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Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 21 Solutions
Mergers and Acquisitions
1. This result would be a case where the acquiring firm pays a premium higher than the
value created from the acquisition. The shareholders of the acquired firm would gain the
2. On the on hand, a reason to judge an acquisition by stock price reaction is that markets
tend to be unbiased in their assessment of value. Research shows that initial market
3. The five archetypes are (1) improve the performance of the parent company, (2)
consolidate to remove excess capacity from an industry, (3) create market access for the
target’s products, (4) acquire skills or technologies more quickly or at lower cost than
they could be built in-house, and (5) pick winners early and help them develop their
4. If Company A acquires Company B currently valued at $200 million and pays $240
5. Although EPS may begin to increase, it insufficiently compensates for the additional risk
from the debt or other changes in the acquirer’s capital structure.
6. There are two circumstances under which the acquirer is better off paying in stock than in
cash: (1) the acquirer’s shares are overvalued relative to the acquired company’s shares,
or (2) the acquirer cannot create value (or lowers value) from increasing leverage.
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8. From the cost savings side, the analysis would do a line-by-line estimate of cost savings.
There should be sufficient detail so that, for example, a large proportion is not lumped
