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Unformatted text preview: Red Lion chains. The new Hilton had
1,900 hotels, with brands from budget to luxury to fit the pocketbooks of all travelers.
Plagued by problems resulting from its own merger with Doubletree Hotels, Promus needed
Hilton’s financial strength to support its premium hotel brands. The two companies had discussed
a merger in 1997 but couldn’t agree on price. In mid-1999, Hilton again approached Promus, and
they struck a deal based on a value for Promus of about eight times projected 2000 earnings
before interest, taxes, depreciation, and amortization. The $4-billion deal priced Promus shares at
$38.50—a nearly 45 percent premium above the share price in late August 1999. Some lodging
industry analysts believed the higher price was fair, citing Hilton’s ability to consolidate the two
companies, achieve economies of scale, and increase market share.
Once the merger was approved and financed, the work of integrating the operations of two
very different companies began. By looking for ways to improve synergy among the chains, Hilton
achieved cost savings of $72 million, 30 percent more than anticipated, in the first year. Hilton
expanded its Honors guest rewards program to another 1,400 hotels and developed e-business
solutions to improve cross-selling. With its new system, reservations agents can access multiple
hotel chains from one screen and find another room at a sister hotel when a customer’s first
choice is full.
Successful horizontal mergers (mergers of firms in the same line of business) such as that of
Hilton and Promus require careful evaluation of the target firm and a clear understanding of the
motives involved on both sides. Not all mergers turn out as well, and disappointing outcomes may
call for other actions. This chapter looks at several types of corporate restructuring—mergers,
leveraged buyouts, and divestitures—as well as at restructuring that results from business failure. F 711 712 PART 6 LG1 Special Topics in Managerial Finance 17.1 Merger Fundamentals
Firms sometimes use mergers to expand externally by acquiring control of
another firm. Whereas the overriding objective for a merger should be to improve
the firm’s share value, a number of more immediate motivations such as diversification, tax considerations, and increasing owner liquidity frequently exist. Sometimes mergers are pursued to acquire needed assets rather than the going concern.
Here we discuss merger fundamentals—terminology, motives, and types. In the
following sections, we will describe the related topics of leveraged buyouts and
divestitures and will review the procedures used to analyze and negotiate mergers. Basic Terminology
The activities involving
expansion or contraction of a
firm’s operations or changes in
its asset or financial (ownership)
The combination of two or more
firms, in which the resulting firm
maintains the identity of one of
the firms, usually the larger.
The combination of two or more
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