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2/23/2019

FM-2
Mergers and Acquisitions – An Intro

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Differences

Basic Forms of Acquisitions


Merger: Combination of two or more companies into one (aka
Amalgamations)
Absorption
Consolidation
Purchase of Division or Plant
Takeover: Acquisition of a certain stake in the equity of the
target company

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Divestitures – the mirror image

Demerger: Transfer of one or more business divisions to form


a new entity and distributes the shares of the new company
to the parent company’s stockholders (aka spin-off)

Partial Selloff: sells a piece of itself to another company

Equity carveout: Transfer of one or more business divisions to


form a new entity and then sells shares in the division to the
public

Unifying thread: Corporate restructuring – activities that


significantly expand or contract a firm’s operations or modify
its financial structure

Diversification

Mergers achieve risk reduction through diversification


wrt earnings of merging entities
When is this risk reduction maximal?
Is the merger a prerequisite?

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Earnings growth

Suppose Firm A acquires Firm T with the following premerger


information
Firm A Firm T Post merger
EPS 2 2
Price per share 40 20
PE ratio 20 10
No. of shares 10 mn 10 mn
Total earnings 20 mn 20 mn
Total Value 400 mn 200 mn

Firm A plans to acquire firm B

Firm A Firm B
Market price per 50 20
share
No. of shares 1 mn 0.5 mn

Merger is expected to bring gains with a PV of 10 mn.


Board of firm B has indicated that it will agree to a sale, if A
offers 15 mn in cash.
Should firm A go ahead?
What is the NPV for B in this?
What should be the post-merger stock price?

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Cash vs Stock acquisition

What if A offers 15 mn in stocks? Will B’s board accept it?


What should be the post merger share price?

What if the synergy is expressed in terms of the post-merger


PE ratios? And there are two different estimates of synergy?

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