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FFM CH21 - Chapter21 TypesofMergers MergerAnalysis...

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Mergers and Divestitures Chapter 21 Types of Mergers Merger Analysis Role of Investment Bankers Corporate Alliances Private Equity Investments and  Divestitures 21-1
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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
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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 firm’s share a supplier/customer relationship Example : Ford Motor purchasing a tire  manufacturer 21-3
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Types of Mergers (cont’d) 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
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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 firm’s management resists the merger. Acquirer must go directly to the target firm’s  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
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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
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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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