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Mergers and Acquisitions

PARAMJIT
1519512

What is a Merger?
In a MERGER, two (or more) corporations
come together to combine and share their
resources to achieve common objectives.
The shareholders of the combining firms
often remain as joint owners of the
combined entity.
A new entity may be formed subsuming
the merged firms

What is an Acquisition?
In an ACQUISITION, one firm purchases
the assets or shares of another.
The acquired firms shareholders cease to
be owners of that firm.
The acquired firm becomes the subsidiary
of the acquirer.
Acquisitions usually take the form of a
public tender offer.

Stock Price Reactions


Mergers
Bidders gain 0%
Targets gain 20%

Tender Offers
Bidders gain 4%
Targets gain 30%
(Jensen and Ruback, Journal of Financial Economics, 1985)

Gains: Improved Managerial


Efficiency
Market for corporate control assumes that
managers act in the interest of the
shareholders. Firms that do not maximize
shareholder value are targets for takeover.
Prediction:
Target share prices experience significant
declines prior to the merger or tender offer.
Managers of target firms are fired after the
takeover.

Diversification: Employees
Other stakeholders
They are forced to hold undiversified portfolios
of the stock of the bidder/target firm.
It is hard for them to diversify on their own
accounts.
Employees cannot diversify their human capital.
They may be willing to accept a lower salary and/or
have a larger commitment to the company if they
take less risk.
May ultimately benefit shareholders.

Diversification: Executives
Managers in small firms may be undiversified for
control purposes, and become too risk averse.
Hence, both inside and outside shareholders
may benefit through diversification.
A merger always changes control in at least one
of the firms.
Good or bad depending on who is losing out and why.
Fired: Bad if you are the one being dismissed.
Retired: Good if you are the one being bought out.

Takeover Defenses
Successful takeovers:
Target Stockholders gain 20-35% or more

Unsuccessful takeover:
Target stockholders gain little if not eventually
taken over.

Legal/Regulatory Defenses
State corporation/anti-takeover laws
impose rules that are similar to stringent
charter amendments for all corporations
chartered in that state.
Inter-firm litigation can be effective.

LATEST MERGER AND


ACUISITION
Flipkart acquies online fashion portal
Jabong.
IDFC bank acquires Grama Vidayala.
Aditya Birla fashion acquires clothing brand
Forever 21.
Microsoft sign agreement to acquire LinkdIn
Bharti Airtel acquired Videocon 6 circle.

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