mergers principles of corporate finance brealey and myers sixth edition slides by matthew will...
TRANSCRIPT
Mergers
Principles of Corporate FinanceBrealey and Myers Sixth Edition
Slides by
Matthew Will Chapter 33
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
33- 2
Topics Covered
Sensible Motives for Mergers Some Dubious Reasons for Mergers Estimating Merger Gains and Costs The Mechanics of a Merger Takeover Battles Mergers and the Economy
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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1997 and 1998 Mergers
Selling Company Acquiring Company Payment, billions of dollars
NYNEX Bell Atlantic 21.0McDonnell Douglas Boeing 13.4Digital Equipment Compaq Computer 9.1Schweizerischer Union Bank of Swiz. 23.0Energy Group PCC Texas Utilities 11.0Amoco Corp. British Petroleum 48.2Sun America American Intl. 18.0BankAmerica Corp. Nationsbank Corp. 61.6Chrysler Daimler-Benz 38.3Bankers Trust Corp. Deutsche Bank AG 9.7Netscape America Online 4.2Citicorp Travelers Group Inc. 83.0
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Economies of Scale
A larger firm may be able to reduce its per unit cost by using excess capacity or spreading fixed costs across more units.
$ $$Reduces costsReduces costs
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Economies of Vertical Integration Control over suppliers “may” reduce costs. Over integration can cause the opposite effect.
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Economies of Vertical Integration Control over suppliers “may” reduce costs. Over integration can cause the opposite effect.
Pre-integration (less efficient)
Company
S
S
S
S
S
S
S
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Economies of Vertical Integration Control over suppliers “may” reduce costs. Over integration can cause the opposite effect.
Pre-integration (less efficient)
Company
S
S
S
S
S
S
S
Post-integration (more efficient)
Company
S
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Combining Complementary Resources
Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm.
Firm A
Firm B
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Combining Complementary Resources
Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm.
Firm A
Firm B
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Sensible Reasons for Mergers
Mergers as a Use for Surplus Funds
If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Dubious Reasons for Mergers
Diversification Investors should not pay a premium for
diversification since they can do it themselves.
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Dubious Reasons for Mergers
The Bootstrap Game
Acquiring Firm has high P/E ratio
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Dubious Reasons for Mergers
The Bootstrap Game
Acquiring Firm has high P/E ratio
Selling firm has low P/E ratio (due to low number of shares)
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Dubious Reasons for Mergers
The Bootstrap Game
Acquiring Firm has high P/E ratio
Selling firm has low P/E ratio (due to low number of shares)
After merger, acquiring firm has short term EPS rise
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Dubious Reasons for Mergers
The Bootstrap Game
Acquiring Firm has high P/E ratio
Selling firm has low P/E ratio (due to low number of shares)
After merger, acquiring firm has short term EPS rise
Long term, acquirer will have slower than normal EPS growth due to share dilution.
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Dubious Reasons for Mergers
Earnings per dollar invested
(log scale)
NowTime
.10
.067
.05
Muck & Slurry
World Enterprises (before merger)
World Enterprises (after merger)
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Estimating Merger Gains
Questions Is there an overall economic gain to the merger? Do the terms of the merger make the company
and its shareholders better off?
????
PV(AB) > PV(A) + PV(B)
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Estimating Merger Gains
Economic Gain
Economic Gain = PV(increased earnings)
= New cash flows from synergies
discount rate
©The McGraw-Hill Companies, Inc., 2000Irwin/McGraw Hill
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Takeover Defenses
White Knight - Friendly potential acquirer sought by a target company threatened by an unwelcome suitor.
Shark Repellent - Amendments to a company charter made to forestall takeover attempts.
Poison Pill - Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.