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Unformatted text preview: to gain access to the world’s single largest, richest, and least regulated market and to acquire world-class technology at a bargain price. British
companies have been historically the most active acquirers of U.S. firms. In the
late 1980s, Japanese corporations surged to prominence with a series of very
large acquisitions, including two in the entertainment industry: Sony’s purchase 734 PART 6 Special Topics in Managerial Finance of Columbia Pictures and Matsushita’s acquisition of MCA. More recently, German firms have become especially active acquirers of U.S. companies as producing export goods in Germany has become prohibitively expensive. (German
workers have one of the world’s highest wages and shortest workweeks.) It seems
inevitable that in the years ahead, foreign companies will continue to acquire U.S.
firms even as U.S. companies continue to seek attractive acquisitions abroad. Review Questions
17–6 Describe the procedures that are typically used by an acquirer to value a
target company, whether it is being acquired for its assets or as a going
17–7 What is the ratio of exchange? Is it based on the current market prices
of the shares of the acquiring and target firms? Why may a long-run
view of the merged firm’s earnings per share change a merger decision?
17–8 What role do investment bankers often play in the merger negotiation
process? What is a tender offer? When and how is it used?
17–9 Briefly describe each of the following takeover defenses against a hostile
merger: (a) white knight, (b) poison pill, (c) greenmail, (d) leveraged
recapitalization, (e) golden parachutes, and (f) shark repellents.
17–10 What key advantages and disadvantages are associated with holding
companies? What is pyramiding and what are its consequences?
17–11 Discuss the differences in merger practices between U.S. companies
and companies in other countries. What changes are occurring in international merger activity, particularly in Western Europe and Japan? LG5 17.4 Business Failure Fundamentals
A business failure is an unfortunate circumstance. Although the majority of firms
that fail do so within the first year or two of life, other firms grow, mature, and
fail much later. The failure of a business can be viewed in a number of ways and
can result from one or more causes. Types of Business Failure technical insolvency
Business failure that occurs
when a firm is unable to pay its
liabilities as they come due. A firm may fail because its returns are negative or low. A firm that consistently
reports operating losses will probably experience a decline in market value. If the
firm fails to earn a return that is greater than its cost of capital, it can be viewed
as having failed. Negative or low returns, unless remedied, are likely to result
eventually in one of the following more serious types of failure.
A second type of failure, technical insolvency, occurs when a firm is unable
to pay its liabilities as they come due. When a firm is technically insolvent, its
assets are still greater than its liabilities, but it is confronted with a liquidity crisis.
If some of its assets can be converted into cash within a reas...
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