ECON 3420 Discussion 8

ECON 3420 Discussion 8 - ECON 3420A Financial Economics...

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ECON 3420A Financial Economics 2010-2011 Term 1 Discussion 8: Mergers and Acquisitions (M&A) 1. What features of an M&A would suggest that acquirer shareholders would likely gain after the acquisition. One feature of M&A that shareholders will likely gain after acquisition is if the current management is incompetent. If current board of directors, CEO’s and other senior executives are not performing well, that means there is room for potential for the company to improve. Through mergers and acquisition, shareholders will replace the new board or senior executives with better personnel in order for the firm to reach its potential. Through the maximization of the firm’s potential, the firm’s earnings will increase which increases shareholders’ wealth. Second feature includes a proven track record of mergers and acquisition from the acquiring company. By analyzing past performance through its previous M&A, it is a good indication that the acquirer is doing meaningful strategic planning. They identify the various the strategic fits than would enhance the company as a whole instead of making the company bigger. These strategic fits include aligning corporate objectives or performance measures, integrate processes and systems. It is also important to closely align the markets being served, technologies owned, research and development and financial position. One case is Cathay Pacific acquiring Dragonair where Cathay Pacific has a decent track record of buying other airline companies to expand its own networks. As a result, the company has profited through the acquisition of not just the assets of Dragonair, but also the network. Matching cultures, organizational structures and management relationships are important features for synergy. It is very difficult to see how a technology company that specializes in producing software products to be acquired by a firm that sells fashion or clothing. Clearly, there will be a huge clash in culture where the way of doing business is very different. The organizational structures do not match which reflects the difference in each company’s business model and relationship with management is divided since no management from each company knows what activities the other management is doing. If the senior executives operate in a high-equity-based compensation (HEBC) scheme, it is a good indicator that the management is aligned with the interest of its
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shareholders. Since the earnings of the company are directly tied to management’s income, they will have an incentive to maximize the company’s earnings and performance. Hence, the incentive or interests of principal and agent are aligned. Alternative version: For the acquirer to gain after an acquisition it is necessary that there is a potential for the target firm to increase its value. This potential is given especially when the target firm has been managed badly in recent past. This means that due to bad management the current value of the target firm is below its real/fair value. A very simple example
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This note was uploaded on 03/03/2012 for the course ECON 3420 taught by Professor Kwong during the Spring '11 term at CUHK.

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ECON 3420 Discussion 8 - ECON 3420A Financial Economics...

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