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Lecture 14
Corporate Finance
Lecture 14 :
Mergers & Acquisitions
Corporate Finance
Lecture 14
Corporate Finance
Lecture 14
Corporate Finance
Lecture 14
Financial activity
Strategic activity
Conglomerate activity
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Acquirer
Target
100
50
1,000
1,000
0.10
0.05
12x
8x
1.20
0.40
1,200
400
1 new share for 3 existing
shares
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Combined Group
1,333
150
0.1125
12x
1.35
1,800
Assumptions :
Terms of share swap at respective market price
If target company is acquired at premium then acquirer issues more
shares resulting in reduction in EPS
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Empirical Evidence
! Accounting studies
! Examine the financial results (accounting data) to draw
inferences about the underlying economic impact of
mergers & acquisitions
!
Examples of measure :
Net income
Operating margin
Return on equity (ROE)
Return on assets (ROA)
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Empirical Evidence
!
!
!
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Empirical Evidence
!
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Empirical Evidence
! Event studies
! Shareholders from target firms gain from takeovers mainly
due to the premium paid by acquirer & slightly lower
return from negotiated mergers
Return between 16 - 30% around the date of the
announcement of a tender offer
During the 1980s -> Substantial returns of average 53%
Return to about 10% in negotiated mergers
! Return to shareholders of bidding firms : Small, timevarying & may be positive or negative
Announcement return to bidders in tender offers from
5% gain in the 1960s to 1% loss in the 1980s
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Empirical Evidence
!
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Value of Bs stock
No merger
PVB
Merger
$75
$15
No. of Shares
1m
600,000
$75m
$9m
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If market made a mistake i.e. MVB < PVB => Cost < 0
=> B is a bargain & merger would be worthwhile to A
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Stocks
! Cost depends on gains which
show up in post merger price
! Mitigates effects. Bs
shareholders benefit or bear the
effects as they are part owners of
AB
! If A is pessimistic about post
merger share value then stock
alternative is better
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Revaluation of assets
Market price will rise thereby causing the takeover to be
more expensive
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