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1、 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Mergers and DivestituresTypes of Mergers Merger Analysis Role of Investment Bankers Corporate Alliances Private Equity Investments and DivestituresC
2、hapter 2121-1 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.What are some good reasons for mergers?Synergy: value of the whole exceeds sum of the parts. Could arise from: Operating economies Fina
3、ncial economies Differential management efficiency Increased market power Taxes (use accumulated losses) Break-up value: assets would be more valuable if sold to some other company.21-2 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly acc
4、essible website, in whole or in part.What are some questionable reasons for mergers?Diversification Purchase of assets at below-replacement cost Get bigger using debt-financed mergers to help fight off takeovers21-3 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicate
5、d, or posted to a publicly accessible website, in whole or in part.What is the difference between a “friendly” and a “hostile” merger?Friendly merger The merger is supported by the managements of both firms. Hostile merger Target firms management resists the merger. Acquirer must go directly to the
6、target firms stockholders and try to get 51% to tender their shares. Often, mergers that start out hostile end up as friendly when offer price is raised.21-4 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or
7、 in part.Merger Analysis: Post-Merger Cash Flow Statements2012201320142015 Net sales$60.0$90.0$112.5 $127.5 - Cost of goods sold36.054.067.576.5 - Selling/admin exp4.56.07.59.0 - Interest expense3.04.54.56.0 EBT16.525.533.036.0 - Taxes6.610.213.214.4 Net income9.915.319.821.6 Retentions0.07.56.04.5
8、Cash flow9.97.813.817.121-5 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Why is interest expense included in the analysis?Debt associated with a merger is more complex than the single issue of n
9、ew debt associated with a normal capital project. Acquiring firms often assume the debt of the target firm, so old debt at different coupon rates is often part of the deal. The acquisition is often financed partially by debt. If the subsidiary is to grow in the future, new debt will have to be issue
10、d over time to support the expansion. 21-6 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Why are earnings retentions deducted in the analysis?If the subsidiary is to grow, not all income may be a
11、ssumed by the parent firm. Like any other company, the subsidiary must reinvest some its earnings to sustain growth.21-7 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.What is the appropriate disc
12、ount rate to apply to the targets cash flows?Estimated cash flows are residuals which belong to the acquirers shareholders. They are riskier than the typical capital budgeting cash flows. Because fixed interest charges are deducted, this increases the volatility of the residual cash flows. Because t
13、he cash flows are risky equity flows, they should be discounted using the cost of equity rather than the WACC.21-8 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Discounting the Targets Cash Flows
14、The cash flows reflect the targets business risk, not the acquiring companys. However, the merger will affect the targets leverage and tax rate, hence its financial risk.21-9 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible web
15、site, in whole or in part.Calculating Continuing ValueFind the appropriate discount rate21-10Determine continuing value 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Cash Flow Stream2012201320142
16、015 Annual cash flow$9.9$7.8$13.8$ 17.1 Continuing value221.0 Cash flow$9.9$7.8$13.8$238.1Value of target firm Enter CFs in calculator CFLO register, and enter I/YR = 14.2%. Solve for NPV = $163.9 million21-11 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Would another acquiring company obtain the same
