C39CN - Past Exam Papers.doc

December 16 c39 cn d target share prices have a

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DECEMBER 16
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C39 CN d. Target share prices have a positive run-up in period prior to takeover announcement. e. Takeover premiums reflect bidder’s strategy of making large preemptive bid. DECEMBER 17
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C39 CN f. The evidence suggests that mergers are usually value adding, and not hubristic or driven by management entrenchment. Berkovitch, Narayanan (1993) Correlation among target, bidder, total gains Target & bidder have positive correlation – synergy driving force (but agency and hubris present in some deals) g. Focussed acquisition is more successful than unfocussed diversification. Berger and Ofek (1995): Firms that diversified over the period 1986-1991 lost between 13% and 15% of firm value. Comment and Jarrell (1995): Increased focus showed higher returns than less focused firms Also, the financial markets typically apply a discount to conglomerates, and there are numerous examples of conglomerates such as Kraft, Tyco and McGraw-Hill which are splitting up in order to achieve better value for investors. Some companies such as GE, J and J and Siemens seem to manage the conglomerate approach, but it is rarely successful as a strategy. h. Mergers do not appear to lead to monopoly and market power. Spillovers are the effects on competitive rivals’ share prices of a change in competitive strength of a firm through merger. If rival’s share prices fall, this implies that the firm has become more market dominant. However, spillovers are usually positive which implies that the M&A has been undertaken for reasons of efficiency. Therefore there is also the possibility of such efficiency gains at rivals firms, which is factored into price. It is also possible that a positive spillover implies increased market power allows both the M&A firms and its rivals to gain from the possibility of forming price-fixing cartels. However, evidence, e.g. ‘going private’ transactions is not consistent with this. i. Horizontal integration is more successful than vertical integration. DECEMBER 18
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C39 CN Fan and Lang (2000) Vertical and complementary relatedness has increased over time Vertically related firms do poorly compared to more focused firms Complementary firms show higher values and more complementary (10% more) over j. Do bad bidders become good targets? Mitchell and Lehn: Studied sample of 1,158 companies examined their control transaction over the period 1980-1988 They determined that companies that make acquisitions which cause their equity to lose value are increasingly likely to become takeover targets k. Winner's Curse Nikhil Varaiya (1988) – studied 800 acquisitions over 1974-1983 Measured overpayment = (winning bid – highest bid prior to the market responding negatively to bid prices) Found bidders overpaid by 67% l. Agency Problems - Executive Compensation and Acquisition Decisions Ajoy Khoranam and Marc Zenner analyzed the role that executive compensation played in the corporate acquisition decisions of 51 firms which made 84 acquisitions over the period 1982-1986 (Ajay Khorana & Marc Zenner, “Executive Compensation of Large Acquirers in the 1980s.” Journal of Corporate Finance, 4, 1988, 209-240) DECEMBER 19
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C39 CN Question 4 The first wave was called Merging for monopoly and it took place mainly in the US as did second wave and largely third wave
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