Ch31
Firm A has a value of $100 million and Firm B has a value of $60 million. Merging the two would enable cost savings with a present value of $20 million. Firm A purchases Firm B for $65 million. How much do Firm A's shareholders gain from this merger?
15 million NPV = 20 - 5 = 15.
Companies A and B are valued as follows: Company A B # shares 2,000 1,000 Earnings/Share $10 $10 Share Price $100 $50 Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). Suppose that the merger really does increase the value of the combined firms by $20,000. (i.e., PVAB - PVA - PVB = $20,000). What is the cost of the merger?
4,000 PV_AB = 200,000 + 50,000 + 20,000 = 270,000; Price per share = 270,000/2,500 = 108; Cost = (108)(500) - 50,000 = 4,000.
Which of the following actions by an acquiring firm signals its belief that postmerger gains will be substantially larger than expected?
Acquiring firm makes a cash offer, since this allows the acquirer to solely benefit from gains not yet reflected in the market.
If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm, then the cost of this merger is:
Cost = (x) PV_AB - PV_B
Which of the following statements is FALSE? A. Mergers and acquisitions are part of what is often referred to as "the market for corporate control." B. The takeover market is also characterized by merger waves—peaks of heavy activity followed by quiet troughs of few transactions. C. There are two primary mechanisms by which ownership and control of a public corporation can change: Either another corporation or group of individuals can acquire the target firm, or the target firm can merge with another firm. D. Merger activity is greater during economic contractions than during expansions.
D
Firm A wants to acquire Firm B. Recently, Firm B's stock price increased from $20 to $24 per share, evidently due to its excellent financial performance. Firm A thus estimates Firm B's stand-alone price at $24. Firm A intends to purchase all 100,000 shares of Firm B for $27 per share (cash offer), expecting a postmerger gain of $800,000. However, the CFO suggests a re-evaluation of the offer, pointing out that the true stand-alone value Firm B may be $20 per share, not $24 per share. If the stand-alone value is $20 per share, will the merger still generate positive NPV for Firm A?
Yes. Firm A will still make a gain, although Firm B captures more of the economic gain than expected. Firm A is trading $2.7 million [27 × 100,000] in exchange for a (potential) stand-alone value of $2.0 million [24 × 100,000]. Cost = Cash paid - PVB; 2.7 - 2.0 = 700K. This still leaves an NPV of $100K [800K - 700K] on the transaction, even with the pessimistic stand-alone value of $20.
As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover. These bonds are an example of:
a poison put
Merging in order to lower financing costs is unlikely to generate synergies for the following reason:
any gain from lowering the required interest rate is offset by increased guarantees on the debt.
The following are sensible motives for mergers EXCEPT:
diversification
Compensation paid to top management in the event of a takeover is called a:
golden parachute
Takeover defenses appear to favor:
managers
A dissident group solicits votes in an attempt to replace existing management. This is called a:
proxy fight
If an acquisition is completed using a cash payment, then the acquisition is:
taxable
Google's acquisition of Motorola Mobility is an example of a:
vertical merger
A poison pill protects the rights of shareholders.
F
Diversification is a very sensible reason for two companies to merge.
F
Supermajorities give shareholders more control over the firm.
F
What role do hedge funds take when they speculate on merger activity by buying stock of firms that are "in play"?
Hedge funds specialize in taking on the risk that the deal will fall through and allow risk averse investors to cash out.
Historically, merger activity increases with which market condition?
High stock market prices
The merger of two similar pharmaceutical firms is an example of a: I) horizontal merger; II) cross-border merger; III) conglomerate merger; IV) vertical merger
I only
The following are sensible motives for mergers: I) prevent target firm from wasting surplus funds; II) eliminate target firm inefficiencies; III) complementary resources; IV) increasing earnings per share (EPS)
I, II, and III only
A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.
T
If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus Firm B's value as a separate entity.
T
In the purchase method of merger accounting a new asset category called goodwill is created.
T
Who usually gains the most in a merger?
Target firm's shareholders
