Mergers and Acquisitions
28-1.What are the two primary mechanisms under which ownership and control of a public corporation can change?
Either another corporation or group of individuals can acquire the target firm, or the target firm can merge with another firm.
28-2.Why do you think mergers cluster in time, causing merger waves?
There are many competing theories as to why this is so. They generally fall into two camps: either stock market valuations drive merger activity or industry shocks accompanying economic expansions drive merger activity. It is clear that merger activity is much greater during economic expansions than during contractions and that merger activity strongly correlates with bull markets. Thus, there must be something about economic expansions in general and higher stock market valuations in particular that grease the wheels of the merger process. However, unless you are willing to believe that the majority of managers simply buy other companies because they can, without regard to economic reasoning, this can’t be the whole story. There must be real economic impetus to the activity. Many of the same technological and economic conditions that lead to bull markets also motivate managers to reshuffle assets through merger and acquisitions. Thus, it takes a combination of forces usually only present during strong economic expansions to drive peaks in merger activity.
28-3.What are some reasons why a horizontal merger might create value for shareholders?
Horizontal mergers are more likely to create value for acquiring shareholders. Horizontal mergers combine two firms in the same industry. This provides for greater potential synergies in eliminating redundant functions within the two firms and potentially increased pricing power with both vendors and customers.
28-4.Why do you think shareholders from target companies enjoy an average gain when acquired, while acquiring shareholders on average often do not gain anything?
The acquiring firm has to compete against other firms, thus reducing the gains it can obtain from the transaction. Target shareholders benefit from this competition, as they obtain higher bids for the company.
28-5.If you are planning an acquisition that is motivated by trying to acquire expertise, you are basically seeking to gain intellectual capital. What concerns would you have in structuring the deal and the post-merger integration that would be different from the concerns you would have when buying physical capital?
In cases where you are buying a lot of intangible assets, especially human capital, you have to be particularly worried about how you are going to create incentives for the target’s employees to stay-on. Retention bonuses are common for key employees in these types of acquisitions. It is also hard to be successful with a hostile acquisition when retention of target employees is critical. Keeping uncertainty low and moving quickly during the integration phase are both critical to acquisitions of expertise.
28-6.Do you agree that the European Union should be able to block mergers between two U.S.-based firms? Why or why not?
The argument can go either way on this. Some of the critical factors to consider are: What is the social good created by antitrust regulation? Do European regulators have a right to regulate firms doing business in Europe, regardless of where those firms are headquartered? What would be the alternatives?
28-7.How do the carryforward and carryback provisions of the U.S. tax code affect the benefits of merging to capture operating losses?
Carryforward and carryback provisions generally reduce the attractiveness of tax losses as a motivation to merger. Since the tax loss motivation is based on the ability of a larger firm to capture the tax deduction from the losses of the target, it requires that the target not be able to capture the value of that...