Mergers

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Fundamentals of Financial Management, 12e
Chapter 23: Mergers and Other Forms of Corporate Restructuring

After studying Chapter 23,
you should be able to:

Chapter 23

Explain why a company might decide to engage in corporate
restructuring.
Understand and calculate the impact on earnings and on market value of companies involved in mergers.
Describe what benefits, if any, accrue to acquiring company
shareholders and to selling company shareholders.
Analyze a proposed merger as a capital budgeting problem.
Describe the merger process from its beginning to its conclusion. Describe different ways to defend against an unwanted takeover. Discuss strategic alliances and understand how outsourcing has contributed to the formation of virtual corporations.

Explain what “divestiture” is and how it may be accomplished. Understand what "going private" means and what factors may motivate management to take a company private.
Explain what a leveraged buyout is and what risk it entails.



Mergers and Other
Forms of Corporate
Restructuring










© Pearson Education Limited 2004
Fundamentals of Financial Management, 12/e
Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI

23-1



23-2

Mergers and Other Forms
of Corporate Restructuring

Mergers and Other Forms
of Corporate Restructuring

 Sources

of Value
 Strategic Acquisitions
Involving Common Stock
 Acquisitions and Capital
Budgeting
 Closing the Deal
23-3

 Takeovers,

Tender Offers, and

Defenses
 Strategic Alliances
 Divestiture
 Ownership Restructuring
 Leveraged Buyouts
23-4

What is Corporate
Restructuring?

Why Engage in
Corporate Restructuring?

Any change in a company’s:
1. Capital structure,
2. Operations, or
3. Ownership
that is outside its ordinary course of
business.








So where is the value coming
from (why restructure)?
23-5

Van Horne & Wachowicz,
© Pearson Education Limited 2004



23-6

XXIII - 1

Sales enhancement and operating
economies*
Improved management
Information effect
Wealth transfers
Tax reasons
Leverage gains
Hubris hypothesis
Management’s personal agenda
* Will be discussed in more detail in the following two slides.

by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI

Fundamentals of Financial Management, 12e
Chapter 23: Mergers and Other Forms of Corporate Restructuring

Sales Enhancement
and Operating Economies






Sales Enhancement
and Operating Economies

Sales enhancement can occur because of
market share gain, technological
advancements to the product table, and
filling a gap in the product line.
Operating economies can be achieved
because of the elimination of duplicate
facilities or operations and personnel.
Synergy -- Economies realized in a merger
where the performance of the combined firm
exceeds that of its previously separate parts.

23-7

Economies of Scale -- The benefits of size
in which the average unit cost falls as
volume increases.





Horizontal merger: best chance for economies
Vertical merger: may lead to economies
Conglomerate merger: few operating
economies
Divestiture: reverse synergy may occur

23-8

Strategic Acquisitions
Involving Common Stock

Strategic Acquisitions
Involving Common Stock

Strategic Acquisition -- Occurs when one
company acquires another as part of its overall
business strategy.




Example -- Company A will acquire Company B
with shares of common stock.

23-9

Company A
$20,000,000

Company B
$5,000,000

Shares outstanding

5,000,000

2,000,000

Earnings per share

When the acquisition is done for common stock, a
“ratio of exchange,” which denotes the relative
weighting of the two companies with regard to
certain key variables, results.
A financial acquisition occurs when a buyout firm is
motivated to purchase the company (usually...
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