CHAPTER

TWENTY

External Growth
Through Mergers

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Table 20-1
Ten largest mergers and acquisitions in 1998
Buyer

Block
Hirt
Short

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Exxon . . . . . .
Travelers Inc. . .
SBC . . . . . . .
NationsBank . . .
ATT . . . . . . .
Bell Atlantic . . .
British Petroleum
Daimler-Benz . .
WorldCom . . . .
Zenca Group . . .
Sandoz AG. . . .
Mitsubishi Bank .

Acquired Company
.
.
.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.
.
.

.
.
.
.
.
.
.
.
.
.
.
.

Mobil
Citicorp
Ameritech
BankAmerica
Tele-Communications
GTR
Amoco
Chrysler
MCI
AB Astra
Ciba-Geigy AG
Bank of Tokyo

Value
($ billions)
$79
73
66
60
54
53
49
43
41
35
34
34

Note: Figures in U.S. dollars

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Table 20-2
Largest (proposed) mergers and acquisitions in Canada in 1998
Value
(Cdn.
$ billions)

Merger Partners

Block
Hirt
Short

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Royal Bank . . . . . .
CIBC
. . . . . . .
Seagram . . . . . . . .
Trans Canada Pipelines .
Northern Telecom . . .
Union Pacific Resources.
Bowater . . . . .
Call-Net . . . . . . .
Nova. . . . . . . . .
Merrill Lynch . . . . .

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. . Bank of Montreal
Toronto Dominion
. . Polygram
. . Nova
. . Bay Networks
. . Norcen Energy
Avenor
Fonorola
Huntsman
. . Midland W

$23.1
22.0
15.6
15.0
13.4
3.7
2.5
1.8
1.3
1.3

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Table 20-3
Financial data on potential merging firms
Small
Corporation
Total earnings. . . . . . .
Shares of
stock outstanding . . . .
Earnings per share . . . .
Price-earnings ratio (P/E) .
Market price per share . .

. . $200,000
.
.
.
.

.
.
.
.

50,000
$4.00
7.5x
$30.00

Expand
Corporation
$500,000
200,000
$2.50
12x
$30.00

Block
Hirt
Short
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Table 20-4
Post-merger earnings per share

Total earnings: Small ($200,000) + Expand ($500,000) . . . $700,000

Shares outstanding in surviving corporation:
Old (200,000) + New (50,000) . . . . . . . . . . . . .

New earnings per share for Expand Corporation =

$700,000
250,000

250,000

= $2.80

Block
Hirt
Short
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Figure 20-1
Impact of alternate plans on Expand Corporation
Earnings per share for Expand Corporation ($)

With Growth Corporation

Without merger
With Small Corporation

7
6
5
4
3
2
1
0
1

10

Year

Block
Hirt
Short

No merger . . . . . . . . . . . . . . . . . . . .
Merger with Small Corporation . .
Merger with Growth Corporation

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Immediate
Effect
$2.50
2.62
2.12

10-year
Effect
$6.49
6.07
6.79
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Figure 20-2
Risk-reduction portfolio benefits
Probability of occurrence
1.00
Without merger

With merger

.50

Block
Hirt
Short
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Earnings per share

Earnings per share

= $2.50 (expected value)

= $1.00 (standard deviation)

= $2.50 (expected value)

= $ .50 (standard deviation)
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Chapter 20 - Outline

LT 20-1

Mergers vs. Consolidations

3 Types of Mergers
Negotiated vs. Tender Offers
Takeover Terminology
Why Merge?
Motives of Selling Shareholders

Block
Hirt
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Mergers vs. Consolidations

LT 20-2

A business combination can be either a merger or a

consolidation
Merger:
a combination of 2 or more companies where the acquirer buys the
voting shares of the target company, but both remain as separate
legal entities
a holding company controls one or more other companies with a
minimal equity investment

Consolidation:
when 2 or more companies are combined to form an entirely new
entity
more common in U.S.
Block
Hirt
Short

Acquirer may pay in cash, in its own shares, or in both

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3 Types of Mergers

LT 20-3

Horizontal Merger:
unites direct competitors
ex., 2 shoe companies combine
Vertical Merger:
unites buyers and sellers
ex., a shoe manufacturer buys a leather producer
Conglomerate Merger:
merging of firms in totally unrelated industries
ex., a shoe company joins with a beverage company

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Negotiated vs. Tender Offers

LT 20-4

Negotiated Offer:
a friendly merger that is negotiated between officers
and directors of the participating corporations
it is agreed upon by all sides

Block
Hirt
Short

Takeover (or Unsolicited) Tender Offer:

when a company attempts to acquire a target firm
against its will (an unfriendly takeover)
unsolicited tender offers for a target company have
gained in popularity
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Takeover Terminology

LT 20-5

White Knight:
a friendly company that agrees to bid a higher price for
a targeted company
Crown Jewels:
targeted company sells prize division or asset of
company to make it less attractive to buyer
Poison Pill:
present shareholders entitled to buy more shares at
reduced prices
Golden Parachute:
contract that pays existing management if they lose
their jobs in a takeover
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Why Merge?

LT 20-6

Financial motives:
to reduce risk through diversification
to increase operating efficiency
to improve access to financial markets
to obtain a tax carry-forward benefit
Non-financial motives:
to protect / increase market share
to expand through acquisition rather than internal
growth
to expand marketing and management capabilities
to allow for new product development
to provide synergistic benefits (2+2=5)

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Motives of Selling Stockholders

LT 20-7

Price offered for their stock is attractive

Desire to receive acquiring firms stock which may have
greater acceptability in the market
Provides shareholders an opportunity to diversify their
holdings
Officers of selling company may receive attractive postmerger management contracts
Block
Hirt
Short

Avoids the bias against smaller businesses

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