Transcript Mergers, Aqcuisitions and Corporate Control

Mergers, Aqcuisitions and
Corporate Control
June 2007
Recent Mergers
Acquiring Company
American Online
Chevron
JDS Uniphase
Deutsche Telecom
BP Amoco (UK)
Echostar Communications
Hewlett-Packard
American Intl. Group
Phillips Petroleum
Selling Company
Time Warner
Texaco
SDL, Inc.
VoiceStream Wireless
Atlantic Richfield
Hughes Electronics
Compaq Computer
American General Corp.
Conoco
Payment
($ billions)
106.0
42.9
41.1
29.4
27.2
25.8
25.0
24.6
24.2
Definition
Merger: Combination of two firms into one,
with the acquirer assuming assets and
liabilities of the target firm.
The Merger Market
Tools Used To Acquire
Companies
Proxy Contest
Tender Offer
Acquisition
Leveraged
Buy-Out
Merger
Management
Buy-Out
Proxy Contest
• Takeover attempt in which outsiders
compete with management for
shareholders’ votes.
• Also called Proxy Fight
• Most proxy contests fail because outsiders
use their own limited money while
management can use the corporation’s
funds and lines of communication with
shareholders to defend itself
Acquicisiton
• Takeover of a firm by purchase of that
firm’s common stock or assets
• The acquiring company runs the firm after
merger
• Must have the approval of at least 50% of
the shareholders of each firm
Leveraged Buy-Out
• Acquisition of the firm by a private group
using substansial borrowed funds.
Management Buy-Out
• Acquisition of the firm by its own
management in a leveraged buyout
Tender Offer
• Takeover attempt in which outsiders
directly offer to buy the stock of the firm’s
shareholders.
• The acquiring firm can bypass the target
firm’s management altogether.
• If the tender offer is succesful, the buyer
will get control and can replace the
existing management
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 costs
$
$
$
Sensible Reasons for Mergers
Economies of Vertical Integration
– Control over suppliers “may” reduce costs.
– Over integration can cause the opposite
effect.
Pre-integration
Post-integration
(less efficient)
(more efficient)
Company
S
S
S
S
S
Company
S
S
S
Sensible Reasons for Mergers
Combining Complementary Resources
Merging may results in each firm filling in the
“missing pieces” of their firm with pieces from
the other firm.
Firm A
Firm B
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.
Evaluating Mergers
• 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)
Evaluating Mergers
• Economic Gain
Economic Gain = PV(increased earnings)
=
New cash flows from synergies
discount rate