599 guide concise

599 guide concise - Stock Market Reaction to M&A Cases:...

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Cases: 1. BASF hostile takeover of Engelhard Outcomes: Bidder Target Weighted Average Outcome (+) % (+) % (+) % Win-Win (-) % (+) % (-) % Destroyed Value (+) % (-) % (+) % Overpaid (-) % (-) % (-) % Lose-Lose Steps to Event Study Analysis: 1. Collect data – Returns for target, bidder, and market indices 330 days before to 60 days after the announcement date (make sure to convert returns into daily % return) 2. Regress percentage returns of bidder and target against market indices 3. Determine abnormal return by subtracting returns from regression estimates 4. Determine event window 5. Sum abnormal returns over the event window 6. Estimate the statistical significance 7. Calculate total gain and loss for bidder, target, and weighted average 8. Outcome? Definitions: o Alpha: The excess return that the market risk premium doesn’t account for. Should be zero. o Beta: Correlation with the economy o Sigma: standard deviation of the return; volatility of the stock Roadblocks to Value Creation: o Creating enough value to justify the premium paid o Agency Problems o Poor strategies or strategic fit o Investment banker motivations
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o Growth Trap: Beware of unachievable growth rates that are imbedded into the stock price. Can the firm keep growing at that rate forever? Roadblocks to the Deal Process: o Asymmetric Information: Target has more knowledge. Is the firm selling because they know there is a problem? o Winner’s Curse: o Escalation of commitment o Time pressure o Inadequate due diligence o Audit, credit, and IB reports – trust them? o Costs are upfront, benefits could take years o Valuation is often used to justify the price Roadblocks to Post Merger Integration o Loss of key managerial expertise o Reduced incentives for new line managers o Bidder inexperience in new business o Conflicts in corporate culture o Inadequate communications – Communication must be honest and frequent o Failure to match strategy and integration o Employees and customers become targets by competitors o Incorrect timing o Loss of commitment by senior executives after the deal Cases: 1. Aetna / US Healthcare 2. BHP proposed acquisition of Potash Corp. 3. Cisco 1. Company Analysis: What are the firm’s main resources or core competencies? VRIO Framework 2. Environmental Analysis: Porter’s 5 Forces; nature of competition in the industry; size/scope; related merger environment; stock market reaction 3. Industry Fit/Synergies: How will the bidder create value? Cost savings, revenue growth, strategic fit, luck, 4. Deal Pipeline: Target ID, entry option, clear vision of integration Reverse Synergies? Public Comparables
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This note was uploaded on 02/13/2012 for the course BUSI 599 taught by Professor Ravenscraft during the Fall '10 term at UNC.

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599 guide concise - Stock Market Reaction to M&A Cases:...

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