Professional Documents
Culture Documents
Chapter 1: Introduction to
Business Combinations
Friendly Combinations
Boards of directors of
combining companies
negotiate terms of
proposed combination.
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Types of Business Combinations
Unfriendly (Hostile)
Combinations
Board of directors of
target company resists
the combination.
The acquiring company
deals directly with
individual shareholders
through a tender offer.
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Defense Tactics
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Defense Tactics
Selling
the crown jewels: sale of valuable
assets to make the firm less attractive.
Operating synergies
Competitiveness in the international
marketplace
Financial synergy ?
Diversification ? ?
Divestitures
? ?
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Business Combinations: Why Not?
Insufficient
management control over
the resulting conglomerate, resulting in
future divestitures.
Business
combinations may enable
suboptimal allocation of capital.
Accountingmethod may encourage firms
to pay too much.
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Business Combinations:
Historical Perspective
1-8
Types of Combinations
Cash
Stock
Common stock Pooling of
of S Company Interests Method
Combination of
above
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Stock Acquisition VS Asset Acquisition
Stock Acquisition Asset Acquisition
may obtain control by must acquire 100% of
acquiring 50% of voting target firm, hence
common stock higher cost
can avoid formal need to negotiate with
negotiation with target target management
management
no separate legal
maintain separate legal
entity
entity
limited liability
greater flexibility in filing
tax returns
regulations apply to one
firm only
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Types of Combinations
Statutory Merger
Statutory Consolidation
Stock Acquisition
Consolidated Financial
Financial Statements Financial Statements Statements of A
of A Company + of B Company and B Companies
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Determining Price
Price
effect of acquisition on future earnings
value of the firms identifiable net assets
estimated value of implied goodwill
Stock exchange ratio
number of shares of acquiring company
to be exchanged for each share of the
acquired company
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Determining Method of Payment
Cash or stock?
Factors affecting method of
payment:
liquidity position of acquiring firm
willingnessof sellers to accept
alternative forms of payment
tax and accounting issues
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Estimate Implied Goodwill
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