Sld20 External Growth Through Merger
description
Transcript of Sld20 External Growth Through Merger
C H
A P
T E
R
T W E N T Y
External GrowthThrough Mergers
McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Table 20-1Ten largest mergers and acquisitions in 1998
ValueBuyer Acquired Company ($ billions)
1. Exxon . . . . . . . . . . . Mobil $792. Travelers Inc. . . . . . . . Citicorp 733. SBC . . . . . . . . . . . . Ameritech 664. NationsBank . . . . . . . . BankAmerica 605. ATT . . . . . . . . . . . . Tele-Communications 546. Bell Atlantic . . . . . . . . GTR 537. British Petroleum . . . . . Amoco 498. Daimler-Benz . . . . . . . Chrysler 439. WorldCom. . . . . . . . . MCI 4110. Zenca Group . . . . . . . . AB Astra 3511. Sandoz AG. . . . . . . . . Ciba-Geigy AG 3412. Mitsubishi Bank . . . . . . Bank of Tokyo 34Note: Figures in U.S. dollars
PPT 20-1
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Table 20-2Largest (proposed) mergers and acquisitions in Canada in 1998
Value Merger Partners (Cdn.
$ billions)
1. Royal Bank . . . . . . . . Bank of Montreal $23.12. CIBC . . . . . . . Toronto Dominion 22.03. Seagram . . . . . . . . . . Polygram 15.64. Trans Canada Pipelines . . . Nova 15.05. Northern Telecom . . . . . Bay Networks 13.46. Union Pacific Resources. . . Norcen Energy 3.77. Bowater . . . . . Avenor 2.58. Call-Net . . . . . . . Fonorola 1.89. Nova. . . . . . . . . Huntsman 1.310. Merrill Lynch . . . . . . . Midland W 1.3
PPT 20-2
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Small ExpandCorporation Corporation
Total earnings. . . . . . . . . $200,000 $500,000
Shares of stock outstanding . . . . . . 50,000 200,000
Earnings per share . . . . . . $4.00 $2.50
Price-earnings ratio (P/E) . . . 7.5x 12x
Market price per share . . . . $30.00 $30.00
PPT 20-3
Table 20-3Financial data on potential merging firms
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Table 20-4Post-merger earnings per share
Total earnings: Small ($200,000) + Expand ($500,000) . . . $700,000
Shares outstanding in surviving corporation: Old (200,000) + New (50,000) . . . . . . . . . . . . . 250,000
New earnings per share for Expand Corporation = = $2.80$700,000
250,000
PPT 20-3
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Figure 20-1Impact of alternate plans on Expand Corporation
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8 9 10
Year
Earnings per share for Expand Corporation ($)With Growth Corporation
Without merger
With Small Corporation
Immediate 10-yearEffect Effect
No merger . . . . . . . . . . . . . . . . . . . . $2.50 $6.49Merger with Small Corporation . . 2.62 6.07Merger with Growth Corporation 2.12 6.79
PPT 20-4
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Figure 20-2Risk-reduction portfolio benefits
Probability of occurrence
Without merger With merger
Earnings per share
= $2.50 (expected value)= $1.00 (standard deviation)
1.00
.50
0Earnings per share
= $2.50 (expected value)= $ .50 (standard deviation)
PPT 20-5
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Chapter 20 - Outline LT 20-1
• Mergers vs. Consolidations
• 3 Types of Mergers
• Negotiated vs. Tender Offers
• Takeover Terminology
• Why Merge?
• Motives of Selling Shareholders
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Mergers vs. Consolidations LT 20-2
• A business combination can be either a merger or aconsolidation
Merger:– a combination of 2 or more companies where the acquirer buys the
voting shares of the target company, but both remain as separatelegal entities
– a holding company controls one or more other companies with aminimal equity investment
Consolidation:– when 2 or more companies are combined to form an entirely new
entity
– more common in U.S.
• Acquirer may pay in cash, in its own shares, or in both
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
3 Types of Mergers LT 20-3
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
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Negotiated vs. Tender Offers LT 20-4
Negotiated Offer:
– a “friendly” merger that is negotiated between officersand 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 firmagainst its will (an “unfriendly takeover”)
– unsolicited tender offers for a target company havegained in popularity
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Takeover Terminology LT 20-5
White Knight:
– a friendly company that agrees to bid a higher price fora targeted company
Crown Jewels:
– targeted company sells prize division or asset ofcompany to make it less attractive to buyer
Poison Pill:
– present shareholders entitled to buy more shares atreduced prices
Golden Parachute:
– contract that pays existing management if they losetheir jobs in a takeover
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Why Merge? LT 20-6
Financial motives:
– to reduce risk through diversification
– to increase operating efficiency
– to improve access to financial markets
– to obtain a tax carry-forward benefit
Non-financial motives:
– to protect / increase market share
– to expand through acquisition rather than internalgrowth
– to expand marketing and management capabilities
– to allow for new product development
– to provide synergistic benefits (“2+2=5”)
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Motives of Selling Stockholders LT 20-7
• Price offered for their stock is attractive
• Desire to receive acquiring firm’s stock which may havegreater acceptability in the market
• Provides shareholders an opportunity to diversify theirholdings
• Officers of selling company may receive attractive post-merger management contracts
• Avoids the bias against smaller businesses