CH.11MERGERS AND ACQUISITIONS

Motivation for M&A

Taking advantage of economics of scale Improving target management Combining complementary resources Capturing tax benefits Providing low-cost financing to financially

constrained target Increasing product-market rents

Acquisition Pricing

Analyzing premium offered to target stockholdersCompare the premium offered to target

stockholders to premium offered in similar transactions

Problems: (1) how to define a comparable transactions?; (2) measured premiums can be misleading if an offer is anticipated by investors; and (3) ignores the value of the target to the acquirer after the acquisition

Acquisition Pricing (Cont’d)

Analyzing value of the target to the acquirerCompare the offer price to the estimated

value of the target to the acquirerComputed using the valuation techniques

discussed in ch 7 & 8

Acquisition Pricing (Cont’d) Earnings multiples

Forecasting earnings: assuming no acquisition

Determining the price-earnings multiple: Use the pre-acquisition PE multiple? Limitations: (1) growth expectations are likely to

change. Valued using a multiple for firms with comparable growth and risk characteristics; (2) premerger PE multiples are unavailable for unlisted targets; and (3) ensure that the multiple is calculated prior to any acquisition announcement

Acquisition Pricing (Cont’d)

Discounted abnormal earnings or cash flowsForecast abnormal earnings/free cash flowsCompute the discount rate: use

postacquisition cost of capital/cost of equityAnalyze sensitivity

Acquisition Financing

Effect of form of financing on target stockholdersTax effectsTransaction costs and the form of financing

Effect of form of financing on acquiring stockholdersCapital structure Information problem

Acquisition Outcome

Other potential acquirers who could pay an even higher premium to target stockholders than is currently offered

Target management entrenchment: likely to oppose an offer