Merger Motives and Target

Valuation: A Survey of Evidence

from CFOs
Tarun K. Mukherjee, Halil Kiymaz, and H. Kent Baker

This study provides insights about the motives for mergers and acquisitions (M&As) as well as
divestitures and the practices used to value targets during 1990-2001. The survey evidence shows that
the primary motivation for M&As is to achieve operating synergies while the top-ranked reason for
divestitures is to increase focus. The results also show that most firms believe diversification is a
justifiable motivefor acquisitions most notably as a means of reducing losses during economic downturns.
Discounted cashflow methods dominate market multiples as the preferred approach for valuing both
publicly-held and closely-held companies. Perhaps the most surprising finding is that although firms
often define merger cash flows as the equity cash flows from the target, the discount rate used by
acquiring firms is their own WACC rather than the targets 'cost of equity. This finding reflects one of the
most persistent bad practices in valuing M&As and might lead to overpayment to targets. [G34]

•The determinants of merger and acquisition (M&A)
behavior have long been a topic of interest to
researchers. Stewart, Harris, and Carleton (1984)
observe that empirical studies on M&A behavior have
typically followed one of two general strategies. Some
researchers have examined the differences between the
pre-merger and post-merger performance of merged
firms. Others have focused on identifying differences
in the characteristics of firms involved versus those
not involved in M&As. Despite each having its flaws,
both strategies have produced some valuable insights
into M&A behavior. Although voluminous research exists
on M&As over the past two decades, the observation
made by Stewart et al. (1984) is still valid today.
In this study, we follow a less well-traveled path to
understanding M&A behavior by asking the decision
makers. Unlike most research on M&As, we survey
chief financial officers (CFOs) of US firms to obtain
direct evidence of managerial perspectives about
M&As. As with other approaches used to investigate
M&A behavior, survey research has its strengths and
Tarun K. Mukherjee is the James Moffett Chair in Financial
Economies at the University of New Orleans in New Orleans,
LA 70148. Halil Kiymaz is an Associate Professor of Finance 'During the 1990s, the number of hostile takeovers and leveraged
al Rollins College in Winter Park. FL 32789-4499. H. Kent buyouts declined substantially, while the number of cross-border
Baker is University Professor of Finance at American Universitymergers increased. See, for example, Andrade, Mitchell, and
in Washington. DC 20016-8044.
weaknesses.' Surveys of managers do not replace the
two general approaches previously mentioned to
examine M&A behavior, but they complement them
and yield additional insights. As Bruner (2002, p. 50)
notes, "The task must be to look for patterns of
confirmation across approaches and studies much like
one sees an image in a mosaic of stones."
Several reasons underlie the importance of taking a
fresh look at M&As by conducting a new survey. First,
more than a decade has passed since the publication
of the last academic survey on the topics addressed
in our study.^ Hence, this survey of executives
provides a means of benchmarking how academics
see the world. Second, the largest merger wave in
history occurred during 1992-2000. However, the
characteristics of the takeovers in the 1990s differ
greatly from those of earlier periods.•* Third, the
'Bruner (2002) compares the strengths and weaknesses of four
research approaches (event studies, accounting studies, survey
of managers, and case studies) used to examine the profitability
of M&As.
^To our knowledge, Ingham, Kran, and Lovestam (1992)
published the most recent academic study on M&As. As Bruner
(2002) notes, practitioners have also conducted surveys to
assess the profitability of M&As and he sumniarizes the results
of 13 surveys.
Stafford (2001) and Holmstrom and Kaplan (2001).
8 JOURNAL OF APPLIED FINANCE — FALL/WINTER 2004
importance attached to factors motivating M&As
changes over time. As Sorenson (2000) notes, a
generally accepted tenet is that different factors
motivated the 1990s merger movement compared with
earlier ones in the 1960s or the 1970s-1980s. For
example, Grinblatt and Titman (2002) characterize the
1960s and 1970s as a period of conglomerate
acquisitions primarily motivated by fmancial synergies,
taxes, and incentives; the 1980s as one of financial
acquisitions motivated by taxes and incentive
improvements; and the 1990s as a period in which
strategic acquisitions motivated by operating
synergies became increasingly important.
The scope of our study is somewhat broader than
previous academic surveys on M&As such as Baker,
Miller, and Ramsperger (1981a, 1981b) and Mohan et
al. (1991). In this study, we include questions on M&A
motives, valuation models, and other pertinent issues.
Specifically, the study's three main objectives are to:
(1) identify primary motivations for engaging in
M&As and divestitures during 1990-2001;
(2) learn how managers view the relationship
between diversification and firm value; and
(3) gain insights about valuation techniques used
to value target firms.
In addition, we seek managers' opinions on some
statements containing results of empirical studies
relevant to M&As.
Although this study is partially exploratory in nature,
we have a priori expectations about responses from
the survey participants. Regarding our first objective,
a consensus appears from the merger literature that a
premium to the target firm is justified if the merger
produces synergistic benefits. Financial theory
suggests that managers should take actions that
increasefirmvalue. Empirical studies by Bradley, Desai,
and Kim (1988), Mulherin and Boone (2000), and others
support the notion that synergistic effects lead to
value creation. Consequently, we expect managers to
cite synergy as the primary motive for M&As. Similarly,
we expect focus to be the primary motive for
divestitures. Our results confirm these expectations.
We link our second objective to the continuing
academic debate about the effects of diversification
on the value of the mergedfirm.The view expressed in
much of the pertinent literature is that conglomerates
are inefficient and diversification destroys value.'' Yet,
some recent research by Campa and Kedia (2002) and
Villalonga (2004) challenges the notion of a
"See Wernerfelt and Montgomery (1988), Lang and Stulz
(1994), Berger and Ofek (1995), Rajan, Servaes, and Zingales
(2000), Whited (2001), Lamont and Polk (2001, 2002),
among others.
diversification discount and suggests potential value
creation from diversification. Our intention here is to
see where financial managers stand on this debate.
Our evidence shows that an overwhelming majority of
the respondents cast their votes in favor of
diversification as a sound motive for M&As.
The basis of our third objective is a growing body
of evidence (for example, Trahan and Gitman, 1995,
Bruner, Eades, Harris, and Higgins, 1998, and Graham
and Harvey, 2001) showing that managers rely on
discounted cash flow (DCF) based valuation in general
corporate finance settings. In particular, our interest
lies infindingout the extent to which an acquiring firm
relies on the DCF model (in preference to a market
multiple model) when evaluating a target. We anticipate
heavy reliance on DCF methods. Our results on this
particular aspect of the survey, to quote Graham and
Harvey (2001, p. 189), "are both reassuring and
surprising." A reassuringfindingis that most acquiring
firms use present value techniques to evaluate targets.
Surprisingly, despite defining cash fiows as the equity
cash fiows from the target, firms generally use their
own cost of capital rather than the target's cost of
equity as the discount rate. Academics often view the
use of this discount rate as an inappropriate practice.
I. Literature Review
In this section, we discuss the relevant literature about
the motives for M&As and divestitures, the relationship
between diversification and firm value, and valuation
techniques used to analyze the target firm.
A. Motives for M&As
There are probably almost as many motives for
M&As as there are bidders and targets. Yet, grouping
the motives of M&A transactions into various
categories is often useful. Trautwein (1990) offers
several theories of merger motives including efficiency,
monopoly, raider valuation, empire-building, process,
and disturbance theory. Berkovitch and Narayanan
(1993) suggest three major motives for takeovers:
synergy, agency, and hubris. Other motives include
diversification, tax considerations, management
incentives, purchase of assets below their replacement
cost, and breakup value.
Although the rationale may differ from one merger or
acquisition to another, a common measure of success
of a merger is the increased value of the combined firm.'
Based on this measure, synergy stands out as perhaps
'Bruner (2002) eonsiders a merger suecessful as long as it does
not destroy value.
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION
the most justifiable motive in M&As. Sirower (1997)
defines synergy as increases in competitiveness and
resulting cash flows beyond what the two companies
are expected to accomplish independently.* Eccies,
Lanes, and Wilson (1999) outline the source of synergies
as eost savings, revenue enhancements, process
involvements, financial engineering, and tax benefits.
Goold and Campbell (1998) report six forms of synergy
including shared know-how, shared tangible resources,
pooled negotiation power, coordinated strategies,
vertical integration, and combined business creation.'
Several empirical studies lend support to the
importance of synergy as a merger motive. For example,
Bradley, Desai, and Kim (1988) document that a
successful tender offer increases the combined value
of the target and acquiring firms by an average of 7.4%.
Berkovitch and Narayanan (1993) show that synergy
is the primary motive in takeovers with positive total
gains. Maquieira, Megginson, and Nail (1998) examine
260 pure stock-for-stock mergers from 1963 to 1996.
They document significant net synergistic gains in
non-conglomerate mergers and generally insignificant
net gains in conglomerate mergers. Mulherin and Boone
(2000) study the acquisition and divestiture activity of
a sample of 1305 firms from 59 industries during 1990-
1999. The symmetric, positive wealth effects for
acquisitions and divestitures are consistent with a
synergistic explanation for both forms of restructuring.
Houston and Ryngaert (1996) discuss cost cutting,
revenue enhancement, and risk reduction as possible
factors explaining successful acquisitions, with cost-
cutting being the most important for banks. They argue
that most bank acquisitions have not added value to
the acquiring bank's shareholders. This finding
suggests that some of the reasons for undertaking an
acquisition do not warrant the size of the premiums
offered. Based on nine case studies of bank mergers,
Rhoades (1998) finds that all of the cases involve
significant cost cutting in line with pre-merger
projections and four of the nine mergers show clear
efficiency gains relative to peers.
Eun, Kolodny, and Scheraga (1996) test the synergy
hypothesis for cross-border acquisitions using a
sample of foreign acquisitions of US firms during 1979-
1990. Their findings indicate that cross-border
takeovers are generally synergy-creating activities.
Kiymaz and Mukherjee (2000) point to the synergistic
benefit resulting from country diversification. Seth,
'Sirower (1997) further argues that to obtain any synergy
acquiring firms must limit competitors' ability to contest their
or the targets' current input markets, process, or output
markets, and must open new markets where these competitors
cannot respond.
'See Fluck and Lynch (1999) for a theory of financial synergy.
Song, and Pettit (2000) also find that the synergy
hypothesis is the predominant explanation for their
sample of foreign acquisitions of US firms.
B. Motives for Divestitures
Several research studies report that companies often
subsequently divest previous acquisitions. For
example, Kaplan and Weisbach (1992), who study a
sample of large acquisitions completed between 1971
and 1982, find that these acquirers divested almost 44 %
of the target companies by the end of 1989. They
characterize the ex post success of the divested
acquisitions and consider 34 to 50% of classified
divestitures as unsuccessful. Although diversifying
acquisitions are almost four times more likely to be
divested than related acquisitions, they do not find
strong evidence that diversifying acquisitions are less
successful than related ones.
Firms have a wide variety of reasons for divestitures.
For example, a common reason is to increase a firm's
focus. Comment and Jarrell (1995) document a trend
toward corporate focus. John and Ofek (1995) find that
asset sales lead to an improvement in the subsequent
operating performance of the seller's remaining assets.
They find that the improvement in performance occurs
primarily in firms that increase their focus. Borde,
Madura, and Akhigbe (1998) find evidence that
valuation effects are more favorable when foreign
divestitures are for strategic reorganization purposes.
Another reason for divestitures is to eliminate a low-
performing division or business. By divesting the
business, especially one in an unrelated area resulting
from a previous conglomerate merger, a company may
be able to recreate the value destroyed at the time of the
earlier acquisition. Allen et al. (1995) examine the
correction-of-a-mistake hypothesis with a sample of 94
spin-offs that occurred during the 1962-1991 period.
Their results suggest that managers who undertake poor
acquisitions can redeem themselves, at least partially,
by subsequently divesting the unwise acquisition.
A third reason for divestitures is to increase
managerial efficiency. By spinning-off parts of the
business, managers may be able to operate more
efficiently alone in the spun-off firm than together in
the parent firm. Johnson, Klein, and Thibodeaux (1996)
find evidence consistent with the notion that spin-
offs create value by improving investment incentives
and economic performance.
A fourth reason is to achieve a specific organization
form such as through a spin-off or carve-out. By
splitting the firm into its component businesses, the
market may be able to value the components more
accurately than when they are combined. According
to Nanda and Narayanan (1999), when firms are
10
undervalued due to unobservability of divisional cash
flows, they may resort to divestiture to raise capital.
C. Diversification and Firm Value
According to Grinblatt and Titman (2002), purely
diversifying takeovers offer both potential advantages
and disadvantages. A common argument in support of
diversification is that lowering the risk of a firm's stock
increases its attractiveness to investors and thereby
reduces the firm's cost of capital. Diversification may
also enhance a firm's flexibility, allow it to use its
organization more effectively, reduce the probability
of bankruptcy, avoid information problems inherent in
an external capital market by way of internal allocation
of resources, and increase the difficulty of competitors
uncovering proprietary information. On the other hand,
combining two firms can destroy value if managers
misallocate capital by subsidizing unprofitable
business lines. Another disadvantage is that mergers
can reduce the information contained in stock prices.
Whether gains are associated with diversification-
related M&As depends partly on whether
diversification helps or hurts firm values. Much
empirical work focuses on how corporate
diversification affects shareholder value.* Servaes
(1996) reports that the market's attitude toward
diversification depends on the period studied. He finds
diversification discounts or penalties in the 1960s and
1980s, but not during the 1970s. The prevailing wisdom
among fmancial economists since the 1990s has been
that diversified firms sell at a discount relative to the
sum of the imputed values of their business segments.
A stream of literature suggests that the discount on
diversifiedfirmsimplies a destruction of value resulting
from diversification. For example, empirical research
by Morck, Shieifer, and Vishny (1990), Lang and Stulz
(1994), Berger and Ofek (1995), Walker (2000), and
Lamont and Polk (2002) suggests that diversification
related acquisitions may be value reducing.
Financial economists offer many explanations for the
diversification discount. A leading hypothesis
consistent with the notion that diversification destroys
value is the inefficient-internal-capital-market
hypothesis. That is, conglomerates tend to misallocate
their investment funds by cross-subsidizing
investments in divisions with poor growth
opportunities. Alternative explanations also exist for
the diversification discount. For example, managers
may have pursued a diversification strategy even
when it hurts shareholders in order to reduce their
*See Martin and Sayrak (2003) for a survey of recent
developments in the literature on corporate diversification
and shareholder value.
JOURNAL OF APPLIED FINANCE — FALL/WINTER 2004
human capital risk (Amihud and Lev, 1981), entrench
themselves (Shieifer and Vishny, 1989), or pursue size
as an end (Ravenscraft and Scherer, 1987). Whited
(2001) contends that the diversification discount stems
from measurement error. Graham, Lemmon, and Wolf
(2002) attribute the diversification discount to the
performance of recent acquisitions. They show that
much of value reduction occurs because firms acquire
already discounted business units, and not because
diversifying destroys value. Mansi and Reeb (2002)
argue that this documented discount stems from the
risk-reducing effect of corporate diversification.
On the other hand, a recent stream of empirical studies
argues that diversification does not destroy value.
Campa and Kedia (2002) and Villalonga (2004), for
example, use different statistical techniques to reduce
selectivity bias. These studies demonstrate that the
documented discount on diversified firms disappears
after correcting for the selection bias. For example,
Villalonga uses the Business Information Tracking
Series (BITS), a new census database that covers the
whole US economy at the establishment level, and
reports the existence of a diversification premium.'
D. Valuation Analysis
Although numerous valuation approaches exist to
estimate the value of the target company, the DCF
model is most sound on theoretical grounds.'" This
approach also provides the most intuitive and rational
framework." Marren (1993, p. 195) considers DCF
analysis as "... the most important valuation technique
for estimating the worth of a business to an individual
bidder." Researchers over the years have found
increasing use of DCF models in various decision-
making settings of a corporation. More recent
'Villalonga (2004) uses a common sample of firms and a
common method to compare the value estimates obtained on
BITS against those obtained on COMPUSTAT. The results
show the existence of a diversification discount when firms'
activities are broken down into COMPUSTAT segments,
consistent with existing studies. When the same firms' activities
are broken down by using BITS segments, the diversified firms
trade at a significant average premium relative to comparable
portfolios of single-business firms. The author offers two
explanations for these findings: 1) COMPUSTAT yields a
conglomerate discount that is different but consistent with
the premium found in BITS for related diversification; and 2)
the discount found in COMPUSTAT results from strategic
accounting practices in managerial segment reporting.
'"See Marren (1993) for a description of the various valuation
approaches used to estimate the value of a company.
"Several complexities exist in using the DCF method. For
example, DCF models are highly sensitive to assumptions made
for growth, profit margin, and terminal value. In addition, a
target company's future cash flows depend on the method of
acquisition and the purchase price.
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION
testimony of this trend is provided by Trahan and
Gitman (1995), Bruner et al. (1998), and Graham and
Harvey (2001). For example, in a telephone survey of
leading practitioners, Bmner et al. (1998) find that DCF
is the dominant investment-evaluation technique.
Graham and Harvey (2001) conduct a comprehensive
survey analyzing the current practice of corporate
finance and report that most companies follow
academic theory and use DCF techniques to evaluate
capital budgeting projects.
Applying the DCF method requires forecasting post-
merger cash flow and estimating a discount rate to
apply to these projected cash flows. Some controversy
exists about the proper discount rate to use in the
analysis. There is, however, some consensus that
when the cash flows from the target are estimated as
equity cash flows, the appropriate discount rate is the
target's cost of equity.'^ Two popular models for
calculating the cost of equity capital are the capital
asset pricing model (CAPM) and arbitrage pricing
theory (APT). Once analysts determine the target
company's beta, they can adjust the beta to the new
expected capital structure for the target company.
Several surveys provide evidence about techniques
used to value target firms. For example. Baker, Miller,
and Ramsperger (1981a) report that firms primarily use
DCF analysis to determine the value of takeover
targets. Mohan et al. (1991) find that managers place
high importance on DCF and market value approaches
compared to alternative techniques, especially
liquidation and book value.
A well-known method employed by practitioners to
value a target company is market multiple analysis. This
involves applying a market-determined multiple to net
income, EBITDA, earnings per share, sales, book value,
or other measures. This approach helps to identify a
value range for the target and is useful when there are
no acceptable comparable transactions or comparable
public companies. This simple method does not have a
sound theoretical footing. In keeping with the trend
observed by other researchers involving the increasing
popularity of the DCF technique, we should see less
importance attributed to market multiple models.
II. Research Design
The research design consists of three elements: the
''Some debate exists over the appropriate diseount rate to use.
Aecording to Rappaport (1986), using the aequirer's eost of
eapital to diseount the target's cash-flow stream is only
appropriate when the target's risk is identical to the acquirer's
risk. Marren (1993) recommends using the weighted average
cost of capital (WACC) of the target, assuming a given capital
structure for the target company. Others such as Brigham and
Ehrhardt (2002) indicate the most appropriate discount rate
is the target's eost of equity, not that of either the acquiring
firm or the consolidated post-merger firm.
11
survey instrument, sample, and limitations of this study.
A. Survey Instrument
We developed our original set of questions based
on an extensive review of books, journal articles, and
previous surveys on the motives for acquisitions and
divestitures as well as practices used to value
acquisitions. During March-April 2002, we pre-tested
a preliminary version of our survey by sending it to
seven chief financial officers (CFOs) in the Houston
area. Based on the feedback from five CFOs, we
eliminated several questions to shorten the survey and
changed the wording on some questions to improve
clarity. Based on the recommendation of these CFOs,
we also omitted the detailed DCF models for evaluating
a target that are described in popular textbooks such
as Brigham and Ehrhardt (2002). The CFOs suggested
that including these models would unnecessarily
complicate the survey. The final version of the four-
page survey consists of 23 questions (hereafter
referred to by Q#). We focused on asking closed-end
questions to lessen the subjectivity involved with
classifying responses to open-ended questions. The
Appendix contains a copy of the survey.
The survey includes five areas of inquiry. The first
area involves background data on the number and
average size of the acquisitions (Ql - Q2). The next
group of questions concerns motives for making M&A
decisions including questions on synergy-related and
diversification-related M&As (Q3 - Q8). The third area
of inquiry concerns methods used to value publicly-
held and closely-held targets (Q9 - Q l l ) . The fourth
area examines divestitures (Q12 - Q14). The final part
of our survey asks respondents to indicate their level
of agreement or disagreement with nine statements
involving M&As (Q15 - Q23). The respondents use a
five-point, equal-interval scale where +2 = strongly
agree, +1 = agree, 0 = neither agree nor disagree (no
opinion), -1 = disagree, and -2 = strongly disagree. For
these nine questions, we use one-sample t-tests to
determine whether the level of agreement or
disagreement differs significantly from zero, which
represents a "no opinion" response.
In reporting the survey results, we address three
major research questions and relate empirical
predictions to the responses received. First, what are
the primary motives behind corporate M&As and
divestitures? We expect that the primary motivation
for M&As is synergy. This finding would be consistent
with empirical research involving the increasing
importance of synergy as a merger motive since the
1990s. Although we expect diversification to be an
important motive to some firms, we do not expect it to
be the top-ranked motive. Evidence suggests a much
12
more negative view of diversifying takeovers since
the 1980s. We expect that the two major motives for
divestitures are to increase focus and to divest a low-
performing division. Comment and Jarrell (1995)
document a trend toward corporate focus and away from
conglomeration (diversification). Allen et al. (1995) show
thatfirmsoften unwind unsuccessful prior acquisitions.
Second, what views do managers have about the
relationship between diversification and firm value?
Much debate exists about the effects of diversification
on value. One interpretation of empirical work on firm
diversification supports the view that conglomerates
are inefficient and diversification destroys value.'^
Matsusaka (1993) notes a dramatic reversal in
sentiment toward diversification - positive in the
1960s, neutral in the 1970s, and negative in the 1980s.
Some more recent research by Campa and Kedia (2002)
and Villalonga (2004) shows the documented discount
on diversified firms is not evidence per se that
diversification destroys value. Because diversification
is a deliberate choice, managers are unlikely to diversify
unless they believe that the benefits of diversification
outweigh the costs. Our questions on diversification
explore where managers stand on this issue.
Third, what methods do managers use to value the
target firm? We expect that the DCF method is the
most common approach used to value both publicly-
held and closely-held targetfirms.Such afindingwould
be consistent with the growing body of evidence that
managers rely on DCF valuation in general corporate
fmance settings. For example, survey results by Bruner
et al. (1998) show that DCF is the dominant investment-
evaluation technique used by the most financially
sophisticated companies and financial advisers.'''
Graham and Harvey (2001) report similarfindings.The
use of DCF methods to value targets would also be
consistent with evidence from past practitioner
surveys on M&As by Baker, Miller, and Ramsperger
(198 la) and Mohan etal. (1991).
B. Sample
Our initial sample contains the largest 100 M&As
reported by Mergers and Acquisitions in each year
during the period of 1990-2001, yielding 1200
acquisitions. We adjusted the sample for multiple
acquisitions by the same firms and firms acquired by
other firms in subsequent years. The final sample
consists of 721 firms that engaged in acquisitions
"See, for example, Weraerfelt and Montgomery (1988), Lang and
Stulz (1994), Berger and Ofek (1995), Rajan, Servaes, and Zingales
(2000), Whited (2001), and Lamont and Polk (2001, 2002).
'"Other examples include Trahan and Gitman (1995) and
Graham and Harvey (2001).
JOURNAL OF APPLIED FINANCE — FALL/WINTER 2004
during 1990-2001. We obtained the names and mailing
addresses of CFOs from FIS and Hoover's Online. To
increase the response rate, we included a self-
addressed, postage-paid envelope along with a
personally addressed cover letter with each survey.
Of the 721 surveys, 85 were returned undelivered. In
addition, about 30firmseither returned the survey blank
or contacted us to express their unwillingness to
participate, mostly for the reason of insufficient time.
Our final sample consists of 75 usable responses,
which represents 11.8% of the 636 delivered surveys.
This response rate is similar to that reported in other
academic studies offinancialexecutives." The length,
difficulty, and confidential nature of the subject matter
may help explain the participation rate.
C. Limitations
Our study has several potential limitations. One
limitation is the possibility of non-response bias. This
is true despite taking the normal precautions to avoid
such bias including ensuring confidentiality. To test
for non-response bias, we compared characteristics of
the responding (sample) firms with those of the
population. Having similar characteristics between
these groups would lessen the concern about potential
non-response bias and the ability to generalize the
results. Based on t-tests, our sample closely conforms
to asset sizes of the population as well as their
industrial affiliations."
Another limitation is that our study addresses only
some of the interesting hypotheses prevalent in the
field at present. We limit the scope and hence the length
of our survey to increase the response rate. This
decision to focus on several key areas involving M&As
entails a tradeoff between comprehensiveness and the
response rate. As the length and complexity of
practitioner surveys increase, the response rate
generally declines, which increases the potential for
non-response bias. We believe, however, that the
tradeoff is justified in this situation.
III. Survey Results
We present our results in six parts: characteristics
of responding firms, motives for M&As, divestiture
types and motives, diversification and firm value,
valuation analysis, and other views of M&As.
"For example, Graham and Harvey (2001) achieve a response
rate of nearly 9% from CFOs in a survey about the cost of
capital, capital budgeting, and capital structure. Trahan and
Gitman (1995) obtain a 12% response rate in a survey mailed
to 700 CFOs.
"These tests are available from the authors upon request.
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION 13

A. Characteristics of Responding Firms the types of divestitures consist of sale of an operating •

unit to another firm (50.0%), outright liquidation of
Exhibit 1 shows the results involving the number and assets (43.5%), and spin-offs (6.5%). Because individual
average asset size of acquisitions (Ql and Q2), divestitures may not necessarily fit neatly into any one
respectively. The findings show the involvement of most motive, we asked respondents to check all motives that
of the responding firms in multiple acquisitions during apply to their company's divestitures. Panel B provides
1990-2001. For example, 46.7% of the responding firms the main reasons the responding firms engaged in
engaged in more than 10 acquisitions during this period. divestitures. The evidence shows that the top-ranked
Exhibit 1 also shows that 66.7% of the acquired firms reasons are to increase focus (35.9%) and divest a low-
are less than $500 million in asset size. We computed performing division (35.9%). These findings are
the Spearman rank correlation (r^) between the asset consistent with our expectations.
sizes of acquiring firms and the average size of the
acquired firms. The results show that large firms become D. Diversification and Firm Vaiue
larger through repeated acquisitions of relatively large
firms (r^ = 0.320 significant at the 0.05 level). Exhibit 5 provides the responses to three questions
(Q4 - Q6) involving diversification and firm value. As
B. Motives for M&As shown in Panel A, when asked if they agree with the
statement (Q4) "Some say that diversification is not a
Exhibit 2 reports the results involving the top-ranked justifiable motive for merger," only 22.7% of the
reasons for acquiring another firm (Q3). We gave respondents agree with this statement. Panel B shows
respondents seven choices plus an "other" option. that their rationale for this belief centers on three
Consistent with our expectations, the most important reasons (Q5): shareholders can diversify on their own
motive is synergy, which received 37.3% of the top- (35.7%), the parent company can lose its focus by
ranked responses. The second highest-ranked motive diversifying (21.0%), and a firm should stay in the
is diversification, chosen by 29.3% of the respondents. business it knows best (26.2%). The overwhelming
Although synergy and diversification represent almost majority (77.3%) of the respondents believe that
two thirds of our responses, companies engage in diversification can be a good reason to merge (Q6).
mergers for other reasons. The importance attributed by respondents to the benefits
of diversification is consistent with the new stream of
Anticipating the importance of synergy as a motive,
research by Campa and Kedia (2002) and Villalonga (2004).
we asked two other questions about synergy-related
As Panel C shows, half of these respondents agree that
mergers. One question (Q7) asked respondents to
diversification provides protection during economic
indicate whether their firms were directly or indirectly
downturns because such downturns do not affect all of
involved in synergy-related mergers. Of the 75
the firm's segments equally.
respondents, 69 (92.0 %) answered "yes." The other
question (Q8) instructed these respondents to indicate
the most important source of the merger-ielated E. Vaiuation Anaiysis
synergy among four choices (operating economies,
financial economies, differential efficiency, and Exhibit 6 provides responses to three questions (Q9
increased market power) plus an "other" option. Only - Q l l ) involving valuation techniques. Panel A shows
62 of the 69 respondents provided an answer. As that 37 of the 75 responding firms (49.3%) primarily
Exhibit 3 shows, the overwhelming source of synergy use a DCF model and another 25 firms (33.3%) use this
is operating economics, chosen by 89.9% of the model along with the market multiple method to value
respondents. Although we did not investigate the a publicly-held target firm. Thus, almost 83% of
specific type of operating economy that served as the acquiring firms apply DCF models to determine the
source of synergy, it could result from various sources value of target firms. This practice is consistent with
such as economies of scale in management, market, our expectations as well as past surveys on the reliance
production, or distribution. on DCF methods in both general corporate finance
settings and an M&A setting.
In asking the question about the use of the DCF
C. Divestiture Types and Motives
model, we explained the DCF model in the following
manner: we determine the expected post-merger cash
Of the 75 responding firms involved in M&As during flows that will accrue to my firm's shareholders and
1990-2001,46 of them (61.3 %) also report divestitures then discount such cash flows at an appropriate
(Q12). Panels A and B of Exhibit 4 present the results of discount rate. In other words, we were clear about the
two other questions (Q13 and Q14). As Panel A shows. specific nature of cash fiows (i.e., equity cash fiows).
14 JOURNAL OF APPLIED FINANCE — FALL/WINTER 2004

Exhibit 1. Characteristics of Responding Firms: Number and Average Size of M&As

This exhibit shows the number of M&As undertaken by the responding firms during 1990-2001 and the average asset size of the
target firms acquired during this period.

n %
Panel A. Number of Acquisitions
1-3 - = ^ 14 18.7
4-7 17 22.7
8-10 9 12.0
Above 10 35 46.7
Totals 75 100.1
Panel B. Average Asset Size ofAcquired Firms
Less than $500 million 50 66.7
$500 million - $ 1.5 billion 15 20.0
$1.6 billion-$5 billion 5 6.7
Over $5 billion 5 6J
Totals 75 100.1

Note: Percentages do not equal 100 due to rounding.

Exhibit 2. iVIotives for iVI&As

This exhibit shows the most important reasons that responding firms gave for their M&As during 1990-2001. Respondents
could indicate more than one reason but this exhibit reports only the top-ranked motive.

Motives n %
Take advantage of synergy 28 37.3
Diversify 22 29.3
Achieve a specific organizational form as part of an ongoing restructuring program 8 10.7
Acquire a company below its replacement cost 6 8.0
Use excess free cash 4 5.3
Reduce tax on the combined company due to tax losses of the acquired company 2 1.1
Realize gains from breakup value of the acquired firm 0 0.0
Other 5 6/7
Totals 75 100.0

Exhibit 3. Sources of Synergy

This exhibit presents the source of synergy for those firms directly or indirectly involved in synergy-related mergers. Of the 75
total respondents, 69 stated that they were involved in such activities. Although respondents could indicate more than one
source, this exhibit reports only the top-ranked source.

Source of Synergy n %
Operating economies (resulting from greater economies of scale that improve productivity or cut costs) 62 89.9
Financial economies (resulting from lower transaction costs and tax gains) 4 5.8
Increased market power (due to reduced competition) 3 4.3
Differential efficiency (due to the acquiring firm's management being more efficient) 0 0.0
Totals 69 100.0

Therefore, the use of acquiring firm's WACC as as the discount rate. Few companies use either the
opposed to the target's cost of equity is target's WACC (8.1%) or cost of equity (1.6%) as the
inappropriate. As Panel B shows, 38 of 62 firms discount rate. Mohan et al. (1991) report similar
(61.3%) using DCF models employ their own WACC findings in their survey. These results may indicate
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION 15

Exhibit 4. Divestiture Types and Motives

This exhibit presents the responses of the 46 firms involved in divestitures during 1990-2001. The number of responses in Panel
B exceeds the number of firms engaging in divestitures because respondents could indicate more than a single response.

n ^
Panel A. Types ofDivestitures
Sale of an operating unit to another firm 23 50.0
Outright liquidation of assets 20 43.5
Spin oflf 3 6.5
Equity carve-out 0 0.0
Other 0 0.0
Totals _ _ _ ^ _ ^ 46 100.0
Panel B. Motivesfor Divestitures
Increase focus 33 35.9
Divest a low-performing division 33 35.9
Increase managerial efficiency 9 9.8
Achieve a specific organizational form 7 7.6
Others (e.g., increase cash position, take advantage of high market value, reallocate capital, and antitrust
considerations) 10 10.9
Totals 9?. 100.1

Note: Percentages do not equal 100 due to roimding.

Exhibit 5. Diversification and Firm Vaiue

This exhibit presents the responses on whether or not diversification is a justifiable merger motive and the reasons underlying
these views. The total responses in Panels B and C exceed the number of "yes" and "no" responses in Panel A because
respondents could indicate more than a single response.

n %
Panel A. Diversification as a Merger Motive
Some say that diversification is not a justifiable motive for a merger? Do you agree?
Yes 17 22.7
No 58 77.3
Totals 75 100.0
Panel B. Diversification: Not Justified as a Merger Motive
Diversification through mergers does not create value because:
Shareholders can diversify on their own 15 35.7
The parent loses its focus 13 31.0
A firm should stay in the business it knows best 11 26.2
Other (e.g., does not contribute to the firm by itself) 3 7.1
Totals 42 100.0
Panel C. Diversification: Justified as a Merger Motive
Diversification can be a good reason to merge because it:
Results in much less devastating effects on the firm during economic downturns 36 50.0
Takes advantage of the seasonality of the production cycle 10 13.9
Affords internal capital allocation 9 12.5
Other (e.g., expands the customer and product base and acquires expertise) 17 23.6
Totals 72 100.0

the inability to derive a discount rate for the target or reports the results about the valuation models used
a lack of sophistication in valuation analysis. If the by the 64 responding firms that report acquiring
cash flows used are cash flows to equity, a cost of closely-heldfirms.Almost half (48.4%) of these firms
equity is an appropriate discount rate. Panel C indicate that they use DCF models, while 37.6 % use
16 JOURNAL OF APPLIED FINANCE — FALL/WINTER 2004

Exhibit 6. Valuation Techniques Used for Target Firms

This exhibit presents responses on the valuation techniques used to value publicly-held and closely-held target firms.

n °%°

Panel A. Valuation of a Publicly-Held Target Firm

Discounted cash flow approach 37 49.3
Discounted cash flow approach plus market multiple analysis 25 33.3
Market multiple analysis only 9 12.0
Other j4 5.3
Totals 75 99.9
Panel B. Discount Rate Used to Value a Target Pirm
Acquiring firm's weighted average 38 61.3
Acquiring firm's cost of equity 7 11.3
Target's weighted average cost of capital 5 8.1
Other (e.g., target's cost of equity) VL 19.4
Totals 62 100.0
Panel C. Valuation of a Closely-Held Target Firm
Discounted cash flow approach 31 48.4
Apply industry price-to-eamings multiple to the target 20 31.3
Apply industry price-to-book value multiple to the target 4 6.3
Other (e.g., cash flow multiple, comparable firms, EBITDA multiple, price-to-revenue multiple, internal
projections, customer base, and long-term contracts) _9 14.1
Totals 64 100.1
Note: Percentages do not equal 100 due to rounding.

an industry multiple approach. Thus, the percentage
of firms that primarily use a DCF model to value
publicly-held (49.3%) and closely-held (48.4%) firms
is similar."
F. Other Views on M&As
Exhibit 7 shows the extent to which the respondents
agree or disagree with nine statements about M&As (Ql 5
- Q23). We rank the responses from the highest to lowest
mean response based on a five-point scale. The literature
generally provides support for all nine statements.'*The
respondents, on average, agree with most of the
statements, except Q15 and Q19. Only four of the nine
statements (Q17, Q18, Q20, and Q22) show a positive
mean value statistically different from zero (no opinion)
at the 0.05 level or above using a one-sample t-test.
At least 75% of the respondents agree with two
statements. The first statement (Q17) is "a hostile
takeover often results in higher payment to the acquired
company than a friendly merger." Agreement with this
statement is consistent with the results reported in
several previous studies such as Asquith (1983) and
"In Qll of our survey, we did not give respondents the option
of indicating that they could combine the DCF model with the
following model as we did in Q9.
"See, for example, Jensen and Ruback (1983), Copeland and
Weston (1988), Weston, Chung, and Hoag (1990), and Grinblatt
and Titman (2002) for summaries of empirical evidence on
the effects of mergers on value.
Dennis and McConnell (1986). Chen and Comu (2002)
also find that merger premiums in tender offers are
significantly higher than the premiums in friendly
mergers, which is consistent with numerous studies.
The second statement (Q18) is "an acquisition in a
related industry is worth more than an acquisition in a
non-related industry." Maquieira, Megginson, and Nail
(1998) report net synergistic gains in non-conglomerate
mergers and generally insignificant net gains in
conglomerate mergers.
A majority of the respondents agree with the statement
(Q22): "most of the gains from M&As usually accrue to
shareholders of the acquired firm." Researchers typically
agree that takeovers increase the wealth of the
shareholders of target firms as reflected by the favorable
stock price reactions to takeover bids. Debate exists,
however, as to whether mergers benefit the acquiring
firm's shareholders. For example, Roll (1986) and Bradley,
Desai, and Kim (1988) report that average returns to
bidding shareholders from making acquisitions are at
best slightly positive, and significantly negative in some
cases. The combined market value of the shares of the
target and bidder, on average, go up around the time of
the announced bids."
"Based on the evidence from 14 informal studies and 100
scientific studies from 1971 to 2001, Bruner (2002, p. 48)
concludes "the mass of research suggests that target shareholders
earn sizable positive market-returns, that bidders (with
interesting exceptions) earn zero adjusted returns, and that
bidders and target combined earned positive adjusted returns."
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION 17

Exhibit 7. Level of Agreement or Disagreement with Statements Involving M&As

This exhibit reports the level of agreement or disagreement of the respondents to nine statements involving M&As based on a
five point scale: +2 = strongly agree, +1 = agree, 0 = no opinion, -1 = disagree, and -2 = strongly disagree. The one-sample t-value
indicates whether the mean is statistically different from zero (no opinion).

Agree Disagree t-Value

Statement n +2 +1 -1 -2 Mean

17 A hostile takeover often results in

higher payment to the acquired 74 25.7% 50.0% 18.9% 5.4% 0.0% 0.959 10.087*
company than a friendly merger.

18 An acquisition in a related industry

is worth more than an acquisition 74 23.0 52.7 18.9 2.7 2.7 0.905 8.866*
in a non-related industry.

22 Most ofthe gains from M&As

usually accrue to shareholders 75 6.7 49.3 21.3 20.0 2.7 0.373 3.335***
ofthe acquired firm.

20 An all-cash offer is more effective

in a hostile merger than in a 72 5.6 40.3 31.0 20.8 1.4 0.278 2.598*
friendly merger.

21 Poison pills usually represent non-

wealth-maximizing behavior. 74 9.5 29.7 31.1 28.4 1.4 0.176 1.514

23 M&As may increase shareholders'

wealth at the expense of bond- 73 2.7 26.0 52.1 16.4 2.7 0:096 1.021
holders, especially in leveraged-
biiyout situations.

16 Cash (or cash combined with stock

exchange) requires a higher premium 74 5.4 32.4 31.1 23.0 8.1 0.041 0.331
because of tax consequences to the
shareholders ofthe acquired firm.

19 Suppose A and B are two target

companies in two different countries.
The economy of A's country has a
much lower correlation (than B's 72 1.4 13.9 55.6 26.4 2.8 -0.153 -2.024**
country) with the economy of
the United States. All else the same,
a higher premium is justified for A .

15 Cash (or cash combined with stock

exchange) payment requires a higher
premium in M&As than a straight 74 10.8 18.9 17.6 37.8 14.9 -0.270 -1.872*
stock-exchange transaction.

Note: The percentages for each question may not add to 100 due to rounding.

***,**, *, indicates statistical significance at the 0.01, 0.05 , and 0.10 levels, respectively.

The fitial statetnent (Q20) oti which substantial
agreement exists among the respondents is that: "an
all-cash offer is more effective in a hostile merger than
in a friendly merger." Several studies such as Travlos
(1987) and Franks, Harris, and Mayer (1988) find that
annouticement returns to bidding firms tnaking cash
offers are higher than when making stock offers. This
result may reflect the relatively negative information
about the bidder's existing business signaled by the
offer to exchange stock. Based on a sample of takeover
18
offers during 1981-1986, Brown and Ryngaert (1991)
find that the returns for cash offers are significantly
higher than the returns for all stock or mixed offers.
The only statement (Q15) about which a majority of
respondents disagree is "cash (or cash combined with
stock exchange) payment requires a higher premium in
M&As than a straight stock-exchange transaction."
This finding is inconsistent with results reported in
several empirical studies. For example, Huang and
Walkling (1987) show that valuation effects are larger
for cash offers than stock exchange offers. Sullivan,
Jensen, and Hudson (1994) subsequently confirmed
this finding.
IV. Conclusions
We survey CFOs of US firms engaged in M&As and
divestitures to learn their views about these activities
and how they value the target firm. Based on the
survey evidence, we find that the primary motivation
for M&As is to achieve operating synergies while the
top-ranked reason for divestitures is to increase focus.
Both results are consistent with other empirical
evidence that strategic acquisitions are the dominant
form of acquisitions during the 1990s. Strategic mergers
are typically horizontal mergers that achieve operating
synergies by combining firms that were former
competitors or whose products or talents fit well
together. Our results also show that most firms believe
diversification is a justifiable motive for acquisitions,
most notably as a means of reducing losses during
economic downturns.
We find that discounted cash flow is the dominant
method for valuing both publicly-held and closely-
held companies, while market multiple analysis is a
distant second. Perhaps the most surprising finding is
that although a large percentage of firms define merger
cash flows as the equity cash flows from the target,
the discount rate used by acquiring firms is their own
WACC rather than the targets' cost of equity. This
evidence documents one of the most persistent bad
practices in M&As - using the buyer's WACC to value
a target's cash flows.
On average, managers generally agree with
statements involving research evidence and issues
about M&As. Only four of the nine statements,
however, show a level of agreement that is statistically
different from "no opinion." Although managers may
not have direct knowledge of the specific research
JOURNAL OF APPLIED FINANCE — FALLWINTER 2004
studies serving as the basis for these statements, they
apparently understand, perhaps by experience, the
nature of such evidence.
Our findings suggest several important implications
for practitioners, teachers, and researchers. First, the
mismatch of cash flows and discount rates found in
our survey implies overvaluation of target firms. Goold
and Campbell (1998) note that even synergy-producing
mergers are not free from overpayments to targets. They
trace the source of overpayment to four biases that
distort the thinking of executives. One bias is to
overestimate the benefits and to underestimate the costs
of synergy. Sirower (1997) reaches a similar conclusion
and argues that executives mostly focus on the total
price of acquisition rather than the premium paid.
Executives need to be clear about how acquisition prices
are derived and what exactly they present and focus on
post acquisition strategy of the acquiring firm.
Even in the presence of unbiased estimates of costs
and benefits, the use of a wrong (lower than justified)
discount rate would result in overpayment.
Alternatively, buyers may be underestimating the risk
of target cash flows because they are overconfident
about their investment. This warrants further study,
possibly along the lines of some ofthe hypotheses in
behavioral finance about investor overconfidence
reported by Shefrin (2002). In any case, the persistence
of the bad practice in M&As of using the buyer's
WACC to value the target's equity cash flows should
prompt teachers and practitioners to redouble their
efforts to promote "best practice" or at least better
practice in M&As.
Second, the allure of synergies as a motive for
M&As invites further exploration of the nature, size,
and uncertainty of synergy values. Future surveys
could break down synergistic effects into various
subgroups and investigate the relative importance of
the various types of synergies. For example,
operational synergies could be divided into cost
savings and revenue enhancements. A reassuring
finding is that the survey evidence seems to reject the
popular belief that managers pursue mergers for non-
economic (managerial) reasons.
Finally, our findings add fuel to the debate between
the pro- and anti-diversification advocates. Some recent
research by Campa and Kedia (2002) and Villalonga
(2004) challenges the notion of a diversification
discount. The importance attributed by our survey
respondents to the benefits of diversification is
consistent with this new stream of research. •
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION 19

Appendix. Survey on Mergers and Acquisitions (M&As)

Note: This survey applies only to firms that acquired other firms.

1. My company was involved in M&As during the period January 1, 1990 - December 31,2001.
(Please check only one.)
a 1-3
a 4-7
a 8-10
a above 10

2. The following choice most closely describes the average asset size ofthe companies we acquired during the last
12 years. {Please check only one.)
• Less than $500 million
a $500 million-$1.5 billion
a $1.6 billion-$5 billion
Q Over $5 billion

3. Provided below are some ofthe reasons that are offered for acquiring another company. Which of these motives
best explain your firm's acquisitions in the last 12 years? {If you check more than one choice, please rank them,
with 1 being the most important reason.)

In making M&A decisions, our primary motive(s) was (were) to:

Q acquire a company below its replacement cost.
Q reduce tax of the combined company due to tax losses of the acquired company.
a use excess free cash.
a diversify.
a take advantage of synergy.
a realize gains from breakup value ofthe acquired firm.
Q achieve a specific organizational form as part of an ongoing restructuring program.
• Other (Please fill in.)

4. Some say that diversification is not a justifiable motive for merger. Do you agree?
Q Yes
Q No

If the answer to question #4 is "No," please s/c/p to question #6. If the answer is "Yes," please
answer #5 and sl<ip #6.

5. (Please check all that apply). Mergers through diversification do not create value because:
• a firm does not need to diversify as its shareholders can diversify on their own.
Q diversification results in the parent company losing its focus.
a a firm should stay in the business it knows best.
Q Other (Please fill in.)

6. (Please check all that apply.) Diversification can be a good reason to merge because it:
• reduces/avoids the need for external capital by transferring capital internally.
• results in much less devastating effects on the firm during economic downturns as not all sectors of a firm are
expected to perform equally poorly during such downturns.
Q takes advantage of the seasonality of the production cycle,
a Other (Please fill in.)

7. My firm was directly or indirectly involved in synergy-related mergers.

• Yes
a No
20 JOURNAL OF APPLIED FINANCE — FALL/WINTER 2004

If the answer to #7 is no, please skip to question #9.

8. Merger-related synergy is said to derive basically from the following sources:
A. Operating economies (resulting from economies of scale).
B. Financial economies (lower transaction costs/ more coverage by security analysts).
C Differential efficiency (acquiring firm's management is more efficient).
D. Increased market power (lower degree of competition).

The following source(s) most closely describes my firm's M&As during the period January 1,1990 - December
31,2001. (If more than one source was relevant, please rank the sources, 1 being the most important.)
• Operating economies
Q Financial economies
• Differential efficiency
• Increased market power
• Other (Please fill in.)

9. My firm determines the share price of a publiclv-held target firm in the following manner.
• We primarily use a discounted cash flow model (i.e., we determine the expected post-merger cash fiows that will
accrue to my firm's shareholders and then discount such cash fiows at an appropriate discount rate).
• We combine the discounted cash fiow model with the following model(s). {Please fill in.)

Q We use market multiple analysis. (Please fill in.)

We use the following model(s) (Please ftll in.)

If your firm does not use a discounted cash fiow model in evaluating mergers, please skip question #10.

10. When employing the discounted cash fiow model, we determine the discount rate in the following manner:
a We use my firm's average cost of capital as the discount rate.
Q We use the target firm's average cost of capital as the discount rate.
• We use my firm's cost of equity capital as the discount rate.
Q We use the target firm's cost of equity capital as the discount rate.
a We determine the discount rate by the following method. (Please fill in.)

11. When the target happens to be a closely-held (private) company, we determine the offer price in the following
manner.
• This question does not apply to my firm because we did not acquire any private company.
• Applying industry price-to-eaming multiple to the earnings ofthe company to be acquired.
Q Applying industry price-to-book value multiple to the earnings of the company to be acquired.
a Discounted cash fiow approach.
Q We use the following method to determine the offer price for a closely-held company. (Pleasefitllin.)

12. During January 1,1990 - December 31,2001, my company involved in divestitures.

Q Was
Q Was not

If the answer to #12 is "was not," please skip to question #15. If the answer is "was," please continue.

13. My firm was involved in the following type(s) of divestitures. (Please check all that apply.)
a Outright liquidation of assets
Q Sale of an operating unit to another firm
MUKHERJEE, KIYMAZ, & BAKER — MERGER MOTIVES AND TARGET VALUATION 21

a Spin-off
a Equity carve-out
a Other (Please fill in.)

14. (Please check all that apply.) The main motive(s) for my company's divestittires was (were) to:
a inerease focus.
a divest low-performing division.
Q increase managerial efficiency.
• lower the cost of external financing.
a achieve a specific organizational form.
O reward the manager ofthe division that is being spun off.
• Other motive (Please fill in.)

MISCELLANEOUS. Please indicate the extent of your agreement or disagreement by checking the appropriate
column. (SA = Strongly Agree, A = Agree, NAND = Neither Agree nor Disagree, D = Disagree, and SD = Strongly
Disagree.)

STATEMENT SA A NAND SD
15. Cash (or cash combined with stock exchange)
payment requires a higher premium in M&As
than a straight stock-exchange transaction.

16. Cash (or eash combined with stock exchange)

requires a higher premium because of tax consequences
to the shareholders of the acquired firm.

17. A hostile takeover often results in higher payment

to the acquired company than a fnendly merger.

18. An acquisition in a related industry is worth more

than an acquisition in a non-related industry.

19. Suppose A and B are two target companies in two

different countries. The economy of A's country has
a much lower correlation (than B's country) with the
economy ofthe United States. All else the same,
a higher premium is justified for A.

20. An all-cash offer is more effective in a hostile

merger than in a fnendly merger.

21. Poison pills usually represent non-wealth-

maximizing behavior.

22. Most ofthe gains from M&As usually accrue

to shareholders ofthe acquired firm.

23. M&As may increase shareholders' wealth at

the expense of bondholders, especially in
leveraged-buyout situations.

THANK YOU FOR YOUR KIND PARTICIPATION

(PLEASE ATTACH YOUR BUSINESS CARD IF YOU WISH TO RECEIVE THE FINAL REPORT)
22
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