 What are some good reasons for mergers? Synergy: value of the whole exceeds sum of the parts. Referred to as 2+2=4 and could arise from: Operating economies aka economies of scale: Smaller management team Streamlining production, marketing or distribution Financial economies Lower transaction costs (ie price per unit in production) 21-6 Differential management efficiency One management team is better/more sophisticated than another Increased market power aka reducing your competition when within anti-trust limitations Taxes (acquire a target to use its accumulated losses) Break-up value: assets would be more valuable if sold to some other company....
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FFM CH21 - Mergers and Divestitures Chapter 21 Types of...

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