The ready availability of junk bond financing

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Unformatted text preview: elief that through restructuring, the firm’s hidden value can be unlocked. The ready availability of junk bond financing throughout the 1980s fueled the financial merger mania during that period. With the collapse of the junk bond 2. A somewhat similar nonmerger arrangement is the strategic alliance, an agreement typically between a large company with established products and channels of distribution and an emerging technology company with a promising research and development program in areas of interest to the larger company. In exchange for its financial support, the larger, established company obtains a stake in the technology being developed by the emerging company. Today, strategic alliances are commonplace in the biotechnology, information technology, and software industries. 714 PART 6 Special Topics in Managerial Finance market in the early 1990s, the bankruptcy filings of a number of prominent financial mergers of the 1980s, and the rising stock market of the later 1990s, financial mergers lost their luster. As a result, the strategic merger, which does not rely so heavily on debt, tends to dominate today. Motives for Merging Firms merge to fulfill certain objectives. The overriding goal for merging is maximization of the owners’ wealth as reflected in the acquirer’s share price. More specific motives include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeover. These motives should be pursued when they are believed to be consistent with owner wealth maximization. Growth or Diversification Companies that desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to fulfill this objective. Instead of going through the time-consuming process of internal growth or diversification, the firm may achieve the same objective in a short period of time by merging with an existing firm. Such a strategy is often less costly than the alternative of developing the necessary production capacity. If a firm that wants to expand operations can find a suitable going concern, it may avoid many of the risks associated with the design, manufacture, and sale of additional or new products. Moreover, when a firm expands or extends its product line by acquiring another firm, it also removes a potential competitor.3 Synergy Hint Synergy is said to be present when a whole is greater than the sum of its parts—when “1 1 3.” The synergy of mergers is the economies of scale resulting from the merged firms’ lower overhead. These economies of scale from lowering the combined overhead increase earnings to a level greater than the sum of the earnings of each of the independent firms. Synergy is most obvious when firms merge with other firms in the same line of business, because many redundant functions and employees can thereby be eliminated. Staff functions, such as purchasing and sales, are probably most greatly affected by this type of c...
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This document was uploaded on 01/19/2014.

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