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Chapter 20 External Growth through Mergers. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies,...
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Transcript of Chapter 20 External Growth through Mergers. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies,...
Chapter 20
External Growththrough Mergers
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
PPT 20-1
TABLE 20-1Largest acquisitionsever
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
PPT 20-2
TABLE 20-2Financial data onpotential merging firms
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
PPT 20-3
TABLE 20-3Postmerger earningsper share
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
PPT 20-3FIGURE 20-1Risk-reductionportfolio benefits
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 20 - Outline LT 20-1
Mergers vs. Consolidations Why Merge? 3 Types of Mergers Motives of Selling Stockholders Terms of Exchange Negotiated vs. Tender Offers Wall Street Takeover Terminology
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Mergers vs. Consolidations LT 20-2
A business combination can be either a merger or a consolidation
Merger: a combination of 2 or more companies where the resulting
firm keeps the identity of the acquiring companyConsolidation:
when 2 or more companies are combined to form an entirely new entity
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Why Merge? LT 20-3
Financial motives:–to reduce risk (the portfolio effect)– to increase operating efficiency– to improve access to financial markets – to obtain a tax carry-forward benefit
Nonfinancial motives:– to expand marketing and management capabilities– to allow for new product development– to provide synergistic benefits (the “2+2=5” effect)
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
3 Types of Mergers LT 20-4
Horizontal Merger:– unites direct competitors– ex., 2 shoe companies combine
Vertical Merger:– unites buyers and sellers– ex., a shoe manufacturer buys a leather producer
Conglomerate Merger:– merging of firms in totally unrelated industries– ex., a shoe company joins with a beverage company
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Motives of Selling Stockholders LT 20-5
• Desire to receive the acquiring firm’s stock which may have greater acceptability in the market
• Provides stockholders an opportunity to diversify their holdings
• Gain on sale of the stock at an attractive price• Officers of selling company may receive attractive
postmerger management contracts and directorships in the acquiring firm
• Avoids the bias against smaller businesses
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Terms of Exchange LT 20-6
Cash Purchases:takes on many characteristics of a classical
capital budgeting decisionStock-For-Stock Exchange:
often a trade-off between an immediate gain or dilution in EPS and future growth
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Negotiated vs. Tender Offers LT 20-7
Negotiated Offer:– a “friendly” merger that is negotiated between officers and
directors of the participating corporations– it is agreed upon by all sides
Takeover (or Unsolicited) Tender Offer:– when a company attempts to acquire a target firm against its
will (an “unfriendly takeover”)– unsolicited tender offers for a target company have gained in
popularity
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Wall Street TakeoverTerminology LT 20-8
Saturday Night Special:– a surprise offer made right before the market closes
for the weekend– takes the target company’s officers by surprise
White Knight:– a third firm that management calls on to help it
avoid an unfriendly takeover– not always successful at winning