CH 26
CH 26
CHAPTER 26
Mergers, LBOs, Divestitures,
and Holding Companies
Types of mergers
Merger analysis
Role of investment bankers
LBOs, divestitures, and holding
companies
Copyright © 2002 by Harcourt, Inc. All rights reserved.
26 - 2
Diversification
Purchase of assets at below
replacement cost
Acquire other firms to increase
size, thus making it more difficult
to be acquired
Friendly merger:
The merger is supported by the
managements of both firms.
(More...)
Copyright © 2002 by Harcourt, Inc. All rights reserved.
26 - 7
Hostile merger:
Target firm’s management resists
the merger.
Acquirer must go directly to the
target firm’s stockholders, try to
get 51% to tender their shares.
Often, mergers that start out
hostile end up as friendly, when
offer price is raised.
= $221.0 million.
= $163.9 million.
Copyright © 2002 by Harcourt, Inc. All rights reserved.
26 - 15
$9.00 $16.39
Price
Paid for
0 5 10 15 20 Target
Bargaining Range =
Synergy
Pooling of interests:
Assumes a merger among equals.
New balance sheet is merely the sum of
the two existing balance sheets.
No income statement effects other than
summing the two income statements.
(More...)
Copyright © 2002 by Harcourt, Inc. All rights reserved.
26 - 26
Purchase:
The assets of the acquired firm are
“written up” to reflect purchase price if it
is greater than the net asset value.
Goodwill is often created, which appears
as an asset on the balance sheet.
Common equity account is increased to
balance assets and claims.
Goodwill is amortized and expensed over
time, thus reducing future reported
earnings.
Copyright © 2002 by Harcourt, Inc. All rights reserved.
26 - 27
Identifying targets
Arranging mergers
Developing defensive tactics
Establishing a fair value
Financing mergers
Arbitrage operations
Advantages:
Control with fractional ownership.
Isolation of risks.
Disadvantages:
Partial multiple taxation.
Ease of enforced dissolution.