OLEMISS MBA 611 - Mergers (3 pages)

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Mergers



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Mergers

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Pages:
3
School:
The University of Mississippi
Course:
Mba 611 - Financial Analysis
Financial Analysis Documents

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Synergy Value of the whole exceeds sum of the parts Could arise from Mergers Chapter 32 Economies of Scale Operating economies Financial economies Differential management efficiency Taxes use accumulated losses Break up value Assets would be more valuable if broken up and sold to other companies Sensible Reasons for Mergers Economies of Vertical Integration Control over suppliers may reduce costs Over integration can cause the opposite effect Pre integration less efficient Post integration more efficient Company Combining Complementary Resources Merging may results in each firm filling in the missing pieces of their firm with pieces from the other firm Firm A Company S S S S S Sensible Reasons for Mergers S S S Sensible Reasons for Mergers Firm B Bank of America Family Tree Mergers as a Use for Surplus Funds If your firm is in a mature industry with few if any positive NPV projects available acquisition may be the best use of your funds Note Ironically MBNA was once owned by a previous version of Bank of America which sold it in an IPO Dubious Reasons for Mergers Diversification Investors should not pay a premium for diversification since they can do it themselves Purchase of assets at below replacement cost Acquire other firms to increase size thus making it more difficult to be acquired The Bootstrap Game Acquiring Firm has high P E ratio Selling firm has low P E ratio due to low number of shares After merger acquiring firm has short term EPS rise Long term acquirer will have slower than normal EPS growth due to share dilution Estimating Merger Gains Friendly merger The merger is supported by the managements of both firms Hostile merger Target firm s management resists the merger Acquirer must go directly to the target firm s stockholders try to get 51 to tender their shares Often mergers that start out hostile end up as friendly when offer price is raised Estimating Merger Gains Questions Is there an overall economic gain to the merger Do the terms of the merger



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