CH.11 MERGERS AND ACQUISITIONS

1
CH.11MERGERS AND ACQUISITIONS
2
Motivation for MA

• Taking advantage of economics of scale
• Improving target management
• Combining complementary resources
• Capturing tax benefits
• Providing low-cost financing to financially
  constrained target
• Increasing product-market rents

3
Acquisition Pricing

• Analyzing premium offered to target stockholders
• Compare the premium offered to target
  stockholders to premium offered in similar
  transactions
• Problems (1) how to define a comparable
  transactions? (2) measured premiums can be
  misleading if an offer is anticipated by
  investors and (3) ignores the value of the
  target to the acquirer after the acquisition

4
Acquisition Pricing (Contd)

• Analyzing value of the target to the acquirer
• Compare the offer price to the estimated value of
  the target to the acquirer
• Computed using the valuation techniques discussed
  in ch 7 8

5
Acquisition Pricing (Contd)

• Earnings multiples
• Forecasting earnings assuming no acquisition
• Determining the price-earnings multiple
• Use the pre-acquisition PE multiple?
• Limitations (1) growth expectations are likely
  to change. Valued using a multiple for firms with
  comparable growth and risk characteristics (2)
  premerger PE multiples are unavailable for
  unlisted targets and (3) ensure that the
  multiple is calculated prior to any acquisition
  announcement

6
Acquisition Pricing (Contd)

• Discounted abnormal earnings or cash flows
• Forecast abnormal earnings/free cash flows
• Compute the discount rate use postacquisition
  cost of capital/cost of equity
• Analyze sensitivity

7
Acquisition Financing

• Effect of form of financing on target
  stockholders
• Tax effects
• Transaction costs and the form of financing
• Effect of form of financing on acquiring
  stockholders
• Capital structure
• Information problem

8
Acquisition Outcome

• Other potential acquirers who could pay an even
  higher premium to target stockholders than is
  currently offered
• Target management entrenchment likely to oppose
  an offer