Chapter_21_Mergers_and_Acquisitions - Mergers and...

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OPENING CASE Mergers and Acquisitions 21 CHAPTER I n April 2007, Netherlands-based ABN AMRO and U.K.-based Barclays announced a merger that would create the world’s largest asset manager as well as one of the world’s five largest banks. The value of the deal was about 67 billion ($91.07 billion). Under the terms of the merger, Barclays would offer 3.225 shares of the new company for each share held by ABN AMRO shareholders. Also, ABN AMRO agreed to sell LaSalle Bank to Bank of America for $21 billion, which would result in a 12 billion distribution to shareholders. How do companies like ABN AMRO and Barclays determine whether a merger is a good idea? This chapter explores reasons that mergers should take place, and, just as important, reasons why they should not. There is no more dramatic or controversial activity in corporate fi nance than the acquisition of one fi rm by another or the merger of two fi rms. It is the stuff of headlines in the fi nancial press, and it is occasionally an embarrassing source of scandal. The acquisition of one fi rm by another is, of course, an investment made under uncer- tainty, and the basic principles of valuation apply. One fi rm should acquire another only if doing so generates a positive net present value for the shareholders of the acquiring fi rm. However, because the NPV of an acquisition candidate can be diffi cult to determine, merg- ers and acquisitions, or M&A activities, are interesting topics in their own right. Some of the special problems that come up in this area of fi nance include the following: ±1.± ±The±benefi ts from acquisitions can depend on such things as strategic fi ts. Strate- gic fi ts are diffi cult to defi ne precisely, and it is not easy to estimate the value of strategic fi ts using discounted cash fl ±ow±techniques.± 2. There can be complex accounting, tax, and legal effects that must be taken into account when one fi rm is acquired by another. 3. Acquisitions are an important control device for shareholders. Some acquisitions are a consequence of an underlying confl ict between the interests of existing managers and those of shareholders. Agreeing to be acquired by another fi rm is one way that shareholders can remove existing managers. 4. Mergers and acquisitions sometimes involve “unfriendly” transactions. In such cases, when one fi rm attempts to acquire another, the activity does not always ±For±up-to-date± information on happenings in the world of M&A, go to www. ± ,±then± type “merger” into its search option.
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2 confi ne itself to quiet, genteel negotiations. The sought-after fi rm often resists takeover and may resort to defensive tactics with exotic names such as poison pills, greenmail, and white knights.
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Chapter_21_Mergers_and_Acquisitions - Mergers and...

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