Chapter 4

-Complementary fit

-Supplementary fit

-Conglomerate

-Congeneric merger

Acquisition that helps to compensate for some weakness of the acquiring firm

Target reinforces strength of the acquiring firm

Acquisitions of companies outside of their other lines of business

-Acquisition of related enterprise but not producers of same product

If gain is greater than 0 + costs of merger

1. Cash payments to stockholders

2. Securities - may dilute equity

3. Investment banking fees

4. Legal fees

5. Other fees

6. Interest payments on debt

-Growth

-Synergy

-Diversification

-Improved management

-Financial synergy

-Organic growth: Internal growth

-Non-organic growth: Growth through acquisitions

-Insufficient internal growth —> acquisition

-Gains from quicker development

-Falling stock prices

-Increasing output —> declining unit cost

-May only lasts with certain output

Being able to offer wide range of services / products to same customers

-Cost reducing synergies

-Revenue enhancing synergies

-These are easier to predict & achieve

-EOS

-Harder to achieve

-Harder to predict

-Example: Cross-selling of products / services

-Synergy —> 2+2=5 —> combined firms are more valuable than individually

-Operating economies: Reduction in operating costs

• Elimination of duplicate facilities

• Reduction in various departments (Marketing, Sales)

-Focused on fragmented industries

-Featured industries: Dentists, home builder

-Popular motive since 1990s

-Distribution inclued systems for getting products to companies

-Poor motive for acquisition

-Shareholders can diversify their portfolios less expensively than companies

-Large conglomerates try to advertise company to appeal to investors

-Ads are expensive & inspecific

-obtain the optimal capital structure

-form a lower risk investment for shareholders

-Managers seek to acquire firms for personal motives (pay premium)

-Managers may believe their own valuations are superior to market (overpay)

-Hubris does not explain all takeovers

-stock price of acquirer falls after announcement

-significantly negative returns for acquirer after announcement

-Sometimes no negative response

Managers believe their valuation is superior to the market & then may overpay

Managers may know they are overpaying but they do so to pursue their own goals (Principal-Agent Problem)

-Companies that make acquisitions —> lose equity value —> likely to become takeover targets

-Linked with stock price performance of bad bidder —> low market value —> acquisition of bad bidder possible

-Concept associated with many auction contests

-Overestimate value of auction item —> overbid & win auction

-Measure overpayment —> bidders overpaid by 67%

-Managers acquire to increase size —> higher compensation

-Companies with acquisitions —> positive relationship between size & compensation

-Compensation increased with good acquisition & stayed same with bad acquisition

-Low P/E ratio & high book value

-High liquidity

-High CF

-Idea: 1 & 2 Ranking gives competitors major advantage

-Acquire comapnies that are not number 1 & 2 if they could infuse capital and help companies to achieve position itself

-if 1&2 can’t be achieved —> cut losses —> sell & use capital in more productive business

-Re-domicile Deals —> acquire company in lower taxed country & transfer headquarter

-Tax inversion —> move headquarter to low tax nation while operating in high tax nation