M&a Exam Review
Chapter 28
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
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