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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 corporations
funds and lines of communication with
shareholders to defend itself

Acquicisiton
Takeover of a firm by purchase of that
firms 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 firms
shareholders.
The acquiring firm can bypass the target
firms 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

Company

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