Mergers

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Mergers

• Chapter 32

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Mergers

• Horizontal
• Vertical
• Conglomerate

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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


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Sensible Reasons for Mergers

• Economies of Vertical Integration
• Control over suppliers may reduce costs.
• Over integration can cause the opposite effect.

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Sensible Reasons for Mergers

• Combining Complementary Resources
• Merging may result in each firm filling in the
  missing pieces of their firm with pieces from
  the other firm.

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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.

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Sensible Reasons for Mergers

• Eliminating Inefficiencies
• Change and improve management team
• Industry Consolidation
• Improve efficiency when too many firms/too much
  capacity

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Dubious Reasons for Mergers

• Diversification
• Investors should not pay a premium for
  diversification since they can do it themselves.

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Dubious Reasons for Mergers

• The Bootstrap Game

Acquiring Firm has high P/E ratio
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Dubious Reasons for Mergers

• The Bootstrap Game

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Dubious Reasons for Mergers
Earnings per dollar invested (log scale)
World Enterprises (after merger)
World Enterprises (before merger)
Muck Slurry
.10 .067 .05
Time
Now
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Estimating Merger Gains

• Questions
• Is there an overall economic gain to the merger?
• Do the terms of the merger make the company and
  its shareholders better off?

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Estimating Merger Gains
Suppose A wants to acquire B
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Estimating Merger Gains
Example Two firms merge creating 25 million in
synergies. If A buys B for 65 million, the cost
is 15 million.
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Estimating Merger Gains

• Economic Gain

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Estimating Merger Gains

• Example - Given a 20 cost of funds, what is the
  economic gain, if any, of the merger listed
  below?

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Takeover Methods

• Tools Used To Acquire Companies

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Takeover Defenses

• White Knight
• Shark Repellent
• Poison Pill -

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Gains from Mergers

• Gains go to target firm
• Why?
• Smaller and gains are higher as proportion of
  value
• Price gets bid up during process
• They can say no!