British companies have been historically the most

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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 concern. 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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This document was uploaded on 01/19/2014.

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