Too much capacity these conditions often trigger a

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too much capacity, These conditions often trigger a wave of mergers and acquisitions, which then force companies to cut capacity and employment and release capital for reinvestment elsewhere in the economy. DUBIOUS reasons for Mergers : Diversification : Diversification is easier and cheaper for the stockholders than for the corporation.vs Stockholders of firm A can easily buy shares of firm B to diversify their own portfolios. – Investors should not pay a premium for diversification since they can do it themselves; in fact, discounts are more common.
Economic Gain: PV (increased earnings)= New cash flows from synergies/discount rate Estimating NPV of the Merger for Acquirer:Economic Gain − Cost For Mergers financed by cash: Cost = Cash Paid Out – Target Firm Value For Mergers financed by stock: Cost = Value of Shares Issued – Target Firm Value Who Usually Benefits from the Merger? – Shareholders of the target, The executives of the acquiring firm, Lawyers & brokers. Who Usually Loses in a Merger? Shareholders of the acquirer due to overpayment, The executives of the target firm, All employees due to restructuring. -Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pretzels (SDP). SCC has 3,000 shares outstanding, selling at $50 per share. SDP has 2,000 shares outstanding, selling at $17.50 a share. SCC estimates the
economic gain from the merger to be $15,000. A. If SDP can be acquired for $20 a share, what is the NPV of the merger to SCC? B. What will SDP sell for? C. What will SCC sell for when the market learns that it plans to acquire SDP for $20 a share? D. What are the percentage gains to the shareholders of each firm? E. Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, SCC sells for $50, so instead of paying $20 cash, SCC issues 0.40 of its shares for every SDP share acquired. What will be the price of the merged firm? f. What is the NPV of the merger to SCC when it uses an exchange of stock? (see notes)
Homework: Mergers and Acquisition: 1. Do each of the following motives for mergers make economic sense? Answer yes or no.

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