An acquisition will benefit the shareholders of the

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An acquisition will benefit the shareholders of the acquiring firm if this value is greater than the cost of the acquisition. The cost of an acquisition can be defined in general terms as the price paid to the share- holders of the acquired firm. The cost frequently includes a merger premium paid to the shareholders of the acquired firm. Moreover, the cost depends on the form of payment, that is, the choice between paying with cash or paying with common stock. 5. The possible benefits of an acquisition come from several sources, including the following: a. Revenue enhancement b. Cost reductions c. Lower taxes d. Reductions in capital needs 6. Some of the most colorful language of finance comes from defensive tactics used in acquisition battles. Poison pills, golden parachutes, crown jewels , and greenmail are terms that describe various antitakeover tactics. 7. Mergers and acquisitions have been extensively studied. The basic conclusions are that, on average, the shareholders of target firms do very well, whereas the shareholders of bidding firms do not appear to gain very much. 8. For a variety of reasons, companies often wish to sell assets or operating units. For relatively large divestitures involving operating units, fi rms sometimes elect to do carve-outs, spin-offs, or split-ups. C O N C E P T Q U E S T I O N S 1. Merger Accounting Explain the difference between purchase and pooling of interests accounting for mergers. What is the effect on cash flows of the choice of accounting method? On EPS? 2. Merger Concepts Indicate whether you think the following claims regarding takeovers are true or false. In each case, provide a brief explanation for your answer. a. By merging competitors, takeovers have created monopolies that will raise product prices, reduce production, and harm consumers. b. Managers act in their own interests at times and in reality may not be answerable to share- holders. Takeovers may reflect runaway management.
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22 c. In an efficient market, takeovers would not occur because market prices would reflect the true value of corporations. Thus, bidding firms would not be justified in paying premiums above market prices for target firms. d. Traders and institutional investors, having extremely short time horizons, are influenced by their perceptions of what other market traders will be thinking of stock prospects and do not value takeovers based on fundamental factors. Thus, they will sell shares in target firms de- spite the true value of the firms. e. Mergers are a way of avoiding taxes because they allow the acquiring firm to write up the value of the assets of the acquired firm. f. Acquisitions analysis frequently focuses on the total value of the firms involved. An acquisition, however, will usually affect relative values of stocks and bonds, as well as their total value.
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  • Spring '12
  • Scott
  • Firm, Firm B

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