ch06 - Chapter 6 Theories of Mergers and Tender Offers and...

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Theories of Mergers Theories of Mergers and Tender Offers and Tender Offers 6 6 Chapter Chapter
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Chapter 6-2 Reasons for Mergers Size and returns to scale Benefits of size are usual source of “synergies” Economies of scale Average costs decline with larger size Lower required investment in inventory Large firms more able to implement specialization Improved capacity utilization Economies of scope – firm can produce additional products due to experience with existing products
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Chapter 6-3 Reasons for Mergers Transaction costs Technological factors do not guarantee a merger will enhance profit Specialization gains suggest reasons mergers should not occur If supplier can produce input more cheaply, will not profit a firm to merge Coase framework Firm must decide between internal or external production Transaction costs within and outside firm determine decision on firm size and merger
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Chapter 6-4 Value increasing theories Transaction costs – organization of firm is reaction to appropriate balance of internal operations and external markets Mergers create synergies Economies of scale More effective management Improved production techniques Combination of complementary resources Takeovers are disciplinary Can be used to remove poor managers Facilitate competition between different management teams
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Chapter 6-5 Value reducing theories Agency costs of free cash flow Free cash flow is a source of value reducing mergers Firms with FCF are those where internal funds exceed investment required for positive NPV projects Managerial entrenchment Managers hesitant to distribute cash to shareholders Investments may be in form of acquisitions where managers over pay but reduce likelihood of their own replacement
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Chapter 6-6 Value neutral theory – hubris Merger bids result from managerial hubris – managers are prone to excessive self confidence Winner’s curse Competitive bidding has a distribution of
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ch06 - Chapter 6 Theories of Mergers and Tender Offers and...

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